PARAGUAY

Strong Fundamentals to Face

New Global Trends

June, 2014

Carlos G. Fernández Valdovinos Central Bank of Paraguay

Roadmap

• Challenges in the new global context

• Sound macro-foundations to face headwinds

• Market perspective

• Summary

Roadmap

• Challenges in the new global context

• Sound macro-foundations to face headwinds

• Market perspective

• Summary

Challenges in the new global context

• Almost six years after the beginning of the largest economic crisis in 80 years, some signs (green shots) suggest that the worst may be over.

• The “new” world:

– Widespread recovery on economic growth in 2014.

– Higher growth projections than in 2013.

• In December 2013, the Federal Reserve announced that it would start 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.

• 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.

0,0

1,0

2,0

3,0

4,0

5,0

6,0

World Advanced Economies Emerging Economies andDeveloping Countries

GD

P g

row

th(%

)

2013 2014 2015

Source: IMF-WEO update April-2014.

1,9

0,2 1,5

6,5

2,7 2,8 2,8

1,6 1,4

6,7

2,5 2,4 3,0

1,8 1,0

6,8

3,0 2,9

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

United States European Union Japan Developing Asia Latin America and TheCaribbean

Central and EastEurope

2013 2014 2015

Advanced economies Emerging economies an developing countries

GD

P g

row

th (

%)

Recovery is underway…

Widespread recovery in economic growth… but with some regional differences.

US Treasury bond yields

… but emerging markets face new challenges…

Source: 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)

The FED normalization of monetary policy will remain a key issue in the short term, driving periods of high volatility in emerging markets.

In spite of resilient capital flows, financial conditions have remained tighter after Bernanke announced an imminent tapering.

1,6

1,8

2,0

2,2

2,4

2,6

2,8

3,0

3,2

21

-May

-13

31

-May

-13

10

-Ju

n-1

32

0-J

un

-13

30

-Ju

n-1

31

0-J

ul-

13

20

-Ju

l-1

33

0-J

ul-

13

9-A

ug-

13

19

-Au

g-1

32

9-A

ug-

13

8-S

ep-1

31

8-S

ep-1

32

8-S

ep-1

38

-Oct

-13

18

-Oct

-13

28

-Oct

-13

7-N

ov-

13

17

-No

v-1

32

7-N

ov-

13

7-D

ec-1

31

7-D

ec-1

32

7-D

ec-1

36

-Jan

-14

16

-Jan

-14

26

-Jan

-14

5-F

eb-1

41

5-F

eb-1

42

5-F

eb-1

47

-Mar

-14

17

-Mar

-14

27

-Mar

-14

6-A

pr-

14

16

-Ap

r-1

42

6-A

pr-

14

6-M

ay-1

41

6-M

ay-1

42

6-M

ay-1

4

%

336,9 339,7

220

240

260

280

300

320

340

360

380

400

2-J

an-1

3

20

-Jan

-13

7-F

eb-1

3

25

-Feb

-13

15

-Mar

-13

2-A

pr-

13

20

-Ap

r-1

3

8-M

ay-1

3

26

-May

-13

13

-Jun-1

3

1-J

ul-

13

19

-Ju

l-1

3

6-A

ug-

13

24

-Au

g-1

3

11

-Sep

-13

29

-Sep

-13

17

-Oct

-13

4-N

ov-

13

22

-No

v-1

3

10

-Dec

-13

28

-Dec

-13

15

-Jan

-14

2-F

eb-1

4

20

-Feb

-14

10

-Mar

-14

28

-Mar

-14

15

-Ap

r-1

4

3-M

ay-1

4

21

-May

-14

Bas

ic P

oin

ts

9,4%

7,9%

6,7%

5,2% 5,0% 5,0%

4,1%

3,0% 3,3%

2,7% 2,3%

4,4%

3,7%

3,1%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

10,0%

BRAZIL URUGUAY PARAGUAY PERU CHILE MEXICO COLOMBIA

21-May-13 + 40 days 18-Dec-13 + 40 days

Source: Bloomberg.

… including pressures in domestic currencies…

BRA

BGR

CHL

CHN

COL

HUN

IND

IDN

KOR

LTN

MYS MEX

PRY PER

PHL

POL ROM

RUS

ZAF THA

TUR

UKR

-5

0

5

10

15

20

0,0 0,5 1,0 1,5 2,0 2,5 3,0

Exc

han

ge R

ate

Var

iati

on

(%)

(M

ay 2

2, 2

01

3 /

Aug

30

,20

13

)

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

POL ROM

RUS ZAF

THA

TUR

UKR

KAZ

-5

0

5

10

15

20

-2 0 2 4 6 8 10 12

Exc

han

ge R

ate

Var

iati

on

(%)

(M

ay 2

2,

20

13

/

Aug

30

, 2

01

3)

Inflation (%) (Dec 2012)

BRA

BGR

CHL

CHN

COL

HUN

IND

IDN

KOR

MYS

MEX

PRY PER

PHL

POL

ROM

RUS ZAF

THA

TUR

UKR KAZ

-5

0

5

10

15

20

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

Exc

han

ge R

ate

Var

iati

on

(%)

(M

ay 2

2,

20

13

/ A

ug 3

0,

20

13

)

Current Account / GDP (%) (Dec 2012)

Exchange Rate Variation and Inflation Current Account and Exchange Rate Variation

…which proves that fundamentals matter!

Source: Bloomberg. .

Roadmap

• Challenges in the new global context

• Sound macro-foundations to face headwinds

• Market perspective

• 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 allows us to be prepared to external pressures.

• Structural Reforms: income 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 for a decade…

1,7

4,9 5,3 6,8

1,6

4,2

0,1

-1,4 -2,3

-0,8 0,0

4,3 4,1 2,1

4,8 5,4 6,4

-4,0

13,1

4,3

-1,2

13,6

4,8

1,8

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

*

Eco

no

mic

Gro

wth

(%

)

GDP Average 1992-2002

Paraguay experienced a solid growth in the last decade supported by production and export of raw materials. Still, on top of agriculture, construction and services were also key growth-drivers.

Sound policies and structural reforms increased potential growth rate. Paraguay average economic growth in the last decade is among the highest in the region.

Source: IMF-WEO Update Apr-2014 and CBP.

Paraguay economic growth 1992-2014*

6,90 6,37

5,22 4,76 4,71 4,68 4,62 4,62 4,59

3,50

0

1

2

3

4

5

6

7

8

ARG PER URU PAR COL BOL CHI VEN ECU BRA

%

Average economic growth 2003-2013

…while expectations are improving in the short term

Source: RER Oct-2013 and WEO update Apr 2014

6,1

5.0 4,6 4,5

3,9

4,6

4.0 4 4.0

2,3

5,5 5,1

4,8 4,5

4,2

3,6

2,8

1,8

0,5

-0,5 -1

0

1

2

3

4

5

6

7

Peru Bolivia Paraguay* Colombia Ecuador Chile Uruguay* Brazil* Argentina Venezuela

GD

P g

row

th (

%)

REO Mayo-2013 REO Octubre-2013 /Latest Art.4º/ WEO update Apr-2014

Year 2014

A central bank committed to low and stable inflation

Source: CBP.

0

10

20

30

40

50

abr-

89

abr-

90

abr-

91

abr-

92

abr-

93

abr-

94

abr-

95

abr-

96

abr-

97

abr-

98

abr-

99

abr-

00

abr-

01

abr-

02

abr-

03

abr-

04

abr-

05

abr-

06

abr-

07

abr-

08

abr-

09

abr-

10

abr-

11

abr-

12

abr-

13

abr-

14

%

YoY inflation

0

5

10

15

20

25

abr-

96

abr-

97

abr-

98

abr-

99

abr-

00

abr-

01

abr-

02

abr-

03

abr-

04

abr-

05

abr-

06

abr-

07

abr-

08

abr-

09

abr-

10

abr-

11

abr-

12

abr-

13

abr-

14

%

Core Inflation Total Floor Ceiling

Monetary Aggregates Inflation Targeting (Experimental Stage)

Inflation Targeting

Paraguay has never experienced high rates of inflation and its currency (the Guarani) recently celebrated its seventieth anniversary.

A history of stable prices

Monetary Regimes in Paraguay

The CBP started the implementation of an IT regime in 2011. The explicit public commitment to control inflation as the primary objective is crucial for greater investor confidence and a more predictable business environment.

80

130

180

230

280

Feb

-08

May

-08

Aug

-08

No

v-0

8

Feb

-09

May

-09

Aug

-09

No

v-0

9

Feb

-10

May

-10

Aug

-10

No

v-1

0

Feb

-11

May

-11

Aug

-11

No

v-1

1

Feb

-12

May

-12

Aug

-12

No

v-1

2

Feb

-13

May

-13

Aug

-13

No

v-1

3

Feb

-14

May

-14

USD

exc

han

ge r

ate

(Índ

ex J

anua

ry 2

008

= 1

00)

Guaraní (Paraguay) Peso (Argentina)

Real (Brasil) Peso (Chile)

Nuevo sol (Perú) Peso (Colombia)

Peso (Uruguay)

Real

A floating exchange rate regime…

Uruguay Colombia

Chile

Argentina

Peru Paraguay

Source: Bloomberg

…with large buffers to dampen excessive volatility…

772 723 641

983 1.168

1.293

1.703

2.462

2.864

3.861

4.168

4.984 4.994

5.871

0

1.000

2.000

3.000

4.000

5.000

6.000

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*

In U

SD M

illio

ns

International Reserves International Reserves (% of GDP)

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

Peru 31%

Uruguay 29%

Paraguay 20%

Brazil 16% Chile

15%

Colombia 11%

Argentina

6%

Venezuela 2%

0%

5%

10%

15%

20%

25%

30%

35%

2013

…compounded by a net external creditor position

1.462 1.439 1.642

1.494 1.223

978

537

-256

-630

-1.626 -1.833

-2.699 -2.753

-3.194

-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

201

3In

USD

Mill

ions

Note: Net Creditor Position: Public External Debt – Foreign Official Assets Source: CBP

44%

37%

0%

10%

20%

30%

40%

50%

dic

-94

dic

-95

dic

-96

dic

-97

dic

-98

dic

-99

dic

-00

dic

-01

dic

-02

dic

-03

dic

-04

dic

-05

dic

-06

dic

-07

dic

-08

dic

-09

dic

-10

dic

-11

dic

-12

dic

-13

Deposits/GDP Credits/GDP

Source: CBP

The quality of credit has not been affected by credit growth. In addition, credit has been mainly oriented to the productive sector. Currency matching was important for this result.

A sound financial sector to support growth…

Increase in financial deepening

Evolution of Non-performing loans

Paraguay has experienced a process of financial deepening, given its recent good economic performance. Deposits had increased in line with loans, so banks did not rely heavily on external lending.

2,19%

3,70%

0,48%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

4,00%M

ar-0

8

Jul-

08

No

v-0

8

Mar

-09

Jul-

09

No

v-0

9

Mar

-10

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

No

v-1

1

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

NPL´s NPL´s in local currency NPL´s in foreign currency

…while banks keep a sound capital position

Source: CBP

17,4%

8%

11,2%

6%

8%

10%

12%

14%

16%

18%

20%

sep

-09

dic

-09

mar

-10

jun-

10

sep

-10

dic

-10

mar

-11

jun-

11

sep

-11

dic

-11

mar

-12

jun-

12

sep

-12

dic

-12

mar

-13

jun-

13

sep

-13

dic

-13

mar

-14

Solvency ratio

Basilea

Regulatory Tier 1 capital to risk-weighted assets (level 1)

Regulatorycapital to risk-weighted assets

Roadmap

• Challenges in the new global context

• Sound macro-foundations to face headwinds

• Market perspective

• Summary

A favorable business climate…

Source: Getulio Vargas Foundation.

Economic Climate Index

0

20

40

60

80

100

120

140

160

Paraguay Colombia Peru Bolivia Uruguay Ecuador Mexico Chile Brazil Argentina Venezuela

Jan-14 Apr-14

Rating Credit Watch

Fecha

Ba2 + Feb 2014

Ba3 Jan 2013

B1 Dec 2010

B3 + Jun 2010

B3 Apr 2008

Caa1 + Nov 2007

Caa1 Apr 2003

B2 (inicial) Jul 1999

Rating Credit Watch

Fecha

BB Jun 2014

BB- Dec 2013

BB- Aug 2012

BB- - Jun 2012

BB- Aug 2011

B+ Aug 2010

B Jun 2007

B- Jul 2004

SD Feb 2003

B- Nov 2002

B Jun 1999

B+ Feb 1999

BB- (inicial) Oct 1995

Rating Credit Watch

Fecha

BB- + Jan 2014

BB- (inicial) Feb 2013

Source: Bloomberg

Ratings up

Ratings down

Initial ratings

…and a steady improvement in credit rating…

6,9 6,6

5,5 5,3 5,2 5,1

4,4 4,0

3,6 3,3 2,9

2,5

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

anka

Ang

ola

Par

agua

y

Les

oth

o

Bo

livia

Suri

nam

Gab

on

Geo

rgia

Co

sta

Ric

a

Guat

emal

a

Tun

isia

Arm

enia

El S

alva

do

r

Hun

gria

Cro

acia

GD

P g

row

th (

%)

Ave

rage

200

8-2

013 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

AGO ARM

BOL

CRI

SLV

GAB

GEO

GTM

HUN

LSO

NGA

PRY

LKA

SUR

TUN

0%

1%

2%

3%

4%

5%

6%

7%

8%

0% 2% 4% 6% 8% 10%

Cu

mu

lati

ve g

row

th (

20

12

-201

5)

Cumulative inflation (2012-2015)

45°

Favorable and more sustainable growth compared to peers…

-10 -5 0 5 10

GEOARMTUNSLVCRISURLKAGTMMedianaPRYLSOHRVAGOHUNBOLNGAGAB

CA 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

Gen

Go

v G

ross

Deb

t (

% o

f G

DP

)

2013f 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 y BCP. Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch

…supported by sound external and fiscal balances

Which allowed a favorable first issuance of sovereign bonds…

Source: MH.

Countries Date Rating Maturity (years) Coupon (%) Currency Amount (US$ Million)

Paraguay jan-13 BB- 10 4,625 US$ 500

Bolivia oct-12 BB- 10 4,875 US$ 500

Vietnam oct-05 BB- 10 6,875 US$ 750

Indonesia mar-04 BB- 10 6,750 US$ 1.000

Peru feb-02 BB- 10 9,125 US$ 500

Egipto jun-01 BB+ 10 8,750 US$ 1.000

El Salvador aug-99 BB+ 7 9,500 US$ 150

Costa Rica apr-98 BB 5 8,000 US$ 200

Ecuador dec-05 B- 10 9,375 US$ 650

Rep. Dom. sep-01 B- 5 9,500 US$ 500

Chile apr-99 A 10 6,875 US$ 500

Total supply bids: 197

Bids Average: US$ 26.8 Million

Placement Average: US 3.5 Million

Demand Achieved (Placement Book/ Indication Book):

9.2%

424 689

1350

398 556

2009 190

72

38

0

200

0

0

500

1000

1500

2000

2500

< 10 10 to 25 > 25 to50

> 50 to75

> 75 to100

> 100 to500

To

tal Q

uan

tity

of

Ord

ers

(US$

MM

)

Coupon Size (US$ MM)

Indication Placement

Distribution of the order book by the size of the coupon

Inaugural Sovereign Issues

3,5

4

4,5

5

5,5

6

6,5

7

7,5

18-

dic

-13

23-

dic

-13

28-

dic

-13

2-e

ne-

14

7-e

ne-

14

12-

ene-

14

17-

ene-

14

22-

ene-

14

27-

ene-

14

1-f

eb-1

4

6-f

eb-1

4

11-

feb

-14

16-

feb

-14

21-

feb

-14

26-

feb

-14

3-m

ar-1

4

8-m

ar-1

4

13-

mar

-14

18-

mar

-14

23-

mar

-14

28-

mar

-14

2-a

br-

14

7-a

br-

14

12-

abr-

14

17-

abr-

14

22-

abr-

14

27-

abr-

14

2-m

ay-1

4

7-m

ay-1

4

12-

may

-14

17-

may

-14

22-

may

-14

27-

may

-14

1-j

un-

14

6-j

un-

14

11-

jun-

14

Yie

ld (

%)

Paraguay Armenia Croacia Costa Rica Guatemala

Hungria El Salvador Nigeria Bolivia Sri Lanka

Some of its Peers: Ba2/BB/BB-

Source: Bloomberg. Some of the countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch.

…and favorable sovereign bonds prices

Expectations of the new bond issue

• The Ministry of Finance (Ministerio de Hacienda) is working on the final arrangements for the second emission of the sovereign bonds in the international market for an amount equivalent to US$ 750 million.

• The bonds will be placed on the U.S. market, after the approval of the law authorizing the issuance by Congress.

• The Book Runners will be Bank of America and J.P. Morgan.

• In its debut in 2013, Paraguay issued US$ 500 million and the demand was 11 times the amount auctioned.

• Offers reached the amount of US$ 5.573 million, with 197 foreign investors bidding during the valuation process.

Roadmap

• Challenges in the new global context

• Sound macro-foundations to face headwinds

• Market perspective

• 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.

• In sum, the country offers to the private sector a stable macroeconomic framework for the medium and long term.

Summary

• 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.

• I am convinced that this seminar will be key to materialize those investments in the near future.

• Welcome to Paraguay!

THANK YOU