BMI View: We expect continued private sector loan and deposit growth in Paraguay's banking sector in 2013 , as a rebounding economy increases the willingness of banks to extend credit and strong performance in the agricultural sector swells private sector deposits. While still heavily reliant on foreign currency-denominated lending and deposits, we note that the trend is toward greater use of domestic currency. Additionally, the banking system benefits from very low delinquency rates.
We expect to see steady growth in Paraguay's banking sector in 2013 , as a surging economy supports private sector lending and grows deposits. While small in nominal terms, Paraguay's banking sector is fairly well-developed by regional standards. Indeed, with loans and deposits at 32.3% and 34.0% of GDP, respectively, banking sector activity in Paraguay is greater compared to the size of the economy than in Peru, Venezuela, Mexico, and Argentina.
|Relatively Large, Relative To GDP|
|Latin America - Private Sector Loans & Deposits To GDP, %|
Additionally, the banking sector has been increasingly maximizing its use of deposits for lending purposes. Over the past several years, private sector loan growth has consistently outpaced deposit growth, sending the loan-to-deposit ratio higher ( see chart, below). While loan growth slowed abruptly in H212, as the Paraguayan economy contracted, we expect a rebound in 2013 on the back of surging economic growth, part of our forecast for real GDP growth to hit 7.0% in 2013 ( see our online service, March 14, 'Big Bounce For Economy In 2013'.) In particular, we see continued private sector loan growth supporting a recovery in real private consumption this year. After growing by just 1.0% in 2012, we forecast real private consumption growth of 4.5% in 2013.
|Loan Growth To Boost Consumption|
|Paraguay - Banking Sector Indicators|
Still we note that Paraguay's banking sector remains largely influenced by foreign currency transactions. While most lending to the private sector has been done in guaraníes since 2005, a substantial portion of all loans are still done in foreign currency, potentially exposing the banking sector to exchange rate risk. While not our core view, major unexpected exchange rate fluctuation in the future could adversely impact the quality of banks' loan portfolios.
|FX Still Substantial Portion Of Lending|
|Paraguay - Private Sector Lending|
While somewhat vulnerable to currency risk, we note that the Paraguayan banking sector benefits from a very low delinquency rate. As of the fourth quarter of 2012, the Banco Central de Paraguay (BCP) reported a delinquency rate of just 2.1%, up slightly from 1.7% a year earlier , but down from 2.3% in Q312. These figures suggest that banks could withstand a degree of deterioration in their loan portfolio s without fundamentally threatening the stability of the sector.
|FX Still A Large Proportion Of Deposit Base|
|Paraguay - Private Sector Deposits|
As with private sector lending, we expect strong economic activity to support deposit growth this year. Also, much of the banking sector's deposit base is foreign currency denominated. While FX-deposits as a percentage of total deposits have fallen considerably since the early 2000s, when they accounted for nearly 70% of all private sector deposits, we note that major currency fluctuations or political risk could spark foreign capital flight. That said, last year's impeachment of then-President Fernando Lugo saw no such developments, indicating that banks are deemed to be relatively insulated from political risk.