Paraguay turns to multilateral money due to rate hike

(Bloomberg) – Paraguay plans to reduce its dependence on bond markets this year in the face of rising interest rates, prioritizing cheaper financing from multilateral creditors and further reducing the fiscal stimulus provided during the pandemic.

Most Read from Bloomberg

The government intends to sell approximately US $ 350 million in bonds to finance the deficit in 2022, down from the US $ 600 million in the years before the pandemic, according to the Deputy Minister of the Economy, Iván Haas. The budget authorizes multilateral loans of about $ 1.4 billion, including $ 250 million from the Inter-American Development Bank that Haas said would otherwise have been raised through the sale of bonds.

“For a country like Paraguay, which is not yet ‘investment grade’, multilateral financing is still cheaper than the market,” he said in a virtual interview from Asunción. “Since the multilaterals make credit lines available, we decided to be able to maximize the use” of that money.

Multilateral agencies have been a key source of financing for developing countries during the pandemic, especially in the first months of the crisis, when capital markets were closed for many borrowers. The wave of liquidity unleashed by central banks in 2020 and 2021 made it cheap and easy for many poor countries to cover deficits by selling bonds. Now capital markets financing will become more expensive when the US Federal Reserve begins raising interest rates in March.

Mexico was the first Latin American country to tap into global debt markets this year by selling $ 4.1 billion in 12- and 30-year bonds this month. Panama raised $ 2.5 billion a week later and other developing countries are expected to do the same before the Federal Reserve raises rates.

Paraguay plans to sell several hundred million dollars in global bonds before the end of February to finance the deficit and reduce the US $ 450 million outstanding of the bond that matures in 2023, Haas said. The government is evaluating reopening an existing bond, issuing a new bond with a duration of between 10 and 15 years for at least US $ 500 million, or a combination of both, he said.

Paraguay has issued more than US $ 5.8 billion in dollar-denominated bonds since 2013. Last year’s US $ 826 million issue included the repurchase and exchange for longer-term securities of US $ 330 million in bonds through 2023.

Raising money domestically will also cost more this year after the central bank raised its benchmark rate 450 basis points last year to 5.25% to cool inflation. Paraguayan policy makers are withdrawing monetary and fiscal stimulus as the economy is recovering and inflation is at its highest level in eight years. The government aims to reduce the fiscal deficit to 3% of gross domestic product this year, up from 3.6% in 2021.

The ministry will sell at least US $ 100 million in guarani-denominated debt on the local capital market with the reopening of its outstanding bonds, with the first issue scheduled for February, Haas said.

“Liquidity this year is not going to be the same as it was in 2020 and 2021,” he said.

Original Note: