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Related Issuers
Rating Action:

Moody's upgrades Paraguay's government bond rating to Ba3 with a stable outlook

Global Credit Research - 08 Jan 2013

New York, January 08, 2013 -- Moody's Investors Service has upgraded Paraguay's government bond rating to Ba3 from B1. At Ba3, the outlook is stable.

RATINGS RATIONALE

The key drivers supporting the upgrade are (1) government finances that we expect will continue to align well with peers in the 'Ba' rating category, despite volatile growth, (2) a sustained build-up in international reserves resulting in external liquidity metrics in line with 'Ba' medians, and (3) improved medium-term growth prospects supported by government plans to increase investment in infrastructure.

Government finances have remained strong despite volatile growth because the large agricultural sector is not a significant contributor to government revenues. An improvement in government debt metrics has been possible due to consecutive budget surpluses during 2004-2011. Debt ratios are significantly lower than the medians for 'Ba'-rated countries.

Even though we expect the government to post a deficit in 2012 and to do so again in 2013, both are on the order of 1% of GDP and, in our view, should be easily financed. Debt affordability is strong, as annual interest payments are equivalent to only 3% of government revenues, and rollover risks are very low given the average debt maturity of 21 years.

The country's external liquidity position has improved, with gross international reserves having grown ten-fold over the past decade, rising to $5 billion in 2012 from $500 million in 2002. In 2011, international reserves were sufficient to cover 100% of gross external debt for the first time, roughly double the median among peers rated 'Ba.' High FDI potential related to aluminum and titanium projects should help diversify Paraguay's economic base over the medium term, thus providing a buffer against agricultural-related shocks.

The government is making concerted efforts to enhance the long-term growth outlook by investing in infrastructure. Congress recently passed a law which will require that the government utilize over 80% of the revenues from energy sales to Brazil for investment in infrastructure and education. Furthermore, the government is legally barred from using any government debt for current spending. The 2013 budget lists the specific infrastructure projects (e.g., road construction, electricity) for which the proceeds of its planned international bond issuance should be used.

The stable outlook balances Paraguay's credit improvements with key challenges that include: (1) commodity dependence and related growth volatility, (2) relative fiscal inflexibility stemming from earmarked expenditures, as well as a low revenue base related to the large informal sector, (3) Congress' propensity to approve expansionary budgets, and (4) a high, albeit falling, level of financial dollarization.

Upward rating pressure could result from (1) investments in an aluminum smelter, titanium mining, or other new sectors, enhancing economic diversity and resiliency, (2) creation of a fiscal stabilization fund, (3) an increase in the revenue base and/or a significant reduction in the share of earmarked spending, or (4) a steady decline in financial dollarization.

Downward rating pressure could stem from (1) a significant and prolonged commodity shock driven by climate, weaker demand, or another source, (2) recurrent political instability, (3) a significant deterioration of fiscal metrics, or (4) worsening external liquidity metrics.

Paraguay's country ceilings on bonds and deposits were also adjusted as part of this rating action. The foreign currency bond ceiling was raised to Ba1 from Ba3; the foreign currency deposit ceiling was raised to B1 from B2. Paraguay's local currency bond and deposit ceilings remained unchanged at Ba1.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Sarah Glendon
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Paraguay's government bond rating to Ba3 with a stable outlook
No Related Data.

 

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