Fitch Ratings revised the outlook on Paraguay's long-term foreign- and local-currency issuer default ratings to positive from stable, while affirming the ratings at BB.
The rating agency cited Paraguay's resilience to external shocks, positive growth performance and economic diversification, strengthening external buffers, and consistent macroeconomic policy discipline.
Fitch expects the sovereign's economic growth in 2017 to be the same as 2016's 4%, but it expects a marginal increase in 2018-19 as domestic demand and exports to Brazil increase.
The rating agency said Dec. 14 that inflation for 2017 is expected to average 3.6% while the average inflation rate expected over the next two years would be 4%. Moreover, Fitch expects the government to achieve its 2017 GDP target of 1.5%.
The agency noted that external liquidity and external debt metrics improved as external weaknesses continued to fade. Total net external debt fell to 21.5% in 2017 from 100% in 2008. A substantial portion of the external debt was related to the Itaipu dam and has been amortizing each year.
Fitch also expects consistency in Paraguay's macroeconomic and fiscal policy framework to continue over the medium term after presidential and congressional elections in 2018. However, it forecasts a shift in policy in 2022 as a result of cash flow which would be freed once the debt due for the Itaipu dam is cleared.
Fitch noted that the general government debt to GDP ratio was stable at approximately 20%, which is the lowest in the BB category. The rating agency expects it to remain the same through 2019, but said that the debt ratio could be exposed to foreign exchange rate volatility since 78% of the sovereign's debt is external.