Preliminary Economic Report Year 2003
a. Real Sector. During the year 2003, the Paraguayan economy showed greater stability in the nominal variables and a positive reestablishment in some lines of the productive activity, mainly in the primary sector. Nevertheless, this positive situation will require structural reforms that allow the economy to avoid the slow and very oscillating growth rate, which relies heavily on the agricultural sector. At the end of the year 2003, it is estimated that there will be a growth rate in the order of 2.1 per cent, which indicates an important recovery after the negative rate of 2.3 per cent registered at the end of 2002. This positive result is not sufficient, considering the fact of the annual population growth rate of 2.3 per cent. The estimated result of the growth of the GDP is based upon the good performance of the agricultural sector, which is estimated will close at around 12 per cent, since the nonagricultural sector is expected to show a contraction of 2 per cent. The greater exchange rate stability, the control of the inflation (specially since the month of May), the recovery of the confidence of the public with respect to the banking sector and a better weather conditions for the agricultural sector were identified as being the domestic factors that chiefly caused this improvement of the economy during 2003. On the other hand, the greater stability of the regional economies, the increase in the international prices of soybean and cotton, and the low international interest rates constitute the main external factors that affected the economic recovery. As regards the inflation rate (as measured by the variation of the Consumer Prices Index, CPI), the accelerated rate of growth of the prices verified at the beginning of the year 2003, that reached a maximum level of 21 per cent in interannual terms in the month of April, is no longer an immediate preoccupation for the Central Bank. Thus, after the four first months of the year, a significant reduction in the growth rate of the prices was verified, and the monthly inflation rate even was negative for four consecutive months, as of May, 2003. This allowed a closing rate of inflation of 9.3 per cent, very much below the estimations made at the beginning of the year and lower than the rate of 14.3 per cent registered at the end of year 2002. It must be mentioned that one of the factors, which has contributed to the greater stability of prices during the period, has been the appreciation of the local currency with respect to the US dollar (-15 per cent), a behavior that has also been observed in the other currencies of the region. This appreciation has affected mainly the level of the prices of the tradable goods. However, we may mention that although the inflation of the second semester of 2003 was not significant, this inflation rate can be explained as resulting from the effects of some price adjustments, as the case of fuels (by the increment of the selective tax on the
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consumption of diesel oil, which was implemented by Presidential Decree), public transport fares and the increases in the price of meat products.
b. Monetary Sector The growth of the primary money was more expansive in 2003. Suitable liquidity was provided to the market in order to carry out the normal activity of the productive sector , but without affecting the level of internal prices or the exchange rate. In the present year, an increase in the real demand of Guaraníes has been observed. It is thought that this is due mainly to the greater stability of the exchange rate, and the recovery of the confidence of the public towards the financial system, which is reflected by a significant increase of the banking deposits. Another leading factor of the increment of the real demand of Guaraníes has been the better performance of the real sector of our economy along with a substantial improvement of the regional economic situation. The demand of Bills and Coins in Circulation (M0) has experienced a recovery, with an interannual growth rate around 30 per cent by the end of December and with a inflation rate of one digit. With these expansions observed until the moment and given the expectations of economic growth of the present year, the balance of the real Currency in Circulation (M0) would be slightly over its long-term tendency. On the other hand, as regard the exchange rate market, this has been a year in which the exchange rate has been relatively stable, as there has been even a 15 per cent appreciation of our currency with respect to the US Dollar. The short-term expectations indicate also a stability at the regional level, which is an encouraging factor, since it would appear that external factors would not exert pressures upon the currencies market at the domestic level. The Central Bank made net currency purchases from the financial sector amounting to USD 73 million; a situation that contrasts with the year 2002, when net sales amounting to USD 182 million were made. As regard the main accounts of the General Balance of the Central Bank of Paraguay, that which refers to the Net Credit to the Public Sector, was the one that from beginning of the present year has generated greater negative expectations given the high level of the budget deficit. Nevertheless, at the end of the year, a substantial improvement of the position of the Central Administration can be observed, even though in the month of December, the use of its deposits increased due mainly to cyclical reasons (in addition to the payment of salaries, the traditional Christmas-bonuses are also paid). Anyway, the final estimations are smaller than those expected at the beginning of the year. On the Credit side, in the first quarter of the year the Central Bank granted a short-term advance to the Ministry of Finance, amounting to USD 39 million, which already has been paid. Nowadays, it is noteworthy to emphasize that the Ministry of Finance is in a process of exchanging bonds (Public Internal Debt) with the private sector, which is favorable for the improvement of the fiscal accounts and for a better relationship with the economic agents who lend their financial resources to the government.
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On the financial system side, contractive performance has been observed. This contractive behavior of the financial system is mainly due to the accumulation of money in Current Accounts, which private banks maintain at the Central Bank of Paraguay, registering by the end of the month of December a balance of Guaranies 557 billion, much higher than the amount of Guaranies 69 billion registered in December of 2002 The Central Bank of Paraguay implemented an active policy with market instruments (Instruments of Monetary Regulation- IMR), in order to control the evolution of the primary liquidity and to avoid pressures in the nominal variables and in the level of prices. It was observed that during the year 2003, the balance of IMR had relevant increments, in order to allow the system to resist the high level of liquidity. Thus, the balance of IMR (including Letters of Commitment- Series C under the framework of Decree 20015) was Guaranies 1,134 billion, which represents Guaranies 508 billion more than the amount of the balance registered in December 2002. Nevertheless, this substantial increase of the stock of Instruments of Monetary Regulation, has been obtained without pushing up the interest rates paid by these instruments; very much to the contrary, the interest rates were reduced. In this sense, the average rate of the instruments up through the end of December, 2002, was 25 per cent, whereas at the end of December 2003, it was 13 per cent.
c. Financial Sector A constant recovery of the total deposits of the private sector in the banking system has been observed since the beginning of the year 2003. Thus, the deposits in national currency (MN) at the moment are at a higher level than those registered in the same period of the year 2002. On the other hand, the recovery of the deposits in foreign currency (ME) was more delayed, beginning in February, reaching its maximum level in July 2003, when the balance of these deposits were USD 930 million, after having been a minimum of USD 736 million in July 2002. At the moment, and according to preliminary data, the total balance of deposits of private sector in national currency has increased by 24 per cent (Guaranies 413 billion) in interannual terms; and the total balance of deposits in the banking system in foreign currency, at the end of year 2003 registered an interannual increment of 18 per cent (USD 138 million). Nevertheless, the greater dynamism of the deposits was not accompanied by a greater allocation of financial resources to the local economy, through the concession of credits to the private sector. In effect, the balance of credits to the private sector, in national and foreign currency, tended to decrease in spite of the increment of the total deposits in both types of currencies. Thus, to November of 2003, the total balance of loans in foreign currency granted to the private sector decreased by 22 per cent (USD 107 million); and the total balance of loans in local currency granted to the private sector decreased by 23 per cent (Guaranies 572 billion). It must be emphasized that the reduction of these loans took place in spite of the initiative of the Central Bank to reduce the interest rates paid by its instruments in argument often used to justify the shortage of funds to the private sector. The conservative policy of the banks is generalized. The financial experience of Argentina and Uruguay initiated a process of lack of trust towards the local banking system. The crisis 3
of the Banco Aleman in the middle of the year 2002, generated a deposits-run in both types of currencies – local and foreign currency- which affected all the banks of the local financial system, including those of foreign capital. The perception of the market was that the banking system as a whole was very vulnerable. This situation was a hard test for the national financial system, yet it can be said that it fortified the system, in the sense that the confidence of the public was recovered as regards the successive return of the public deposits. The need to prevent problems of a new banking crisis, motivated all banks to diminish their availabilities of resources for granting credits to the public and consequently to keep more liquidity. The table of “Sources and Funds” published in the Economic Report of November 2003, shows the use and the destination of the banking resources. It stands out that the banks have accompanied the increment of the banking funds and the recovery of credits, increased their positioning in assets of lower risk and greater liquidity, in foreign as well as in local currency. Thus, the investments in IMR increased as also the deposits in the Central Bank of Paraguay (mostly in the form of deposits in current accounts) and their international assets (positioning in international correspondent banks). In face of this continuous increment of the deposits and the preference of the banking sector of using these resources in a more liquid portfolio, which tends to offer lower returns, the banks were forced to continuously reduce their interest rates for deposits. In effect, in the analyzed period, the weighted average of deposit rates for operations involving the attraction and reception of domestic currency registered a decline, going to 9.1 point per cent, from 14.5 to 5.34 per cent annually; and the weighted average of deposit rates for operations involving the attraction and reception of foreign currency declined by 1 point per cent, from 1.9 to 0.9 per cent annually. Given this panorama of contraction of credit, and the high level of country risk, the reduction of the interest rates paid by the Instruments of Monetary Regulation does not imply a factor that encourages the concession of credits. However, with the Stand-By agreement with the IMF, it is hoped that the new credits will be forthcoming when the market perceives that the signals are clear in relation to the strategy of the economic policy of the new government. In this respect, it will be important that credit recovers and grows to reasonable rates, in order to think about that there has been a sustainable economic reactivation, which includes all the sectors of the economy. Only in a environment of greater certainty, will the banks be predisposed to increase their lines of credit, and the private sector will be willing to implement new investment projects. d. Fiscal Sector The expected fiscal result of the Central Administration for 2003, -0,8 of GDP , is below the amount forecasted at the beginning of the year. The fiscal improvement is the result of the increase in the revenues, which were greater than the increase in expenditures, specially the tax revenues such as the Goods and Services Tax, the Value Added Tax and the tax resulting from international trade among others.
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It is important to mention that the increase in the revenues resulted in an increase in the deposits of the government, since September reaching levels that are much higher than other years, and which in this manner made possible for the government to cover excess expenditures as compared to seasonal revenues in December. Besides, the Stand-By Agreement with the International Monetary Fund allowed the channeling of several credits with international organizations. Most of those disbursements arrived in the last week of December. Finally, it should be mention that the internal debt is undergoing restructuring process, which implies the exchange of outstanding debt (matured and not matured) for new bonds with maturity in the next five years. This exchange mechanism will enable the Government to reschedule the payments in a more flexible way and according to its future cash flows. e. External Sector At the regional level, according to the “Economic Commission for Latin America and the Caribbean –ECLAC”, the Latin American economy will grow 1.5 per cent in 2003 and the forecast for 2004 is 3.5per cent, which implies the beginning of an economic expansion after the recession that began in 1997. The Outlook is based on the improvement of the international markets reflected in the decrease of sovereign risk after reaching a historic high during September October 2002. At the local level, during 2003 the Net International Reserves (NIR) of the Central Bank increased more than USD 300 million, as a result of the net sales of the financial system and the public sector to the Central Bank; increment in the Reserve Requirement Deposit associated with foreign currency deposits; increment in the current accounts in foreign currency of the Public Sector and the inflow from the bi-national entities that in the aggregate are greater than the negative cash flow of the external debt. At the end of 2003, the NIR will reach USD 960 millions, the highest level since 1999, year of the disbursement of the Chinese Credit of USD 400 millions. Other factors that allowed the increase of international reserves is the lower exchange rate pressure in the local market, as a result of the depreciation of the US Dollar within the world market; a regional stability; and an increase in the credibility of the financial system which has a positive influence on the exchange rate, thereby allowing the Central Bank of Paraguay to drastically reduce its intervention as a supplier of dollar in the local exchange rate market. In relation to the evolution of the international trade, 2003 was favorable year as regards exports since they increase following the stagnation of the previous years. The improvements in the soybean (54% increase) and cotton production (67% increase) were the pillars of this growth. At the same time, in the last months of the year an increase in the imports were observed, which may be understood to be due to the recuperation of the internal demand. Finally, in relation to the indicators of international trade competitiveness with the main partners of the region, the real effective exchange rate experienced an interannual 5
depreciation of 7 per cent by November, 2003. Although the real bilateral exchange rate with the US dollar experienced an interannual appreciation of 13% as of November, 2003; the local currency experienced depreciation amounting 15 per cent against the Brazilian Real, and of 7 per cent against the Argentinean peso. This means that although we experienced a strong appreciation against the US Dollar, the country experienced no loss of its commercial competitiveness with respect to its most representative trade partners.
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