VZCZCXYZ0000
OO RUEHWEB

DE RUEHAC #0495/01 2172014
ZNR UUUUU ZZH
O 052014Z AUG 09
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8034
INFO RUCNMER/MERCOSUR COLLECTIVE PRIORITY
RHEHNCS/NSC WASHDC
RUEAWJB/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUEKJCS/SECDEF WASHDC

UNCLAS ASUNCION 000495 
 
SIPDIS 
SENSITIVE 
 
TO WHA/BSC MDASCHBACH 
 
E.O. 12958: N/A 
TAGS: PGOV OVIP PREL PY
SUBJECT: CODEL PRICE SCENESETTER 
 
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SUMMARY 
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¶1. (SBU) Embassy Asuncion warmly welcomes Codel Price August 
19-20.  Your visit will come on the heels of President 
Fernando Lugo's one-year anniversary in office, and will find 
the Lugo government grappling with the challenges of 
day-to-day governing.  An inexperienced team, exceedingly 
high expectations for change, endemic corruption, weak 
institutions, and a divided Congress make Lugo's job more 
difficult.  Lugo needs to generate jobs and promote economic 
development while downsizing a bloated state and tackling 
social and security issues of key concern to his 
constituents.  His top goals are fighting corruption, 
strengthening weak institutions, and promoting economic 
growth.  Your visit offers the United States an opportunity 
to reaffirm support for Paraguay's democratic institutions, 
and in particular, its politically beleaguered and divided 
Congress. END SUMMARY. 
 
--------------------------- 
LOCAL AND REGIONAL POLITICS 
--------------------------- 
 
¶2. (SBU) Fernando Lugo's administration represents the first 
interruption in Colorado Party rule in 61 years. By voting 
overwhelmingly for change, the Paraguayan people gave former 
Catholic bishop Lugo a mandate for political, economic, and 
social reform.  However, they also have high expectations. 
Lugo took office on August 15, 2008 -- with his one-year 
anniversary coming just before your visit.  He appears to be 
committed to reform, but is discovering that real change is 
difficult to bring about. 
 
¶3. (SBU) Lugo is a leftist at heart, but a pragmatist of 
mind. He maintains close relations with Venezuela, Bolivia, 
and Ecuador, but also with the United States, Chile, Brazil, 
Colombia and others.  He said in late July that Paraguay's 
"first circle" is MERCOSUR, and that Paraguay does not seek 
to join the Bolivarian revolution.  Lugo visited Washington 
for the first time in May 2007, and traveled to New York for 
the United National General Assembly (UNGA) last fall.  Lugo 
met with President Bush in Washington in October 2008; he saw 
President Obama at the Summit of the Americas in Trinidad and 
Tobago, as well as a congressional delegation led by 
Congressman Engel. 
 
¶4. (SBU) Lugo's challenges are many:  His inexperienced team 
needs to meet Paraguayans' high expectations for change, but 
will have to overcome endemic corruption, weak institutions, 
and a divided Congress to do so.  Lugo's Patriotic Alliance 
for Change (APC), a loose coalition of political parties, won 
a large block of seats in Congress but does not have a 
majority.  Lugo's own Christian Democrat party is not 
represented in Congress. The Liberal Party, one of Paraguay's 
major political parties, waffles back-and-forth in its 
support for Lugo, and Lugo has distant (at best) relations 
with his Liberal Party Vice President, Federico Franco. 
Lugo's own inner circle continues to jockey for power and 
ideological influence.  Executive-congressional relations 
have also been somewhat bumpy.  Social organizations and 
leftist political parties have repeatedly criticized Congress 
for blocking reforms, and threaten to block highways into 
Asuncion and to surround Congress on August 10 in an effort 
to pressure Congress to deliver agrarian and judicial reform. 
 So far, Lugo has weathered the storms he has faced 
(including several paternity scandals), but he has yet to 
develop a clear national agenda, or to engage in the daily 
political brokering which will be critical to his 
administration's success. 
 
-------------------- 
THE ECONOMIC REALITY 
-------------------- 
 
¶5. (SBU) Although Paraguay's macroeconomic indicators show 
the country is reasonably positioned to face the financial 
crisis, the economy is expected to contract at least three 
percent this year, and will continue to shed jobs in the 
process.  Paraguay's Central Bank revised its projection to a 
1.0 percent growth rate for 2009 (compared to 5.8 percent in 
2008). Exports markedly slowed in the first half of 2009 as 
result of lower prices and weaker external demand for 
Paraguay's main export commodities (soy, grains, cattle). 
Paraguay is projecting a fiscal deficit of less than one 
percent of GDP in 2009, and a trade deficit of 1.5 percent of 
GDP (2008 GDP was USD 16 billion). Unemployment is over 20 
percent, and with a population growth rate above 2 percent 
per annum, the economy is not creating enough jobs to meet 
demand. In spite of a large and growing labor force, experts 
cite the lack of skilled workers as an obstacle to economic 
growth. Paraguay boasts vast hydroelectric resources, 
including the massive Itaipu hydroelectric dam built and 
operated jointly with Brazil, but fails to capitalize on 
those resources.  The new government purports to welcome 
foreign investment, but widespread corruption and a weak 
judicial system are deterrents. In addition to retail, 
banking, and professional services, there is significant 
commercial activity involving the import of goods from Asia 
and to a lesser extent the United States for re-export to 
neighboring countries, mainly Brazil. The underground 
economy, which is not included in the national accounts, 
probably equals the formal economy in size. 
 
¶6. (SBU) Paraguay's relative isolation from international 
capital markets reduced the impact of the financial crisis on 
the local banking system. However, as an agriculture 
commodity exporter, the impact of lower demand is felt across 
all productive sectors. Agriculture, which represents about 
25 percent of GDP, is expected to decline over 20 percent in 
¶2009. More than 250,000 families depend on subsistence 
farming activities and maintain marginal ties to the larger 
productive sector of the economy.  The executive branch is 
lobbying Congress for approval of a USD 100 million loan from 
the World Bank, which is a key component of Paraguay's 
response to the financial crisis, but has been stalled for 
months in Congress.  Lugo is under pressure to reduce poverty 
and create jobs, but the government's capacity to deliver on 
those promises is limited. 
 
¶7. (SBU) Bilateral trade with the United States has increased 
over the last six years.  The U.S. imported from Paraguay 
about USD 80 million in 2008, and exported over USD 1.6 
billion, up from USD 1.2 million in 2007.  Paraguay withdrew 
its objection to U.S. trade preferences in the WTO last 
March, thus opening the door for future trade discussions. 
More than a dozen U.S. multinational firms have subsidiaries 
in Paraguay, and some 75 U.S. businesses have agents or 
representatives in Paraguay.  Cargill, ADM, Coca Cola, and 
Exxon Mobile are the largest U.S. companies operating in 
Paraguay.  With over USD 650 million in private investment 
stock, the U.S. is Paraguay,s largest investor. 
 
--------------------------------- 
PUBLIC SECURITY AND SOCIAL ISSUES 
--------------------------------- 
 
¶8. (SBU) Security and social issues are top concerns of 
Lugo's constituents.  Violent crime is increasing in urban 
and rural areas, and the public generally believes that 
Paraguayan security forces (particularly the corrupt police) 
do not meet their security needs.  The "landless" farmer 
movement -- active for many years in Paraguay -- has 
organized protests and land invasions, calling for reform by 
illegally occupying large, privately-held ranches.  On some 
occasions, protests and land invasions have resulted in 
deaths or injuries. 
 
¶9. (SBU) The Tri-Border Area (TBA) of Paraguay, Argentina and 
Brazil is a hub for transnational criminal activity including 
drug trafficking, trafficking in persons (TIP), arms 
trafficking, intellectual piracy, and money laundering. 
Paraguay is a major transshipment point for cocaine from 
Colombia and Bolivia to Brazil; it is the top marijuana 
producer in South America and the second largest in the 
world.  Paraguay remains a regional haven for money 
laundering.  Paraguayan authorities often experience 
difficulties enforcing the law because of hostile geography, 
corruption, chronic understaffing, and the political and 
judicial power some drug traffickers wield. Paraguay took a 
giant step forward on money laundering, intellectual property 
violations, and trafficking in persons by passing a tougher 
penal code that went into effect in July. 
 
¶10. (SBU) Inefficient, state-run institutions dominate 
Paraguayan social services, and Lugo pledged to make health 
care and education reform government priorities.  Social 
services spending increased since 2003; however, most 
spending augmented employees' salaries.  Many Paraguayans 
lack basic access to health care facilities, particularly in 
rural areas, and many more are uninsured.  Influenza H1N1 is 
testing Paraguay's capacity to respond to a pandemic, and 
intensive care hospital beds have been 100 percent occupied 
for several weeks now.  Government agencies and state-owned 
enterprises provide basic public services, but access is 
limited and services have deteriorated in quality. 
 
-------------------------------------------- 
LUGO'S GOALS AND U.S. ASSISTANCE TO PARAGUAY 
-------------------------------------------- 
 
¶11. (U) Lugo's goals are to strengthen democratic 
institutions, fight corruption, and promote economic growth. 
Reforming the National Police and land reform, including a 
national land survey, are also priorities.  He promised to 
promote a "social justice" agenda.  Judicial reform remains 
on Lugo's agenda, and after a few starts and stops, it 
appears that the Senate may soon vote on a two-year-long 
Supreme Court vacancy. 
 
¶12. (U) U.S. assistance in Paraguay supports many of Lugo's 
goals. The centerpiece of our assistance is Phase Two of the 
Millennium Challenge Corporation's Threshold Program, which 
the Paraguayan Congress approved July 31.  The Threshold 
Program, worth USD 30 million, focuses on anti-corruption. 
Paraguay's new Congress, despite its predecessor's fairly 
poor performance under Phase I of the Threshold Program,  was 
eager to play a watch-dog role under Phase II. 
USAID/Paraguay's FY09 budget is USD 17.15 million and focuses 
on Economic Growth; Health Care; Sustainable Management of 
Natural Resources and Protected Areas; and Democratic 
Strengthening.  USAID's Economic Growth Program ("Paraguay 
Vende") has generated over USD 60 million in additional sales 
and over 30,000 full-time job equivalents since 2003, thus 
supporting Lugo's goal to reduce poverty. Likewise, USAID's 
Health Program supports Lugo's stated interest in improving 
basic health services.  Specifically, it targets 
decentralizing health services, improving maternal and child 
care services, and increasing Paraguay's capacity to deliver 
family planning services. In the environment sector, USAID 
continues to support improved management of protected areas. 
The Democracy Program focuses on fighting corruption, giving 
civil society a voice, and promoting decentralization and 
municipal development. 
 
¶13. (U) The Embassy's leading public diplomacy effort is its 
English language scholarship program, which identifies 
academically outstanding young Paraguayans from families with 
limited resources.  Since the program's inception in 2006, 
the Embassy has awarded close to 700 scholarships plus 100 
scholarships for public school teachers.  USG support for the 
Paraguay Military Forces is second only to our support for 
Colombia in South America.  One highlight is the U.S. Armed 
Forces' USD 4.1 million donation of Global Peace Operations 
Initiative (GPOI) funds and technical assistance to 
Paraguay's United Nations Global Peace Keeping Operations 
Program (UNPKO).  Other security funding includes State's 
International Narcotics and Law Enforcement (INL) money, 
which along with DEA and U.S. Special Forces, assists 
Paraguay's Anti-Drug Secretariat (SENAD) and other 
institutions in combating narcotics trafficking, money 
laundering, IPR violations, and trafficking in persons. 
 
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COMMENT 
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¶14. (SBU) Your visit offers the United States an opportunity 
to reaffirm support for Paraguay's democratic institutions, 
and in particular, its politically beleaguered and divided 
Congress. Lugo has stated that he seeks to strengthen 
democratic institutions; Congress' poor public image due to 
corruption and political divisions make it a good candidate 
for U.S. congressional assistance at a critical time in 
Paraguay's democratic transition.  END COMMENT. 
Holloway