PARAGUAY: An introduction to Corporate/Commercial

Overview

Based on the sustained growth that the Paraguayan economy has experienced over the last 15 years, there is a strong trend towards foreign investors participating in key sectors of the economy, such as finance, real estate, infrastructure and agriculture. The Paraguayan economy has undergone significant changes in recent years, and the economy has consistently grown at an average rate of 4.5% annually, a comparatively high regional rate.

Recently, there has been an exponential increase in the participation of foreign investors in the local economy. The Paraguayan government has been implementing a comprehensive investment program for the last nine years, starting with the enactment of the Public-Private Participation Law and the modification of other regulations aimed at channelling private funds and investors into strategic projects.

The main goal of such initiatives is to fill critical infrastructure gaps in transport, electricity, water, sanitation and other sectors through an ambitious plan for the allocation of USD5.5 billion in investments (approximately 4% of the country’s GDP) over the next five years.

On another note, Paraguay is a country with ideal natural conditions and has one of the largest freshwater reserves in the region: the Guarani Aquifer. It also has two important hydroelectric power plants, Itaipu and Yacyretá, as well as the Acaray power plant, which provide clean and sustainable electricity.

Paraguay has one of the largest youth populations in Latin America, with 63.9% of the population being under the age of 35. Paraguay offers a young and skilled labour force in the region.

The country is also attractive for its 100% renewable energy production, not only through hydroelectric power but also via important projects such as green hydrogen, having developed a strategy called "Towards the green hydrogen roadmap in Paraguay". It proposes to contribute to the development of the transport sector in particular.

Also, in recent years, Paraguay has been implementing and investing in new technologies that serve as tools available to citizens, so that they can access different types of information and carry out procedures. Among these, the electronic files of the judiciary, the electronic identity portal, and the entrance desks of different public entities – such as the General Directorate of Public Records, National Land Registry and National Telecommunications Commission – can be highlighted, among others.

In 2020, the Registry of Service Providers (REPSE) was created, one of the main benefits of which is facilitation of access to the certificate of national origin, which grants a 20% margin of preference in national public tenders. REPSE helps the Ministry of Industry and Commerce to maintain an updated database, contributing to the formalisation of the services sector as well as improvement of public policies in the services sector. This mandatory registration, which is free of charge, is valid for two years and applies to individuals and legal entities. Persons providing public services and those who do not pay VAT are exempted from registration.

How Moody's Sees It: Paraguay Earns Investment Grade

On 26 July 2024, Moody's granted Paraguay the long-awaited (and deserved) Baa3 investment grade, thereby improving the country's rating from Ba1 as a long-term and senior unsecured bond issuer. As a result, Paraguay's rating has been upgraded from positive to stable, which will enable the country to access better financing conditions, thus boosting economic diversification.

Moody's notes that Paraguay's stable outlook reflects its expectation that its economic growth will remain strong, supported by public and private investment in key infrastructure projects that mitigates risks related to Paraguay's exposure to commodity price- and weather-related shocks.

In Moody's view, Paraguay has passed numerous tests of economic resilience in recent years, including droughts in 2019 and 2022 as well as the COVID-19 pandemic. In 2020, Paraguay's economy contracted by only 0.6%, less than its regional peers, and it recovered strongly in 2021.

Moody's expects Paraguay's economic diversification and increased resilience to continue, along with the country’s efforts to invest in critical infrastructure and attract more foreign direct investment, thereby further integrating export-oriented supply chains.

How the Paraguayan Government Sees It: Incentives for Investors

The Paraguayan government has an important and strong focus on promoting foreign investment, with public policy programs that encourage investment including the National Development Plan 2030 (“the Plan”). The Plan is based on three axes, one of which is the insertion of Paraguay into the world. The Plan cites the strategy of “Investment Attraction, Foreign Trade and Country Image”, articulating the following action plan: "To promote foreign and national investment that favors the generation of more and better jobs". Paraguay has also enacted:

• Law No 117/91 (the “Investment Law”), to promote foreign investment in Paraguay and provide legal certainty to foreign investors (a crucial component of any investment);
• Law No 60/90, which establishes the Tax Incentive Regime for the investment of capital of national and foreign origin, is amended and expanded";
• Law No 5,542/15 on “Guarantees for Investments and Promotion of Employment Generation and Economic and Social Development";
• Law No 1,064/97 (as amended) on the "Maquiladora Export Industry";
• Law No 6,977/24 on "Renewable Energies"; and
• Law No 7,190/23 on "Carbon Credits".

How Gross Brown Sees It: Banking and Financial System Stability, a Sophisticated Private Sector and Industrialisation Led by Agribusiness

Moody's upgrade reflects the country's robust and sustained economic growth, where public investment in infrastructure, preservation of the country's fiscal strength, and increased and diversified access to market financing played an important role.

Gross Brown notes that the pillars of the country's economic growth are its the excellent banking and financial system, an increasingly sophisticated private sector and industrialisation led by agribusiness, with the main investment sectors being (i) the banking and financial sector, (ii) infrastructure, (iii) real estate, (iv) capital markets, (v) the stock market, (vi) maquilas, (vii) livestock and (viii) health.

As mentioned above, Paraguay has experienced substantial and sustained economic growth over the past 15 years, and macroeconomic and market conditions are attractive for investment. Strong financial sector regulation in the country has created the conditions for extended credit, which has allowed large commercial, real estate and industrial investments to land in Paraguay, in addition to the traditional strength of agribusiness. Paraguay is one of the world's leading exporters of commodities (meat, soybeans, etc) and hydroelectric power. In addition, the Paraguayan private sector's efforts to engage in business alliances with foreign investors have led to important developments in the internal waterway transportation system and port infrastructure.

Within the context of the pandemic, Paraguay's economic growth was projected to contract by 1% of its GDP in 2020. However, the economy rebounded in 2021, closing the year with 5% growth, and in 2022 it grew by 0.1%; however, this slight increase was surpassed in 2023, with a growth rate of 4.5%. As for inflation, in 2021 Paraguay recorded an inflation rate of 7.1%, and in 2022 it recorded inflation of 8.1%; however, inflation stabilised at 3.7% in 2023, lower than the rate of GDP growth. For 2024, GDP growth is forecast at 3.8%, and inflation at 4%.

Last but not least, Paraguay has had the same currency (guarani) since 1943, has never defaulted and has never experienced hyperinflation. The country is characterised by a free-market economy, and there are no capital controls or foreign exchange restrictions. Paraguay also has the lowest tax burden in the region (flat rate of corporate income tax of 10%).

As a result, the firm notes a remarkable increase in large M&A transactions in the local market over the past few years, which demonstrates that the private sector in Paraguay is preparing to generate a greater volume of business and become more competitive in the international market.

With its diverse investment opportunities, Paraguay is well-positioned to attract both domestic and foreign investors. As Paraguay continues to modernise its infrastructure and strengthen its market ties, the prospects for economic expansion remain promising. This positive outlook, coupled with the nation's commitment to maintaining a stable and competitive business environment, solidifies Paraguay's status as an important player in the regional and global economy.