Private sector banks in Paraguay should follow the government into international bond markets to take advantage of investor appetite for one of Latin America’s few consistently improving credit stories, finance minister Carlos Fernández Valdovinos told GlobalMarkets this week.
This year was an important one for Paraguay in bond markets, as Moody’s gave the country its first ever investment grade rating and the government issued its maiden international bond in the guarani currency.
But the minister believes the private sector is best positioned to take advantage of these developments. “We were already trading as investment grade before the upgrade, so the big winner should be and will be the private sector,” said Fernández Valdovinos. “The private sector is still very underdeveloped in terms of looking at what projects they can finance offshore. The sovereign has shown the way, and the private sector has to take advantage.”
Although Paraguay has issued at least once a year since its debut in international bond markets in January 2013, bank or corporate deals from Paraguayan borrowers have been few and far between.
However, the investment grade rating, as well as having a local currency reference point after the government printed G3.643tr ($500m) of seven year guarani paper in February, should help spur more, believes the minister.
“The first candidates should be the banks,” said Fernández Valdovinos. “They are the natural first agent to go out in the market. After our New York law guarani deal, they could also issue local currency abroad. Then it would be [public-private partnership] projects.”
Paraguay’s bond issues have typically been extremely well received. The government rarely issues more than $500m and benefits from scarcity value. The minister said he was confident private sector issuers would take advantage of residual demand from emerging market investment funds that cannot find the Paraguay sovereign paper they would like.
However, the government intends to keep coming back to the international bond market in both dollars and guarani, even if the deals are smaller than those from most of its LatAm peers.
“Our strategy is to commit to being present every year so there’s liquidity,” said Fernández Valdovinos. “We’re conscious that we have to give liquidity to the guarani bonds, so we’ll very probably carry out the same process [of issuing annually] as we did in the dollar market. I say very probably because obviously it depends on the interest rate.”
A new race
Moody’s upgraded Paraguay from Ba1 to Baa3 in July, citing “robust and sustained economic growth” and a belief that the economy was “more resilient to shocks”.
“A track record of institutional reforms […] has improved our assessment of institutional and governance strength,” said the rating agency. Since it first issued international bonds in 2013, Paraguay’s rating has steadily improved from Ba3/BB-/BB- to Baa3/BB+/BB+.
Fernández Valdovinos said Paraguay’s credit improvements had occurred over at least a 22 year period, and that the upgrade had had no effect on the urgency to keep improving. “It’s not the end of a race, but the start of a new race in which we’ll have to be even more competitive,” he said. “We have to continue with consistent policy and to correct our flaws.
“We want good policies that are recognised by the market, rating agencies, and multilaterals — but, more importantly, for the benefits to be felt by the Paraguayan people.” The minister said he was “not obsessed” by chasing further investment grade ratings. “The ball is in [S&P and Fitch’s] court,” he said. “If we continue to work well, the upgrades will come sooner or later.”