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Moody’s Investors Service has upgraded Paraguay’s government bond rating by one notch to Ba2 from Ba3, and changed the outlook to positive from stable.

According to Moody’s, the “decision to upgrade Paraguay’s rating was driven by the following factors:

1.     The improving standing of Paraguay’s key fiscal metrics relative to ‘Ba’ peer medians.

2.     A strengthened institutional framework as a result of the legislation package that was approved last year.

3.     A smooth political transition since the impeachment of former president Fernando Lugo in 2012.

Paraguay is still expecting more news in regards to the second point. Between them lies the soon to be issued regulatory decree of the Public Private Partnership law, which shall make way feasible this kind of investments in the country. The government estimates that the decree will be ready in early March.

RATINGS RATIONALE

FIRST DRIVER - IMPROVING STANDING OF KEY FISCAL METRICS RELATIVE TO 'Ba' PEER MEDIANS

After the central government reported average debt ratios of 18% of GDP and 112% of revenues during 2003-2012, compared with the 39% and 149% for 'Ba'-rated medians during the same period, these debt ratios declined to just 12.7% of GDP and 79% of revenues in 2013. That is well below the 'Ba' medians of 36% and 151%, respectively. Debt affordability, as measured by the ratio of interest payment to revenues, is high at less than 2% (Ba median: 7.7%) owing to the largely concessional nature of Paraguay's debt. The country's average debt maturity is over 20 years.

Although most of the government's debt is in foreign currency, Paraguay has a natural hedge since revenues from hydroelectric energy sales to Brazil and Argentina are US dollar-denominated.

SECOND DRIVER -- STRENGTHENED INSTITUTIONAL FRAMEWORK

The government of President Horacio Cartes, who took office in August 2013, secured passage of several key pieces of legislation within months of coming to power, including a tax reform, a Fiscal Responsibility Law, a Law to Modernize Financial Administration, a Public Private Partnership (PPP) Law, and a revision of the Sovereign Bond Law.

THIRD DRIVER -- SMOOTH POLITICAL TRANSITION

The transition of power since the impeachment of former president Fernando Lugo has been smooth and seamless, including the changeover to the interim Franco administration and more recently to the new Cartes administration. There was no material impact on the economy or to the country's creditworthiness during the transition period. And Paraguay was ultimately reincorporated into MERCOSUR. Throughout the transition, the technical capacity of the Ministry of Finance and central bank remained strong.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook on the Ba2 rating reflects our expectation that, even though it will take time for the government to implement the various laws approved in late 2013, they are likely to improve fiscal oversight (e.g., through the Fiscal Responsibility Law) and allow for higher levels of infrastructure investment (e.g., through the PPP law and/or the revision of the Sovereign Bond Law) over the medium-to-long term.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward rating pressure could result from: (i) successful implementation of recently passed laws; (2) investments in the economy that could enhance economic diversity and/or markedly improve infrastructure.

Downward rating pressure could result from: (1) a reversal of the government's prudent fiscal management (2) a significant and prolonged commodity shock driven by declining prices or adverse climate conditions; (3) recurrent political instability.

COUNTRY CEILINGS

As a result of this rating action, the long-term local currency bond and deposit ceilings changed to Baa3 from Ba1, while the short-term local currency bond and deposit ceilings changed to P3 from Not Prime. The long-term foreign currency deposit ceiling changed to Ba3 from B1, while the short-term foreign currency deposit ceiling remains at Not Prime. The long-term foreign currency bond ceiling remains unchanged at Ba1, while the short-term foreign currency bond ceiling remains Not Prime.

GDP per capita (PPP basis, US$): $6,053 (2012)

Real GDP growth (% change): 13.6% (2013 Estimate)

Rate (CPI, % change Dec/Dec): 4.2% (2013 Estimate)

Gen. Gov. Financial Balance/GDP: -1.9% (2013 Estimate)

Current Account Balance/GDP: 0.8% (2013 Estimate)

External debt/GDP: 18.2% (2013 Estimate)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 29 Jan 2014, a Moody’s rating committee was called to discuss the rating of the Paraguay, Government of. The main points raised during the discussion were: The issuer's institutional strength/framework, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer has become increasingly susceptible to event risks. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The systemic risk in which the issuer operates has not materially changed.”

Authors:  Marcio Torales - Rodolfo G. Vouga Z.

Source:  Moody's Investors Service

Link:  http://www.moodys.com/research/Moodys-sube-la-calificacin-de-bonos-del-gobierno-de-Paraguay--PR_292021