After a difficult decade of authoritarian leadership and high crime levels, Paraguay appears to be on the path to stability – thanks to President Abdo Benitez’s rapid reaction to the pandemic. If the Chinese economy recovers, Paraguay could find itself in an enviable position.
In a nutshell
- Paraguay has handled the pandemic well
- The country could pull off a rapid economic recovery
- Chinese economic demand will play a determining role
In this author’s 2019 report on Paraguay, there was reason for some optimism. Paraguay appeared to be emerging from a long period of authoritarian, corrupt government. During these years, the country profited from its geopolitical location in the center of South America, becoming the largest trading point for everything illegal. The so-called Triple Frontier (the junction between Argentina, Brazil and Paraguay) was a safe haven for everything from money laundering to drug smuggling and contraband of all sorts. It also served as a base for terrorist groups such as Hezbollah and Hamas, which carried out attacks in Argentina and elsewhere from Paraguayan territory.
Paraguay’s situation may have deteriorated but not nearly as much as its neighbors.
The reasons for that modest hope were that there had been several successive peaceful transitions in the head of government, culminating in the election of Mario Abdo Benitez in 2018. His Colorado Party enjoyed a narrow majority in the congress, but nearly half of the Colorado deputies still seemed to be under the control of Mr. Abdo Benitez’s predecessor, Horacio Cartes (2013-2018). At the time of writing that last report, the new president had not shown himself to be a dynamic or an efficient leader, although it did seem that the level of corruption in the government and the degree of opacity were declining.
More importantly, this confidence was based on the fairly rapid emergence of a highly productive, profitable agricultural sector over the past decade. Thanks to robust Chinese demand, it had given a new sense of modernity and entrepreneurship to the Paraguayan economy.
A year later, there is still cause for optimism, although slightly curbed. The economic situation has deteriorated. The export of electrical energy, which, after foodstuffs, is the country’s second most important export, has fallen in terms of value and quantity – approximately 25 percent from 2018 to 2019.
At the same time, the value of essential foodstuffs exports has fallen 28.5 percent from 2018 to 2019. Even so, Paraguay’s commodity export decline is less than the decline in other commodities on which countries in the region are dependent. In other words, Paraguay’s situation may have deteriorated but not nearly as much as its neighbors and there is reason to anticipate a reasonably rapid V-shaped recovery.
Paraguay will pull off a rapid economic recovery and emerge from the quarantine in a relatively strong position.
President Abdo Benitez has shown himself effective in dealing with the Covid-19 pandemic. As Machiavelli would have put it, the leader has managed the situation with a great deal of luck and a measure of virtue or skill. Paraguay has one of the lowest infection rates of any country in Latin America. It also has the lowest mortality rate from the disease (deaths per one million population). The president quickly imposed a lockdown in Asuncion, the nation’s capital, and the Paraguayan health system has been able to withstand the caseload.
Given that it is still early in the expansion of the pandemic in Latin America, it would be premature to predict its final outcome. Still, at this point, it certainly appears that Paraguay will pull of a rapid economic recovery and emerge from its quarantine in a relatively strong position. In doing so, it will have access to very generous international credit from the multilateral lending agencies and will benefit from the fact that it has maintained a relatively stable financial system. The rate of inflation is low and the public debt, while higher than it was a few years ago, is still at a relatively modest level.
Facts & figures
Beijing and Taipei
The rate of Paraguayan recovery will depend in part on how quickly Chinese demand for soy rebounds. There is early evidence that the Chinese economy is in recovery mode, so the demand for soy and other commodities should continue to expand in the coming months. And the friction between the United States and China will work to favor Chinese purchases from Paraguay. In general terms, it looks as if Paraguay will demonstrate a level of stability and success only slightly below that of the most successful small countries in the region, Costa Rica, Panama, and Uruguay.
One geopolitical curiosity might play a role in how Paraguay comes out of the Covid-19 crisis. Paraguay is the only country in South America that maintains relations with Taiwan. This is both a problem and an opportunity.
We can expect a reasonably successful presidency for Mr. Abdo Benitez.
The challenge is that Paraguay cannot play a role in any efforts by Mercosur to negotiate a free trade agreement with the People’s Republic of China. At the moment, this does not appear to be a costly sacrifice because the relatively new government in Buenos Aires has made it clear that such a deal will be improbable in the near future. So far, maintaining relations with Taiwan has not been an obstacle to the extraordinary growth in trade between Paraguay and China. The stark differences between how Beijing and Taipei have handled the pandemic also lend some luster to Paraguay’s ties with Taiwan, which has responded with modest medical aid to the government in Asuncion to help it deal with the pandemic.
Mr. Abdo Benitez has had a difficult and challenging first year in office. During his second year, he has been able to consolidate his power over his party in the congress and over the state bureaucracy. He has, quite simply, proven himself purposeful and competent in dealing with the Covid-19 pandemic, certainly the most significant development in the region. Paraguay is surrounded by extremely bad management and disastrous results in Brazil, Ecuador, and Peru; bad results in Chile, and a deteriorating situation in Argentina. In South America, only Uruguay has had an experience similar to Paraguay.
The most likely scenario is that, over the next few months, President Abdo Benitez will improve with experience and that he will consolidate his power. At the same time, we can anticipate a gradual stabilization of the economic situation helped by growing demand for soy and a consolidation of the bilateral agreement with Brazil for the export of hydroelectric energy.
This means that we can expect a reasonably successful presidency for Mr. Abdo Benitez, in the middle of a region beset by economic and public health problems that are far from under control.