Many still think of Paraguay as the ‘forgotten country’ – and although that label is no longer valid, it’s not hard to see where it came from. Paraguay is bordered by much more populated countries – Brazil, Argentina and Bolivia – and it’s land-locked. Not exactly on the tourist trail, it was long ignored by all but the most adventurous travellers. Having been ruled by dictatorships for nearly all of its 200 years of independence, its reputation has been plagued by human-rights abuses. Further, until the last few years Paraguay’s economic performance has been – to put it mildly – undistinguished. For good measure, the banking sector nearly collapsed, not once but twice, in the final years of the millennium.

However Paraguay is too modest for its own good. Under much more enlightened governance it has been catching up fast, installing a wide range of economic and social reforms that increasingly put it on the global map for astute investors seeking the kind of opportunities that are only available in fast-modernising countries. The banking sector, for instance, is unrecognisable from the one that once thrived on the laundering of money, while taxation has undergone a thorough overhaul that has made it one of the most attractive regimes in the entire region.

Taken together, the reforms helped the country bounce back impressively from the financial crisis which reversed its seemingly unstoppable rise in gross domestic product.

Reforms continue apace under president Fernando Lugo, a former priest, and finance minister Dionisio Borda, who has an international reputation for what the IMF called “macro-economic stability.” Right now, he’s in the process of pushing a cost-cutting programme through the executive branch that will reduce public expenses by over three percent and he expects similar percentage cuts from Congress and the judiciary after the latter two branches went on a job-hiring spree.

In the next parliamentary session the government will take another step in the rehabilitation of the banking sector by passing a law that provides for the seizing of any laundered assets. “We are very tough on money-laundering here,” points out Conor McEnroy, Chairman of Sudameris Bank.

Global approval
The results of this belated programme of reform are unarguable, as the latest World Bank/International Finance Corporation’s survey on the ease of doing business shows. On all counts Paraguay is moving up the rankings. Overall it stands at 106 and, while there’s obviously room for improvement, it’s moved ahead of other nations in its region such as Argentina (115), Brazil (127), Ecuador (130) and Bolivia (149).

Similarly, the ratings in crucial areas such as protection of investors, the obtaining of credit, speed in providing construction permits and enforcement of contracts are improving all the time – and generally exceeding those of its neighbours, some of them by comfortable margins. For instance in terms of protection of investors – a prime consideration for foreign capital – Paraguay ranks at 59, which puts it well ahead of Brazil (74), Argentina (109) and Bolivia and Ecuador (tied at a dismal 132).

There’s still a lot of work to be done, as the IMF notes in its latest report. Some of the state-owned institutions are inefficient and cumbersome, and a lot of red tape remains to be cut.

However Mr McEnroy is a keen and involved observer of Paraguay’s rapid reforms and he likes what he sees. As head of Paraguay’s fifth-largest financial institution, he’s had a ringside seat. And on the basis of what he’s observed in the seven years since his Abbeyfield Group bought the then-ailing bank, the former Swiss Bank Corporation executive is more than optimistic for the nation’s future. “I see GDP growth of five to eight percent for the foreseeable future,” he told World Finance. “Paraguay is a country that has passed a milestone… How many countries have it to say that international reserves are more than twice national debt; and in the practice Paraguay has balanced budgets.”

He cites a few vital signs that suggest a bright tomorrow for a once benighted nation. Take, for instance, the kind of commodities that are in fast-rising, global demand. Paraguay is the world’s largest exporter of organic sugar. It’s also a big exporter of soya beans, sesame seeds and high-quality beef. In beef alone, the value of exports, mainly to Russia, the Middle East and Europe in the form of specialty products, is approaching the $1bn a year mark.

“Paraguay has an important regional and global role as a low-cost commodity producer for the food industry,” explains Mr McEnroy.  However, rather than rely on long-established industries – profitable as they are – the nation is also capitalising on its historic husbandry and agricultural skills by developing a high-margin horticulture industry in fruit and vegetables – notably oranges and limes.

Both industries are kick-started by fertile but inexpensive land. While good cattle country can be had for as little $50 a hectare, prime horticultural land is available at $4,000 a hectare, low by the standards of competing regions. As economists point out, the availability of land at these prices gives investors a low-cost advantage in export markets.

Mindful of the need to attract foreign investment, tax reform has been nothing short of revolutionary, particularly so for foreign investors. Under the so-called 60/90 law, foreign investors are permitted to repatriate the first 10 years of dividends from an investment without being charged withholding tax. In a similar capital-attracting concession, imported equipment is landed VAT-free.

The rest of the tax regime has been streamlined to attract foreign capital and know-how. The simplest way to understand it, say locals, is to think in terms of 10. Corporation tax is 10 percent, VAT on everything except luxury goods is 10 percent, and the individual tax rate is 10 percent (At the time of writing, however, the government was considering raising taxes on windfall earnings from exports, particularly of soya bean and beef, to meet a budget deficit – albeit a modest one by western standards).

FDI windfall
Unsurprisingly, foreign capital has been flowing nicely. Although most foreign investment originates from such reliable sources as the World Bank, the Inter-American Development Bank, the IMF (which is quite a fan of Paraguay’s progress) and other state, semi-state and multi-lateral institutions, foreign investors have begun piling into Paraguay as trust has built in the quality and permanence of the recent bout of reforms. From a low point of less than $40m in 2004, foreign direct investment (under the 60/90 tax incentive scheme) has since soared. By 2006, it more than tripled to $130m and, apart from a blip in 2009 because of the global financial crisis and a drought, it has grown ever since.

Predictably, the initial surge in outside capital originated from the Mercosur – that is, the regional common market – in the form of Brazil, Uruguay and Argentina, as well as from closely-connected nations such as Chile, Peru and Colombia.

But that’s starting to change, explains Mr McEnroy. In the last few years there’s been a steady stream of investment from European family businesses and offices, some of whom have long connections with the region and want to get on the bandwagon.

Industrial innovation
Traditional agricultural industries may have provided the foundation of Paraguay’s recovery, but new ones are emerging on the back of economic growth. The capital Asuncion, which has a population of 520,000 including many young professionals in the city proper, has become a preferred location for Spanish-speaking call centres for banks and telecom companies (among other industries) scattered around South America.

Another fledgling but promising assembly industry is Asian-designed, low-cost motorcycles and scooters for sale in Paraguay and further afield – but especially in Asuncion, where a staggering 65 percent of the population is under the age of 30.

As a junior member of Mercosur, Paraguay qualifies for special domestic-content rates of 40 percent that help give it an edge in this and other relatively recent assembly industries such as computers and electro-domestic goods.

Other industries that are rapidly transforming the nation’s economic landscape are brewers, energy (especially in the form of low-cost, exported hydro-electricity from the Itaipu station) and textiles.

Indeed hydro-electric energy is another engine of growth. “Paraguay has power to burn and is one of the biggest exporters of power in the world,” Mr McEnroy points out. “The agreement with Argentina on Yacreta will expire shortly and that with Brazil for Itaipu in a little over 10 years: soon we’ll be bursting at the seams with cheap energy for any energy intensive industry that wants to set up in Paraguay.”

The rich, fertile and vast land area is seen as another building block: forestry is booming, especially in the long-fibre trees used by the newsprint industry. And, proof positive that the world is finally taking notice of Paraguay, Asuncion has the seeds of a conference industry with the arrival of global brands such as Sheraton, Accor and Ibis.

Resource riches
The fabled Amazon is also a vital tool in Paraguay’s recovery. Widely seen as a muddy, piranha-infested river braved only by intrepid paddlers, it is in fact a vital artery to export markets; playing the same role that the Mississippi plays in the US. Another increasingly busy waterway is the 1,630-mile Paraguay River that is attracting the interest of some of the world’s biggest port operators, including one from Asia that is looking at a substantial investment along its banks. Meanwhile, traffic along the river – which runs through major trading nations such as Brazil, Bolivia, Paraguay and Argentina – is growing, especially in grains and boxes.

“Shipyards are turning out barges as fast as they can build them,” says Mr McEnroy.

Oil exploration is on the rise. Having enviously eyed the enormous contribution that oil and gas have done for Brazil, Paraguay has only just changed highly protective laws to encourage exploration, in particular for methane and hydrocarbons. “Under the old laws, exploration licences were issued for 12 months at a time, which wasn’t nearly long enough, and were renewable only once,” explains Mr McEnroy. “But the government has brought licences to international standards and given companies eight years to prospect.”

Renewing its promise
Paraguay’s membership of Mercosur is seen as important for the nation’s future. South America’s leading trading bloc, it’s short for Mercado Comun del Sur – the common market of the south. Exactly 20 years old, it has a combined GDP of nearly $3trn but it differs from the European Union in being an economic and political agreement between just four nations – Argentina, Brazil, Paraguay and Uruguay. Venezuela under the left-wing government of Hugo Chavez would like to join Mercosur but Paraguay, fearing its influence, repeatedly exercises its veto to block its membership.

Paraguay’s recovery began in 2000 with, as is often the case, a severe economic shock in the form of a collapse of the banking sector. A newly independent central bank took control, shutting down corrupt banks, cancelling licences, tightening supervision and raising standards across the board except for the smaller and systemically less significant cooperatives. A direct result of this spring clean is that foreign-owned banks such as Sudameris dominate the sector.

Today, Paraguay’s rules for a bank’s capital adequacy would shame many of the institutions in Europe. “They’re some of the toughest in the world,” notes an approving Mr McEnroy. “Tier one capital must be a minimum 10 percent by law, but on average tier one is up to 17 percent. The tier one of Sudameris is 16 percent. We don’t do funky stuff in Paraguay. Regulation is plain vanilla, black and white, no grey. Banks are run very conservatively here.” Thus the central bank is an unapologetic advocate of the kind of old-fashioned banking practices that are on the way back around the world.

Mr McEnroy ticks off the main elements of Paraguay’s recovery. “The turnaround had a phenomenal effect on the economy,” he remembers. “Some of the main elements were the reform of state companies, although there’s still work to do there. The business of government was greatly improved, for instance in the collection of taxes. And corporation tax was reduced from 30 percent to 10 percent. The interesting thing is that, instead of tax receipts falling, the amount of tax collected rose by five times.”

A beneficiary of the reform process has been the local currency, the Guarani. As the IMF said in its latest report, “all available indicators suggest the level of the Guarani is consistent with its fundamentals.” Named for the nation’s original language, the Guarani has not been rebased since it was established in 1943 and, in a red-letter event, the currency will be re-based later this year with three zeroes being cancelled.

The important thing, as Mr McEnroy points out, is that the currency is holding its own in the Mercosur and beyond. “It will continue to appreciate modestly against the US dollar and the euro, as it’s been doing.”
The rise of Sudameris Bank says much about the new-look Paraguayan economy. As Mr McEnroy freely admits, it was not exactly the most impressive institution in the country when Abbeyfield bought it in July 2004. “It was the last bank in the queue,” he says. At the time it could boast net income of just $100,000 and $120m of assets (the Paraguayan economy is still about 45 percent “dollarized” – that is, the volume of greenbacks in use). But after seven years under a hand-picked management and board that includes senior central bankers drawn from around the region and from Europe, net income in 2011 will exceed $16m on assets of $700m. That kind of growth could not have happened in the moribund economy of the final years of the millennium.

A troubled history
Paraguay’s material and social development has been hampered by almost 200 years of dictatorships. Indeed the so-called Colorado party, which ruled uninterrupted for more than half a century and remains a powerful influence, routinely adopted populist economics that rode rough-shod over the vast majority of the population. When Lugo won the presidency in 2008 on a mandate of improving opportunities for Paraguay’s 6.3m people, it was the first time government had changed hands to an opposition party peacefully.

A former bishop of San Pedro, Lugo is only the second socialist president in nearly 200 years. He promised economic and social salvation for a country “deeply drowned in misery, poverty and discrimination.” So saying, he refused his presidential salary.

However Lugo is in a vulnerable position. In Paraguay’s bicameral system dominated by coalitions, President Lugo has no majority. The Liberal party, which is the biggest grouping in the governing coalition, does not support his reforms in their entirety. As the Bertelsmann transformation index, a measure of turnarounds in nations, notes, “the topic of land reform in particular is highly contested.” Indeed land-owners have long formed a powerful clique that protects its interests.

Still, this is clearly a different Paraguay. The workforce is young, aspirational, impatient and tech-savvy. As Mr McEnroy points out, 85 percent of the population own a mobile phone, a remarkable percentage in a country where the average per capita income is $4,900, although rising. And with rising incomes and material standards, the domestic market will grow in proportion, predicts the Sudameris chairman.

As that happens, Paraguay will inevitably take its due place on the world map. “This is the untold story, the last frontier,” he says.