S&P Warns Paraguay Political Crisis May Impact Investor Confidence
Rating agency maintains economic growth outlook despite potential short-term fiscal and political instability.
1Political Crisis Risks
S&P Global Ratings warns that Paraguay's current political instability could dampen investor confidence in the short term. Despite this uncertainty, the agency does not foresee immediate changes to the nation's credit rating. They expect Vice President Pedro Alliana to assume the presidency and serve until the current government term ends in August 2028.
2Resilient Economic Projections
The rating agency maintains a positive outlook on Paraguay's economic growth, projecting a 4.8% GDP increase for 2026. Growth is expected to stabilize at 3.5% for both 2027 and 2028. S&P assumes the new administration will continue a pragmatic approach to economic management, which has historically provided predictability and fostered consistent national development.
3Institutional Governance Challenges
Paraguay currently holds a BBB- rating with a stable outlook, reflecting its evolving political institutions. The agency notes that the country faces limited checks and balances alongside comparatively weak governance structures. However, a broad consensus on macroeconomic direction remains a key factor in maintaining stability and supporting the country's overall growth trajectory.
4Fiscal Adjustment Delays
The transition of government power may slow down necessary corrections in public finances. Paraguay previously adjusted its fiscal targets in August to address outstanding obligations to suppliers. Furthermore, the government has officially deferred compliance with the Fiscal Responsibility Law until 2028, creating potential risks for the administration's ability to effectively contain public spending.
5Banking Sector Stability
S&P does not anticipate widespread credit weaknesses stemming from the current political crisis. The agency expects the impact on depositor confidence to remain contained, particularly regarding the situation at Ueno Bank. They emphasize that the current political turmoil is unlikely to trigger systemic failures within the broader national banking and financial system.
6Deposit Protection Measures
Approximately 97% of depositors at Ueno Bank are protected by the national Deposit Guarantee Fund. Following legislative approval from Congress, the process to return covered savings has already commenced. This mechanism serves as a crucial buffer, preventing the political crisis from escalating into a broader financial panic among the general public.
7Fiscal Pressure Factors
Additional fiscal pressure may arise from the costs associated with covering uninsured deposits at Ueno Bank, which include public sector funds. Despite these challenges, S&P initially expects limited deviations from their fiscal baseline. The country's debt burden is projected to remain moderate, staying below that of most comparable peer nations in the region.
8Future Monitoring Criteria
S&P will continue to monitor the situation for signs of increased political uncertainty. Any significant deterioration in institutional trust that negatively impacts growth expectations or weakens fiscal, external, and monetary positions would be viewed as a negative credit development. The agency remains focused on how the transition affects long-term economic policy consistency.
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