Chart Of The Day: Paraguayan Debt Pulling Away From The Pack
Last June we argued that Paraguayan external debt would be one of the stronger performers in the region due to improving economic fundamentals and a positive policy trajectory ( see 'Fixed Income: Set To Become A Regional Outperformer', June 20 2013), a view that has played out since last fall and accelerated in recent weeks. We estimate that real GDP growth surged to 12.6% in 2013 on the back of soaring soy exports, and Paraguayan President Horacio Cartes pushed through measures to limit government spending and cap fiscal deficits soon after being inaugurated in August 2013, both of which burnished the sovereign's credentials. Indeed, Paraguay's borrowing credentials were a standout amongst its neighbours, especially Uruguay, where we have not seen a similar drive to confront persistent fiscal deficits, and Brazil, which has struggled with high inflation, faltering economic activity, and a weak fiscal picture. In Chile, the election of left-leaning President Michelle Bachelet was taken by many as a sign that greater fiscal expansion was likely. While the price index for Paraguay's global, US dollar-denominated 2023 bond is up 6.2% since June 20 of last year, price indices for similar maturity Uruguayan (2022) and Brazilian (2023) bonds are down by 1.6% and 0.7%, respectively. Chile's global 2022 US dollar bond is up 3.1% over the same period.
Looking ahead, we believe Paraguayan debt has the potential to remain attractive relative to its peers. The yield on the 2023 bond is currently at 4.8%, 70 basis points (bps) off of the low of 4.1% recorded in May 2013, which suggests that there is potential for additional capital gains on the bond if the fiscal and economic growth trajectory remain positive. That said, we caution that the largest move is likely to have already occurred. In the current environment of rising yields in developed markets, which we expect to act as a sustained headwind for emerging market debt, we believe it is unlikely that the yield on Paraguay's external debt will be able to sustain its previous lows for any period of time. Still, we maintain our view that Paraguay will benefit from stronger fiscal and growth trajectories than its neighbours, suggesting that relative outperformance may continue even in the event of yields heading higher across external dollar bonds in the region.
Paraguay Pulls Away From The Pack Global, US$-Denominated Government Bond Price Indices (June 20 2013=100)