Inversores Paris Carlos Fernandez Valdovinos

PARAGUAY Investment opportunities in a rising economy Carlos G. Fernรกndez Valdovinos Central Bank of Paraguay September, 2014

Roadmap

• • • •

Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary

Roadmap

• • • •

Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary

Challenges in the new global context • Six years after the beginning of the largest economic crisis in 80 years, some signs (green shoots) suggest that the worst may be over.

• The “new” world: – Widespread recovery on economic growth in 2014.

– Higher growth projections than in 2013.

– Still, recovery is uneven • The Federal Reserve started the normalization of monetary conditions in early 2014.

Challenges in the new global context • This is a positive event, but increased financial market and capital flow volatility is now a concern for emerging markets. • Warning: the rise in U.S. interest rates since May triggered large changes in exchange rates, sovereign spreads, stock markets, and gross portfolio inflows. • Nevertheless, the impact was not homogenous across countries: fundamentals matter.

Recovery is underway, but emerging markets face new challenges...

GDP Growth (%)

6,0 4,0 2,0 0,0

Advanced Economies Emerging Economies and Developing 2013 2014 2015 Countries

Emerging Markets Bond s Index (EMBI)

May 21, 2013 Bernanke announces a possible reduction in the FED’s asset-purchase program

Dec 18, 13 Bernanke announces the withdrawal of the stimulus will begin in early 2014.

Source: IMF-WEO update July-2014. Bloomberg.

Basic Points

3,2 3,0 2,8 2,6 2,4 2,2 2,0 1,8 1,6

21-May-13 10-Jun-13 30-Jun-13 20-Jul-13 9-Aug-13 29-Aug-13 18-Sep-13 8-Oct-13 28-Oct-13 17-Nov-13 7-Dec-13 27-Dec-13 16-Jan-14 5-Feb-14 25-Feb-14 17-Mar-14 6-Apr-14 26-Apr-14 16-May-14 5-Jun-14 25-Jun-14 15-Jul-14 4-Aug-14

%

US Treasury bond yields 400 380 360 340 320 300 280 260 240 220

336,9 322,7

2-Jan-13 22-Jan-13 11-Feb-13 3-Mar-13 23-Mar-13 12-Apr-13 2-May-13 22-May-…

11-Jun-13 1-Jul-13 21-Jul-13 10-Aug-13 30-Aug-13 19-Sep-13 9-Oct-13 29-Oct-13 18-Nov-13 8-Dec-13 28-Dec-13 17-Jan-14 6-Feb-14 26-Feb-14 18-Mar-14 7-Apr-14 27-Apr-14 17-May-…

6-Jun-14 26-Jun-14 16-Jul-14 5-Aug-14

World

…still, fundamentals will matter Exchange Rate and Treasury Bond Yields IND BRA

15

IDN

10 5

CHL CHN

0 0,0 ROM

Exchange Rate Variation (%) (May 22, 2013 / Aug 30, 2013)

0,5

IND

CHL

ZAF RUS

PER

HUN KAZ

CHN

0

-2

TUR

PRY

COL

UKR

0

2 KOR

-5

Source: Bloomberg. .

POL 4 LTN

ROM BGR

2,0

2,5

3,0

Variation in Treasury Yields (%) (May 22, 2013 / Aug 30, 2013)

THA

5

1,5

BGR

MEX

MYS

HUN POL

1,0

LTN

IDN PHL

COL

UKR

KOR

BRA

10

PER

RUS

Exchange Rate Variation and Inflation

15

ZAF PRY

-5

20

TUR

MEX MYS THA

PHL

6

Inflation (%) (Dec 2012)

8

10

Exchange Rate Variation (%) (May 22, 2013 / Aug 30, 2013)

Exchange Rate Variation (%) (May 22, 2013 / Aug 30,2013)

20

12 -8

Current Account and Exchange Rate Variation 20

IND BRA IDN 15 TUR

MEX 10 PHL

ZAF

PRY CHL COL

UKR

-6

-4

-2

ROM

5 THA

0

POL

MYS

RUS PER

0 BGR

KAZ

HUN

CHN

2

KOR

4

-5 Current Account / GDP (%) (Dec 2012)

6

8

Roadmap

• • • •

Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary

Sound macro-foundations to face headwinds • Over the past decade, policy frameworks and economic fundamentals have been strengthened.

• Macro-Policies: government finances are sound, inflation is low, banks are strong, buffers are large, and a flexible exchange rate regime is a useful tool to face external shocks.

• Structural Reforms: tax reforms in 1993 and 2013, passage of a fiscal responsibility law and the approval of a PPP law.

• The Fed exit from unconventional monetary policy will be a bumpy ride, but Paraguay is well prepared.

Strong economic growth, coupled with low and stable inflation 15 10 5

4,9 5,3

6,8 4,2

1,7

1,6

4,8 5,4

4,3 4,1

1,8

4,8

6,4

4,8

4,3

2,1

0,1

0 2014*

2013

2012

2011

-1,2 2010

2009

2008

2007

2006

2005

2004

-4,0 2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

-5

0,0 -1,4-2,3-0,8

GDP

Average 1992-2002

A history of stable prices 50 35

40

%

13,6

13,1

1992

Economic Growth (%)

Paraguay economic growth 1992-2014*

Inflation average 2009-2013

30 25

30 (%)

20

20

15 10

10

5

jul-89 jul-90 jul-91 jul-92 jul-93 jul-94 jul-95 jul-96 jul-97 jul-98 jul-99 jul-00 jul-01 jul-02 jul-03 jul-04 jul-05 jul-06 jul-07 jul-08 jul-09 jul-10 jul-11 jul-12 jul-13 jul-14

0

YoY inflation Source: CBP.

4,3

0 VEN ARG URY BRA BOL PRY ECU COL PER CHI

Large buffers to dampen excessive FX volatility

35% 30%

Guaraní (Paraguay)

230

Peso (Argentina) Real (Brasil)

180

Peso (Chile)

130

Nuevo sol (Perú) Peso (Colombia)

80 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

USD exchange rate (Índex January 2008 = 100)

280

Peso (Uruguay)

Net External Creditor position

International Reserves Peru 31% Uruguay (% of GDP) 29%

2000

20% 15%

Paraguay 20% Brazil 16%

Chile 15% Colombia 11% Argentina 6% Venezuela 2%

10% 5%

-2000 -3000 -4000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Source: CBP and IMF-IFS. Year 2013, last data available.

-1000

2001

2013

0

2000

0%

In USD Millions

1000 25%

A sound financial sector to support growth Increase in financial deepening 50%

Evolution of Non-performing loans 4,00% 3,50% 3,00% 2,50% 2,00% 1,50% 1,00% 0,50% 0,00%

44%

40% 30%

35%

20% 10%

2,28% 0,39% Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14

mar-94 mar-95 mar-96 mar-97 mar-98 mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14

0%

3,91%

Deposits/GDP

17%

NPL´s

17%

Solvency Ratio 16%

Source: CBP

PAR

BRA

ARG

15%

COL

NPL´s in L.C.

Average: 16%

14%

14%

14%

PER

URU

CHI

NPL´s in F.X.

Strong macro-policies led to steady improvements in credit rating 7

Moody`s

S&P

Fitch Ba2(+)

Ba2/BB6

BB- (+)

B+

B1/B+4

BB-(-)

B1

B

B2/B 3

B3(+) B-

2

B3 Caa1(+)

Source: Bloomberg

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Jun-05

1

Dec-05

Caa1

Caa1/CCC+

0

BB- Ba3 BB-

Ba3

Ba3/BB5

B3/B-

BB

In fact, Paraguay has better fundamentals compared to peers…

8,0 7,0

GDP growth (%) Average 2008-2013

6,0 5,0 4,0 3,0 2,0 1,0

6,9

6,6 5,5 5,3 5,2

5,1 4,4

4,0

3,6 3,3

2,9

Mediana=3,8 2,5 1,7 0,9

0,0

-1,0 -2,0

-0,6 -1,7

Nigeria Sri Lanka Angola Paraguay Lesotho Bolivia Surinam Gabon Georgia Costa Rica Guatemala Tunisia Armenia El Salvador Hungria Croacia

-3,0

Source: FMI-WEO Apr-2014 and CBP. Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch

…with relatively better external and fiscal positions GAB NGA BOL HUN AGO HRV LSO PRY Mediana GTM LKA SUR CRI SLV TUN ARM GEO

CA Balance (% of GDP) 2015f 2014f 2013f

-5

0

Paraguay experienced eight consecutive years of fiscal surpluses. This had allowed the country to decrease its public external debt from more than 50 percent of GDP to less than 10 percent, the lowest percentage among pears

5 100

Gen Gov Gross Debt (% of GDP)

-10

Despite strong growth expectations, Paraguay will maintain an solid external balance. This is crucial given tightening external financing conditions.

10 2013

80 60 40 20 -

Source: FMI-WEO Abr-2014 and CBP. Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch

2015f

As a result, recent bond placements were quite successful Sovereign Bonds Prices and Yields 106

8,5 104,31

8,0

104 7,5 7,0 6,5

100,13 6,09

100

6,0 5,80

98

5,5 5,0

96 4,5

Price 2013

Source: Bloomberg

Price 2014

Yield 2013

Yield 2014

08/14

08/14

08/14

07/14

07/14

07/14

07/14

07/14

06/14

06/14

06/14

06/14

06/14

05/14

05/14

05/14

05/14

05/14

4,0

05/14

94

Yield

Price

102

Roadmap

• • • •

Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary

A competitive business climate‌

Economic Climate Index 160 140

120 100 80 60 40 20

Source: Getulio Vargas Foundation. Bloomberg

Jul-14

Argentina

Brazil

Ecuador

Chile

Mexico Apr-14

Venezuela

Jan-14

Uruguay

Bolivia

Peru

Paraguay

Colombia

0

…with an extraordinary production capacity…

1st World Exporter

2nd World Producer

• Net electricity • Organic sugar

• Stevia (and exporter) • Tung

5th World Exporter

• Soybean meal

Source: MIC.

6th World Producer • Soybeans

3rd World Fleet of Barges

• 2200 units with 200 tugs

9th World Exporter

• Meat

4th World Exporter

• Soy • Charcoal • Cassava starch • Soybean Oil 10th World Exporter

• Wheat

‌located in a favorable geographic position

Paraguay

is located in the center of the Region, with the highest income in South America.

South America (100%)

MERCOSUR (70%)

405

281

Nominal GDP* (US$ Billion)

4.539

3.311

Average per capita GDP (US$)

7.946

10.402

Population (Mill. people)

Source: 2012 Latin American Statistic Yearbook - ECLAC www.eclac.org *Projection Yr. 2013

**In current US$ (2011)

A country with low energy and labor costs…

Residential Paraguay Costa Rica México Peru Chile Brasil Colombia El Salvador Guatemala Uruguay

Industrial

82

Paraguay Peru Chile México Uruguay Colombia Brasil El Salvador Costa Rica Guatemala

111 112 129 147 163

186 187 205 213 -

50

100 150 USD/MWh

200

250

57 72 105 135 139 156 183 192 204 213 -

Minimum Wage USD

50

100 150 USD/MWh

250

Social charges and other benefits incidence

700,0

120% 609,0

102%

600,0

100%

500,0 405,0 400,0

80%

395,0 339,0

70%

60%

48%

300,0

35%

40%

200,0

20%

100,0 -

Source: MIC

200

0% Argentina

Uruguay

Paraguay

Brasil

Brasil

Argentina

Uruguay

Paraguay

...which also offers important tax advantages…

PGY

ARG

URU

BRA

CHI

Business Income Tax

≤10%

35%

25%

34%

17%

Personal Income Tax

10%

Taxes

Value Added Tax (VAT)

30%

≤10%

35%

21%

25%

23%

27,5%

25%

0%

• Imports of capital goods tariff (Machinery and Equipment)

0%

• Value Added Tax (VAT) on purchasese of capital goods (within or outside the country)

0%

• Remittances and foreign payments for principal, interest and fees taxes(applies to investments of over $ 5 million.)

0%

• Dividend payment taxes and sending profits abroad (applied to investments of over $ 5 million within a span of 10 years)

40%

19%

Comparative Tax Burden (% of GDP) 25,9%

25,5%

25%

24,5% 19,9%

20%

17,7% 15,6%

15%

13,5%

10% 5% 0%

Source: MIC,STP

…trough several legislations Laws and Other Tax Benefits Law Nº 60/90

System of Fiscal Incentives for capital investment of domestic and foreign origin

Law Nº 1064/97

Maquiladora Export Industry

Law Nº 4427/12

Incentives for production, development, packaging of high-tech goods

Law Nº 4903/13

Industrial parks

Law Nº 5102/13

Investment Promotion Act and public infrastructure expansion and improvement of goods and services by the state (PPP Law)

Decree 11771/00

For the import of raw materials and supplies

Law 4427/12

High-tech assembly

Law 2422/04

Special customs regimes

Source: CBP

Simplification of business processes

National automotive policy Source: MIC

National output and Employment

Law 60/90

Industries registratio Maquila regime n

Unified System for the Opening and Closure of Businesses

Roadmap

• • • •

Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary

Summary • A normalization on monetary conditions in the US is not necessarily a negative event: economic and financial effects will depend on robustness of economic policies. • In Paraguay, fundamentals have improved over the past decade and the economy is well prepared to face external shocks. • Paraguay improvements were reflected in recent and successful bond issuances: market demand was 4.9 times the initial offer and yields lower than in countries with the same credit rating (BB).

Summary • In sum, the country offers to the private sector a stable macroeconomic framework for the medium and long term. • This is crucial: it is a pre-requisite for individuals and companies to extend their planning horizon and, consequently, generate investments that will create employment, production and income.

THANK YOU