Inversores Paris Carlos Fernandez Valdovinos

PARAGUAY

Investment opportunities

in a rising economy

September, 2014

Carlos G. Fernández Valdovinos

Central Bank of Paraguay

Roadmap

• Paraguay under the “new normal”

• Macro-advantages for investors

• Micro-advantages for investors

• Summary

Roadmap

• Paraguay under the “new normal”

• Macro-advantages for investors

• Micro-advantages for investors

• Summary

Challenges in the new global context

• Six years after the beginning of the largest economic

crisis in 80 years, some signs (green shoots) suggest

that the worst may be over.

• The “new” world:

– Widespread recovery on economic growth in 2014.

– Higher growth projections than in 2013.

– Still, recovery is uneven

• The Federal Reserve started the normalization of

monetary conditions in early 2014.

Challenges in the new global context

• This is a positive event, but increased financial market

and capital flow volatility is now a concern for emerging

markets.

• Warning: the rise in U.S. interest rates since May

triggered large changes in exchange rates, sovereign

spreads, stock markets, and gross portfolio inflows.

• Nevertheless, the impact was not homogenous across

countries: fundamentals matter.

US Treasury bond yields

Recovery is underway, but emerging

markets face new challenges...

Source: IMF-WEO update July-2014. Bloomberg.

May 21, 2013

Bernanke announces a

possible reduction in the

FED’s asset-purchase

program

Dec 18, 13

Bernanke announces the

withdrawal of the stimulus will

begin in early 2014.

Emerging Markets Bond s Index (EMBI)

1,6

1,8

2,0

2,2

2,4

2,6

2,8

3,0

3,2

21

-May-1

3

10

-Jun

-13

30

-Jun

-13

20

-Jul-

13

9-A

ug-1

3

29

-Aug

-13

18

-Sep

-13

8-O

ct-

13

28

-Oct-

13

17

-Nov-1

3

7-D

ec-1

3

27

-Dec-1

3

16

-Jan

-14

5-F

eb

-14

25

-Fe

b-1

4

17

-Mar-

14

6-A

pr-

14

26

-Apr-

14

16

-May-1

4

5-J

un-1

4

25

-Jun

-14

15

-Jul-

14

4-A

ug-1

4

%

336,9

322,7

220

240

260

280

300

320

340

360

380

400

2-J

an-1

322

-Jan

-13

11

-Fe

b-1

33-M

ar-

13

23

-Mar-

13

12

-Apr-

13

2-M

ay-1

322

-May-…

11

-Jun

-13

1-J

ul-1

321

-Jul-

13

10

-Aug

-13

30

-Aug

-13

19

-Sep

-13

9-O

ct-

13

29

-Oct-

13

18

-Nov-1

38-D

ec-1

328

-Dec-1

317

-Jan

-14

6-F

eb

-14

26

-Fe

b-1

418

-Mar-

14

7-A

pr-

14

27

-Apr-

14

17

-May-…

6-J

un-1

426

-Jun

-14

16

-Jul-

14

5-A

ug-1

4

Ba

sic

Po

ints

0,0

2,0

4,0

6,0

World Advanced Economies Emerging Economiesand Developing

Countries

GDP Growth (%)

2013 2014 2015

BRA

BGR

CHL

CHN

COL

HUN

IND

IDN

KOR

LTN

MYSMEX

PRYPER

PHL

POLROM

RUS

ZAFTHA

TUR

UKR

-5

0

5

10

15

20

0,0 0,5 1,0 1,5 2,0 2,5 3,0Exchange R

ate

Variation (

%)

(May 2

2,

2013 /

Aug 3

0,2

013

)

Variation in Treasury Yields (%)(May 22, 2013 / Aug 30, 2013)

Exchange Rate and Treasury Bond Yields

BRA

BGR

CHL

CHN

COL HUN

IND

IDN

KOR LTN

MYS

MEX

PRY

PER

PHL

POLROM

RUSZAF

THA

TUR

UKR

KAZ

-5

0

5

10

15

20

-2 0 2 4 6 8 10 12

Exchange R

ate

Variation (

%)

(May 2

2,

2013 /

A

ug 3

0,

2013)

Inflation (%) (Dec 2012)

BRA

BGR

CHL

CHN

COL

HUN

IND

IDN

KOR

MYS

MEX

PRYPER

PHL

POL

ROM

RUSZAF

THA

TUR

UKR KAZ

-5

0

5

10

15

20

-8 -6 -4 -2 0 2 4 6 8

Exchange R

ate

Variation (

%)

(May 2

2,

2013 /

Aug 3

0,

2013)

Current Account / GDP (%) (Dec 2012)

Exchange Rate Variation and

Inflation

Current Account and Exchange Rate Variation

Source: Bloomberg.

.

…still, fundamentals will matter

Roadmap

• Paraguay under the “new normal”

• Macro-advantages for investors

• Micro-advantages for investors

• Summary

Sound macro-foundations

to face headwinds

• Over the past decade, policy frameworks and economic

fundamentals have been strengthened.

• Macro-Policies: government finances are sound, inflation

is low, banks are strong, buffers are large, and a flexible

exchange rate regime is a useful tool to face external

shocks.

• Structural Reforms: tax reforms in 1993 and 2013,

passage of a fiscal responsibility law and the approval of a

PPP law.

• The Fed exit from unconventional monetary policy will be a

bumpy ride, but Paraguay is well prepared.

Strong economic growth, coupled with

low and stable inflation

Source: CBP.

0

10

20

30

40

50

jul-

89

jul-

90

jul-

91

jul-

92

jul-

93

jul-

94

jul-

95

jul-

96

jul-

97

jul-

98

jul-

99

jul-

00

jul-

01

jul-02

jul-

03

jul-

04

jul-

05

jul-

06

jul-

07

jul-

08

jul-09

jul-

10

jul-

11

jul-

12

jul-

13

jul-

14

%

YoY inflation

A history of stable prices

1,7

4,95,36,8

1,6

4,2

0,1

-1,4-2,3

-0,80,0

4,34,12,1

4,85,46,4

-4,0

13,1

4,3

-1,2

13,6

4,81,8

4,8

-5

0

5

10

15

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14*Ec

on

om

icG

row

th(%

)

GDP Average 1992-2002

Paraguay economic growth

1992-2014*

4,3

0

5

10

15

20

25

30

35

VEN ARG URY BRA BOL PRY ECU COL PER CHI

(%)

Inflation average

2009-2013

Large buffers to dampen

excessive FX volatility

International Reserves

(% of GDP)

Source: CBP and IMF-IFS. Year 2013, last data available.

Peru 31% Uruguay

29%

Paraguay20% Brazil

16%Chile 15% Colombia

11%

Argentina6%

Venezuela 2%

0%

5%

10%

15%

20%

25%

30%

35%

2013

80

130

180

230

280

Apr-

08

Ju

l-0

8

Oct-

08

Ja

n-0

9

Apr-

09

Ju

l-0

9

Oct-

09

Ja

n-1

0

Apr-

10

Ju

l-1

0

Oct-

10

Ja

n-1

1

Apr-

11

Ju

l-1

1

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-1

2

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-1

3

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-1

4

US

D e

xc

ha

ng

era

te(Í

nd

ex J

an

ua

ry2

00

8 =

10

0)

Guaraní (Paraguay)

Peso (Argentina)

Real (Brasil)

Peso (Chile)

Nuevo sol (Perú)

Peso (Colombia)

Peso (Uruguay)

-4000

-3000

-2000

-1000

0

1000

2000

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

2013

In U

SD

Millio

ns

Net External Creditor position

44%

35%

0%

10%

20%

30%

40%

50%

ma

r-9

4

ma

r-9

5

ma

r-9

6

ma

r-9

7

mar-

98

ma

r-9

9

ma

r-0

0

ma

r-0

1

ma

r-0

2

ma

r-0

3

ma

r-0

4

ma

r-0

5

ma

r-0

6

ma

r-0

7

ma

r-0

8

mar-

09

ma

r-1

0

ma

r-1

1

ma

r-1

2

ma

r-1

3

ma

r-1

4

Deposits/GDP

Source: CBP

A sound financial sector

to support growth

Increase in financial deepening Evolution of Non-performing loans

2,28%

3,91%

0,39%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

4,00%

Ju

n-0

8

Oct-

08

Feb

-09

Ju

n-0

9

Oct-

09

Feb

-10

Ju

n-1

0

Oct-

10

Feb

-11

Ju

n-1

1

Oct-

11

Feb

-12

Ju

n-1

2

Oct-

12

Feb

-13

Ju

n-1

3

Oct-

13

Feb

-14

Ju

n-1

4

NPL´s NPL´s in L.C. NPL´s in F.X.

Solvency Ratio17% 17%

16%15%

14% 14% 14%

PAR BRA ARG COL PER URU CHI

Average: 16%

0

1

2

3

4

5

6

7

Ju

n-0

5

De

c-0

5

Ju

n-0

6

De

c-0

6

Ju

n-0

7

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

Ju

n-1

1

De

c-1

1

Ju

n-1

2

De

c-1

2

Ju

n-1

3

De

c-1

3

Ju

n-1

4

Moody`s S&P Fitch

BB-

Ba2(+)

B3/B-

Caa1/CCC+

B2/B

B1/B+

Ba3/BB-

B3(+)

Caa1(+)

BB-(-)

B-

Caa1

B3

B1

Ba3Ba3

B+

B

BB-

BB- (+)

Source: Bloomberg

Ba2/BB

BB

Strong macro-policies led to steady

improvements in credit rating

6,96,6

5,55,35,25,1

4,44,0

3,63,3

2,92,5

1,7

0,9

-0,6

-1,7

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

Nig

eria

Sri L

an

ka

Ang

ola

Para

gu

ay

Leso

tho

Boliv

ia

Suri

na

m

Gab

on

Geo

rgia

Costa

Ric

a

Gua

tem

ala

Tu

nis

ia

Arm

en

ia

El S

alv

ad

or

Hu

ng

ria

Cro

acia

GD

P g

row

th (

%)

Ave

rage

20

08

-20

13

Mediana=3,8

Source: FMI-WEO Apr-2014 and CBP.Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch

In fact, Paraguay has better fundamentals

compared to peers…

-10 -5 0 5 10

GEO

ARM

TUN

SLV

CRI

SUR

LKA

GTM

Mediana

PRY

LSO

HRV

AGO

HUN

BOL

NGA

GABCA Balance (% of GDP)

2015f

2014f

2013f

Paraguay experienced eight

consecutive years of fiscal

surpluses. This had allowed the

country to decrease its public

external debt from more than 50

percent of GDP to less than 10

percent, the lowest percentage

among pears

-

20

40

60

80

100

Ge

n G

ov

Gro

ss

Deb

t(%

of G

DP

)

2013 2015f

Despite strong growth expectations,

Paraguay will maintain an solid

external balance. This is crucial

given tightening external financing

conditions.

Source: FMI-WEO Abr-2014 and CBP.Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch

…with relatively better external

and fiscal positions

Sovereign Bonds

Prices and Yields

Source: Bloomberg

As a result, recent bond placements

were

quite successful

100,13

104,31

6,09

5,80

4,0

4,5

5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

94

96

98

100

102

104

106

05

/14

05

/14

05

/14

05/1

4

05

/14

05

/14

06

/14

06

/14

06

/14

06

/14

06

/14

07

/14

07

/14

07

/14

07

/14

07

/14

08

/14

08

/14

08

/14

Yie

ldP

ric

e

Price 2013 Price 2014 Yield 2013 Yield 2014

Roadmap

• Paraguay under the “new normal”

• Macro-advantages for investors

• Micro-advantages for investors

• Summary

Source: Getulio Vargas Foundation. Bloomberg

0

20

40

60

80

100

120

140

160

Colo

mb

ia

Para

gu

ay

Peru

Boliv

ia

Uru

gua

y

Me

xic

o

Chile

Ecua

dor

Bra

zil

Arg

en

tin

a

Ven

ezue

la

Jan-14 Apr-14 Jul-14

Economic Climate Index

A competitive business climate…

1st WorldExporter

• Net electricity

• Organic sugar

2nd WorldProducer

• Stevia(and exporter)

• Tung

3rd World Fleet of Barges

• 2200 unitswith 200 tugs

4th WorldExporter

• Soy

• Charcoal

• Cassava starch

• Soybean Oil

5th WorldExporter

• Soybean meal

6th WorldProducer

• Soybeans

9th WorldExporter

• Meat

10th WorldExporter

• Wheat

…with an extraordinary

production capacity…

Source: MIC.

…located in a favorable

geographic position

Paraguay is located in the center of the

Region, with the highest income in South

America.

South America(100%)

MERCOSUR(70%)

Population(Mill. people)

405 281

Nominal GDP* (US$ Billion)

4.539 3.311

Average per capita GDP (US$)

7.946 10.402

Source: 2012 Latin American Statistic Yearbook - ECLAC www.eclac.org *Projection Yr. 2013 **In current US$ (2011)

213

205

187

186

163

147

129

112

111

82

- 50 100 150 200 250

Uruguay

Guatemala

El Salvador

Colombia

Brasil

Chile

Peru

México

Costa Rica

Paraguay

USD/MWh

Residential

213

204

192

183

156

139

135

105

72

57

- 50 100 150 200 250

Guatemala

Costa Rica

El Salvador

Brasil

Colombia

Uruguay

México

Chile

Peru

Paraguay

USD/MWh

Industrial

609,0

405,0 395,0

339,0

-

100,0

200,0

300,0

400,0

500,0

600,0

700,0

Argentina Uruguay Paraguay Brasil

Minimum Wage USD

102%

70%

48%

35%

0%

20%

40%

60%

80%

100%

120%

Brasil Argentina Uruguay Paraguay

Social charges and other benefits incidence

A country with low energy

and labor costs…

Source: MIC

0%• Imports of capital goods tariff

(Machinery and Equipment)

0%• Value Added Tax (VAT) on

purchasese of capital goods (within or outside the country)

0%

• Remittances and foreign payments for principal, interest and fees taxes(applies to investments of over $ 5 million.)

0%

• Dividend payment taxes and sending profits abroad (applied to investments of over $ 5 million within a span of 10 years)

...which also offers

important tax advantages…

Taxes PGY ARG URU BRA CHI

Business Income Tax

≤10% 35% 25% 34% 17%

Personal Income Tax

10% 35% 25% 27,5% 40%

Value AddedTax (VAT)

≤10% 21% 23% 25% 19%

Source: MIC,STP

25,9% 25,5% 24,5%

19,9%17,7%

15,6%13,5%

0%

5%

10%

15%

20%

25%

30% Comparative Tax Burden (% of GDP)

…trough several legislations

Laws and Other Tax Benefits

Law Nº 60/90 System of Fiscal Incentives for capital investment of domestic and foreign origin

Law Nº 1064/97 Maquiladora Export Industry

Law Nº 4427/12 Incentives for production, development, packaging of high-tech goods

Law Nº 4903/13 Industrial parks

Law Nº 5102/13Investment Promotion Act and public infrastructure expansion and improvement of goods and

services by the state (PPP Law)

Decree 11771/00 For the import of raw materials and supplies

Law 4427/12 High-tech assembly

Law 2422/04 Special customs regimes

Source: CBP

Source: MIC

Simplification of business

processes

National automotive

policy

National output

and

Employment

Law

60/90

Industries

registratio

nMaquila regime

Unified System for the

Opening and Closure of

Businesses

Roadmap

• Paraguay under the “new normal”

• Macro-advantages for investors

• Micro-advantages for investors

• Summary

Summary

• A normalization on monetary conditions in the US is

not necessarily a negative event: economic and

financial effects will depend on robustness of

economic policies.

• In Paraguay, fundamentals have improved over the

past decade and the economy is well prepared to face

external shocks.

• Paraguay improvements were reflected in recent and

successful bond issuances: market demand was 4.9

times the initial offer and yields lower than in countries

with the same credit rating (BB).

Summary

• In sum, the country offers to the private sector a stable

macroeconomic framework for the medium and long

term.

• This is crucial: it is a pre-requisite for individuals and

companies to extend their planning horizon and,

consequently, generate investments that will create

employment, production and income.

THANK YOU