Moody’s raises Paraguay to investment grade for the first time

Paraguay has crossed a line it has been working towards for two decades. On Friday, July 26, 2024, Moody's Ratings upgraded the government of Paraguay's long term credit rating to Baa3 from Ba1 and changed the outlook to stable. Baa3 is the lowest rung of what the market calls investment grade, and it is the first time in its history that Paraguay has held that status with any of the major agencies.

President Santiago Peña, who announced the news while in Paris for the opening of the Olympic Games, called it the result of decades of effort to transform the economy. Finance Minister Carlos Fernández Valdovinos summed it up in four words on social media: "Somos grado de inversión", we are investment grade.

What investment grade means

A credit rating is an independent opinion on how likely a borrower is to repay its debts in full and on time. Three agencies dominate sovereign ratings: Moody's, S&P Global and Fitch. Their scales split into two broad groups. The upper group, investment grade, signals a low risk of default. The lower group, often called speculative grade or high yield, signals more risk.

The dividing line matters more than any single notch above or below it. Many pension funds, insurers and other large institutional investors operate under rules that limit or discourage them from holding bonds below investment grade. A country that crosses the line can sell its bonds to a wider pool of buyers, which usually means lower interest rates and longer repayment periods. ABC Color noted that the benefit can extend to Paraguayan companies that borrow abroad. Moody's also raised Paraguay's country ceilings, which cap the ratings it gives most borrowers based in the country, by two notches.

Paraguay is investment grade with one agency for now. S&P raised it to BB+, one step below the line, in February 2024, and Fitch rates it BB+ as well.

The reasons Moody's gave

Moody's pointed to three main factors:

• Growth that has become more resilient. Agriculture and hydropower still matter a great deal, but processed farm products and light manufacturing have grown quickly. In 2020 the economy shrank by just 0.6%, less than its neighbours, and the 2022 drought did not push it into contraction as earlier droughts had. Growth was 4.7% in 2023, and Moody's expects around 3.5% a year over the coming years, with upside from large foreign investments in forestry and green fertilisers.
• Institutional reform. Moody's cited a new public procurement law, the merger of the tax office and customs into a single revenue agency, closer supervision of state companies and planned pension reforms.
• Fiscal strength. Moody's expects government debt to stay around 40% of GDP (gross domestic product, the total value of what the economy produces in a year), well below other countries rated Baa3.

It also credited infrastructure spending for easing transport bottlenecks, including roads that support new private investment.

The weak spots

The report was not one sided. Most of Paraguay's government debt is in foreign currency, mainly US dollars, which leaves it exposed if the guaraní falls. The government is working on this: debt in local currency rose to 16% of the total in April 2024 from 11% in July 2023, and around 45% of the foreign currency debt is owed to multilateral development banks, which lowers refinancing risk. Moody's also noted the narrow tax base, the economy's exposure to droughts and floods, and weak educational outcomes. It said a downgrade could follow if reforms stall or debt rises.

Markets responded well. Bloomberg reported that Paraguay's dollar bonds were among the best performers in emerging markets on the day.

What it means for investors and residents

For the state, cheaper borrowing frees up money for roads, energy and public services. For businesses, an investment grade sovereign tends to make foreign lenders and investors more comfortable with the country as a whole, and it is one more data point that boards and banks look at when choosing where to put a factory or a regional office.

For individuals, the effects are indirect but real. A rating upgrade does not change residency rules or taxes. It does reflect a track record of low inflation, a stable currency and prudent public finances, which matter to anyone holding assets, buying property or building a business in the country.

What it means if you are considering Paraguay

Paraguay's appeal for most of our clients rests on simple residency, a territorial tax system that generally leaves foreign income untaxed, and a path to citizenship after three years of permanent residence. Investment grade adds a layer of reassurance about the economy behind that residency. Temporary residency requires no investment, and the investor route can lead straight to permanent residency. We help clients apply and work with our local team for legal and tax advice.

This article is general information, not legal, tax or investment advice.