VZCZCXYZ0000
OO RUEHWEB

DE RUEHAC #0091/01 0422122
ZNR UUUUU ZZH
O 112122Z FEB 09
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7596
INFO RUCNMER/MERCOSUR COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ASUNCION 000091 
 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR WHA/BSC MDASHBACH, BFRIEDMAN, MDRUCKER, WHA/FO CMCMULLEN 
 
E.O. 12958: N/A 
TAGS: ECON PREL PGOV PA
 
SUBJECT:  PARAGUAY'S 2008 ECONOMIC PERFORMANCE AND 2009 OUTLOOK 
 
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SUMMARY 
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¶1. (SBU) COMMENT: Following a period of strong economic growth in 
the first semester of 2008, economic activity decelerated during the 
last quarter of 2008 across the three main sectors of the economy: 
agriculture, services and manufacturing. GDP growth for 2009 is 
expected to slow down to 2 to 3 percent due to deteriorating 
international market conditions, insufficient rain, and a decline in 
commodities prices. Paraguay will need to implement policies to 
maintain economic stability, tackle poverty and promote growth -- 
measures outlined in the country's 2009 Contingency Plan that is now 
pending congressional approval. President Lugo's administration is 
looking for broad support to avoid congressional stonewall. Without 
expedited congressional approval of the contingency plan, piece-meal 
implementation of the GOP's plan will be too little, too late.  END 
COMMENT. 
 
--------------------------- 
ALMOST AN EXCELLENT 2008... 
--------------------------- 
 
¶2. (U) According to the Central Bank, Paraguay experienced 5.8 
percent growth in 2008 for a total GDP of 15.4 billion USD, 
registering its second best growth rate over the last six years. GDP 
per capita also increased 3.9 percent to 1,556 dollars, the highest 
level registered in the last 47 years. Agricultural production, the 
largest sector in the economy, contributed 20.2 percent. The 
agricultural bonanza benefited from benign weather and high 
commodity prices during the first half of 2008. Increased domestic 
demand driven by remittances and a relatively stable macroeconomic 
and political environment also contributed to Paraguay's growth. 
Remittances reached 680 million dollars in 2008. In the last quarter 
of 2008, however, international and domestic conditions for the 
agriculture sector rapidly deteriorated -- the financial crisis 
limited the offer of working capital; agricultural areas faced 
severe droughts; and increasing social unrest in rural areas 
disrupted production. 
 
¶3. (U) Mechanized agricultural production increased cultivated land 
area and yields per hectare. The 2008 soy harvest reached a record 
high of 6.8 million tons, a 14.7 percent increase over 2007. The 
production of other crops also increased: corn (14 percent), 
sugarcane (18.3 percent) and rice (66.7 percent). Beef production 
increased 6.5 percent. 
 
¶4. (U) Exports totaled 7.9 billion USD in 2008. (NOTE: The figure is 
the sum of registered (2.5 billion USD) and re-export (5.4 billion 
USD) exports. END NOTE).  Major exports included soy and soy-related 
products (57 percent) and beef (14 percent).  Paraguay's largest 
exports markets were Uruguay (17 percent) and Argentina (16 
percent), and for beef Russia (41 percent) and Chile (35 percent). 
(NOTE: The EU included Paraguay on its Generalized System of 
Preferences Plus program in January 2009, which provides tariff 
exemptions on 6,400 different products. END NOTE.)  Imports totaled 
8.8 billion USD, with China (28 percent) and Brazil (27 percent) 
leading. As the dollar strengthened in the last half of 2008, the 
import of U.S. goods declined to 4 percent.  Leading imports 
included capital goods (46 percent) and intermediate goods (29 
percent). 
 
¶5. (U) Considering that 2008 was a presidential elections year, 
Paraguay showed strong fiscal discipline, finishing the year with a 
budget surplus of nearly 0.15 percent of GDP.  Fiscal performance 
was strong, with total revenue growth of 20 percent year-on-year and 
total spending expansion of 11 percent year-on-year. 
 
¶6. (U) Paraguay's sixth and final review under the Stand-By 
Agreement with the IMF was positive. Over the last five years, real 
GDP rose by about 25 percent (more than in the previous 12 years), 
public finances remained in surplus throughout the period, public 
debt as a percent of GDP was reduced by more than half to less than 
30 percent, and international reserves more than tripled to 2.5 
billion USD in 2008. The country's long term sovereign debt risk 
rating, as reported by S&P, remained at the "B" credit rating. While 
offset by lower oil costs, rising food prices combined with a 
depreciated Guarani to push inflation to around 7.5 percent in 2008, 
up from 6 percent in 2007. 
 
¶7. (U) Social conditions, however, did not improve. Increasing 
income inequalities, rising poverty, and growing unemployment 
accompanied Paraguay's growth. Most of the growth benefited the 
capital intensive agribusiness and encouraged urban flight. There 
was increased consumption from middle and high income sectors but 
the low and poor segments of the population suffered a reduction of 
purchasing power capacity as a result of inflation. Extreme poverty 
grew to 24 percent in 2007. During the year, social unrest in rural 
areas escalated, as landless peasants invaded properties owned by 
large producers. 
 
------------------------------- 
...BUT INTO A CHALLENGING 2009 
------------------------------- 
 
¶8. (U) Paraguay's 2009 outlook remains moderately positive, despite 
a challenging economic environment. The country's macroeconomic 
stability, relative isolation in the international capital markets, 
and reasonable capitalization of local banks (shielded almost 
entirely from the international financial crisis) will help Paraguay 
weather the current global financial turmoil. The GDP growth rate 
for 2009 is estimated at 2 to 3 percent, and inflation is projected 
at 5 to 6 percent. The current account surplus is expected to turn 
into a deficit in 2009, and the external debt of 3.2 billion USD in 
2008 is likely to increase in 2009. The abrupt end of a cycle of 
elevated economic growth will also make fiscal policy much more 
challenging in 2009. 
 
¶9. (U) Setbacks in international commodity prices and declining 
demand for commodities create strain for Paraguay's commodity-export 
model. Agricultural production in 2009 is projected to decline due 
to insufficient rains during the last quarter of 2008. Ongoing 
social unrest in rural areas will likely negatively impact 
agriculture production. The 2009 soy harvest is estimated at 3.6 
million tons (43 percent less than 2008), with 2.5 million hectares 
of cultivated land and a yield of 1.5 kilograms per hectare. 
Producers are preparing for losses after a record-high year for 
production and prices. 
 
¶10. (U) Savings are expected to increase, and spending, exports and 
remittances are expected to decline.  A decrease in remittances from 
Paraguayans living abroad (mainly in Spain, Argentina and the US) to 
an estimated 500 million dollars in 2009 will weigh on domestic 
private consumption. The 2009 GOP budget increased by 11 percent, 
with health (21 percent) and education (8 percent) representing the 
largest increases.  Paraguay plans to seek additional funds from the 
IFIs to balance its budget, and to increase spending on education 
and health. 
 
¶11. (U) The poor management and widely reported deficient provision 
of services by state-owned enterprises will continue to drag the 
economy down. The Supervisory Council of Public Enterprises, created 
under the Stand-by Agreement with the IMF, provides quarterly audits 
and assessments of the accounts and performance of the state-owned 
enterprises, but further measures to increase transparency and 
accountability will be required.  Capital investments, particularly 
in transport infrastructure, will likely increase through concession 
mechanisms. 
 
¶12. (U) Paraguay has the potential to become an important player in 
the biofuels sector. The government has expressed great interest in 
biofuels, and already has in place legislation to promote biofuels 
production and consumption. The GOP's focus is on ethanol production 
for the local market and for export and on biodiesel production by 
small rural producers for the local market.  The government already 
approved seven biodiesel plants which should begin operating in 
¶2009. Total estimated biodiesel production for 2009 is 30 million 
liters.  In addition, there are 10 ethanol plants which are expected 
to produce 120 million liters in 2009.  Meat exports are expected to 
increase significantly in 2009 as lower prices drive higher export 
volumes.  After the December 2008 FDA approval, Paraguay also has 
potential to establish its reputation as a world provider of Stevia. 
 Finally, Paraguay has unexplored market opportunities with U.S. and 
EU GSP programs. 
 
---------------------- 
2009 CONTINGENCY PLANS 
---------------------- 
 
¶13. (U) Paraguay's contingency plan aims to create jobs and maintain 
a GDP growth rate of 2 to 3 percent in 2009.  The plan concentrates 
on three areas: infrastructure, social services, and investment. 
Paraguay plans to have a local debt offering to partially cover the 
cost of the plan, estimated at over 2 billion USD. 
 
¶14. (U) The plan's first phase, which begun in October 2008, was 
aimed at ensuring liquidity in the banking system and managing 
resources with bilateral and multilateral organisms. The second 
phase focuses on infrastructure priorities such as the construction 
and improvement of roads, highways, housing and waterworks, and the 
 
expansion of the conditional-cash transfer mechanism for low income 
families (from 50,000 to 120,000 families). The third phase will 
seek to improve credit access for the productive sectors, especially 
the agricultural sector. The fourth phase aims to implement measures 
to increase public and private spending.  Congress must approve 
phases two through four. 
 
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COMMENT 
------- 
 
¶15. (SBU) Though Paraguay's economic performance in 2008 was decent, 
2009 will be a challenging year. Expectations and political stakes 
are high.  President Lugo's social justice objectives - poverty 
reduction and employment - will continue to dominate the 2009 
economic policy environment. However, Paraguay will need to move 
forward quickly in implementing policies to maintain economic 
stability, tackle poverty and promote growth -- measures outlined in 
the GOP's 2009 Contingency Plan.  With a plan in the works since 
October, the Lugo administration is off to a bit of a slow start in 
rolling out its plan to face the financial crisis.  The GOP is 
looking for congressional support of its plan, but may hit another 
snag when its plan reaches Paraguay's divided Congress.  Without 
expedited congressional approval, piece-meal implementation of the 
GOP's plan could be too little, too late.  END COMMENT.