InsightsSantiago Peña’s Path to Leadership and the Road Ahead

Santiago Peña’s Path to Leadership and the Road Ahead

Paraguay’s new president faces challenges: his ability to maintain independence, gather party support and implement reforms will shape the country’s future.

Santiago Peña, a member of the ruling Colorado Party, has secured the presidency of Paraguay with a comfortable victory over his opponents. While the new government is expected to follow a similar path as its predecessors, Peña’s presidency will face various obstacles, including internal party tensions, the need for structural reforms and redefining Paraguay’s position in the international arena. Peña, who is seen as a protégé of former President Horacio Cartes, has limited political experience but possesses a strong technical background. The extent to which he can maintain independence for his mentor, gather support from different party factions and implement necessary reforms will determine Paraguay’s trajectory under his leadership. 

Positive macroeconomics overshadowed by persistent corruption

Paraguay has made progress in devoting a more robust economic and financial institutional framework, resulting in recent macroeconomic stability, including a stable currency (the guaraní), controlled inflation and manageable deficits. Despite challenges posed by the Covid-19 pandemic and a severe drought in 2022 that significantly impacted the economy’s reliance on soybean and hydroelectric production, Standard & Poor’s projects a year of recovery with a 5% GDP growth in 2023, followed by moderate yet consistent growth of 3.5% in subsequent years. Nevertheless GDP per capita remains significantly lower than that of other Mercosur members: USD 5,600 in Paraguay; USD 9,600 in Brazil; USD 13,700 in Argentina and USD 21,700 in Uruguay. 

Despite advancements in the financial and economic sectors, Paraguay continues to face significant challenges that hinder its appeal to foreign investment, economic diversification and improvements in productivity necessary to close the income gap with neighbouring countries. Corruption levels in Paraguay remain alarmingly high. According to the Corruption Index by Transparency International, the country ranks very low (134 out of 180 countries) when compared to other South American nations, only outperforming Venezuela. Safety concerns, inadequate infrastructure, a high degree of informality in the economy and labour market and poor workforce training further contribute to the low levels of foreign investment, which accounts for only 1% of the GDP. 

According to Hugo Royg of MENTU CONSULTING GROUP, the ruling Colorado Party in Paraguay holds significant power and is often referred to as ‘the owner of the State’. With a history of over 70 years in power, except for a brief period, the party has deep rooted influence in national affairs. Notably, around 80% of civil servants are still affiliated with the Colorado Party, a legacy from the time when party membership was mandatory for state employment during the dictatorship. The party’s wide reach is evident from the fact that there are more party headquarters than police stations. However, despite its broad-based nature, the Colorado Party is internally divided between two main factions. President Benítez has expressed disagreements with former President Cartes, attributing negative effects on the party’s reputation on him. Conversely, Cartes’ supporters have suggested that President Benítez played a role in the sanctions imposed by the United States Office of Foreign Assets Control (“OFAC”) against Cartes’ assets. Looking ahead, Senator Óscar Salomón, representing the ruling faction Fuerza Republicans within the Colorado Party, expressed the desire to maintain independence within their sector. 

The Colorado Party’s practice of clientelism has significantly influenced present day Paraguay. However, achieving necessary state reforms is challenging when a considerable number of public sector jobs are tied to party membership. Government resources are often wasted in sustaining the party’s electoral base, diverting funds from crucial areas such as physical infrastructure, education and healthcare. Furthermore, the informal economy and relatively low tax rates contribute a low level of tax collection, affecting revenue generation for the government. 

Mingling with its neighbours  

While Paraguay is a member of Mercosur, it shares particularly strong ties with Brazil, its largest member. Brazil serves as Paraguay’s primary foreign investor and commercial partner. It is projected that commercial exchanges with Brazil will reach 8 billion in 2023, accounting for 25% of the country’s total commercial exchange. Furthermore, the development of ‘maquilas’ – companies with foreign capital that produce goods for export has led to a robust integration of Paraguay into specific Brazilian productive chains, driving promising diversification within the Paraguay economy. In 2022, maquilas exported over USD 1billion, marking a 20% growth compared to 2021. During the first four months of 2023, there was a 7% growth compared to the previous year. The main sectors where maquilas operate within the economy are auto parts (25% of total), textiles (19%) and aluminium and its derivatives (15%). Additionally, apart from maquilas and commercial ties, the long-standing bi-national project of the ITAIPU hydroelectric dam, operational for over 50 years, serves as a significant link between the two countries. 

However, the relationship with Brazil is not without conflicts, particularly at the borders where the informal sector, low taxes and limited controls in Paraguayan territory have historically facilitated the smuggling of goods into Brazil. 

Choosing between Taiwan and Chine: Striking a balance

Paraguay stands out as the only country in South America that recognises Taiwan and President Peña has affirmed that Paraguay will continue its alliance with Taiwan both during his campaign and after assuming office. However, there are arguments suggesting that the alliance with Taiwan has primarily benefited the ruling Colorado Party rather than the country itself. Some claim that Taiwan-funded projects were used as bargaining chips by the party. It is worth noting that Taiwanese investment in Paraguay remains relatively low, constituting only 3% of Paraguayan exports to the Taiwanese market. Furthermore, there are limited cultural ties between the two nations. Nevertheless, recent years have witnessed a change in this dynamic, with many young Paraguayans receiving training in Taiwan, particularly in technological fields. These skilled individuals are now in high demand within Paraguay companies and across Latin America.  

Fernando Masi, a member of CADEP, a Paraguayan think tank, argues that the country’s international relationships should not be solely dependent on its ties with Taiwan. He suggests that by not opening up to Chinese investments, Paraguay may be missing out on significant opportunities, as Chinese investments have played a crucial role in developing vital infrastructure to other countries within the region. 

Regarding the United States, the Biden Administration has expressed its intention to support President-elect Peña but will also exert pressure on certain economic groups suspected of involvement in drug-related activities and international terrorism. This year’s imposition of OFAC sanctions on companies linked to former President Cartes has been interpreted by some as interference by the United States in Paraguayan politics. This perceived interference may have resulted in advantageous outcomes for the ruling party.

What to expect 

No significant changes are anticipated in the economic front under the new government. The president-elect, who previously served as the Minister of Finance during Cartes’ administration, possesses a strong technical background and places particular emphasis on fiscal balance. Currently, the fiscal deficit stands at 3.5%, surpassing the 1.5% target outlined in the fiscal responsibility rule. Nevertheless, Peña will assume office during a favourable period for the Paraguayan economy, with projected GDP growth of 5% and positive indicators such as a successful soybean harvest, energy generation and the performance of maquilas. However, the incoming government encountered a setback in recent weeks with the postponement of the Paracel cellulose plant, which was anticipated to be the largest investment in Paraguay, valued at over USD 3billion. The delay is attributed to high interest rates and no specific date for its completion has been provided. 

The International Monetary Fund (“IMF”), through its Policy Coordination Instrument (“PCI”) signed by the Partido Colorado, highlighted the need for a pension reform, though it is not deemed urgent, to ensure that the government does not bear the burden of funding future deficits. Various sectors, including teachers and policemen have negotiated their own pension schemes, some of which are clearly unsustainable and would require government resources if the pension reform is not addressed.  

On the expenditure side, it remains to be seen whether the government will implement necessary cuts in areas such as state reform and pension reform, despite the potentially high political cost, while still making the required investments in physical infrastructure and social issues. Carlos Fernández Valdovinos, former president of the Central Bank, is well-known by the current cabinet and aligns with Peña’s stance on fiscal responsibility, making him a strong contender for the position of Finance Minister. 

Regarding the main obstacle hindering foreign investment in the country, the pervasive levels of corruption are unlikely to be effectively addressed in the upcoming government term. Additionally, the division within the Colorado Party poses another hurdle.  

While major adjustments are not expected under the new government in Paraguay, certain changes, particularly in combating corruption, investing in necessary infrastructure and addressing social issues, will contribute to enhancing investment, productivity and production. Mr. Peña could implement crucial policies if he can overcome the challenges posed by unfavourable political dynamics. 

About the Author

Andrea Burstin
Andrea Burstin
Economist by Universitat Pompeu Fabra , Barcelona and MBA by London Imperial College Business School. She Coordinates projects for Spanish food industries association, with a particular focus on marketing research, new trends and innovation. Free lance columnist for “ El Observador” and “En Perspectiva “in Uruguay. She was a Guest Professor in Universidad Carlos III, Madrid (Business Administration Department).
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