Paraguay to Emulate Bolivia With First Dollar Bond Sale

Paraguay, the only Latin American economy set to contract this year, plans to issue the first dollar bonds in its two-century history in the first quarter of 2013 to tap booming global demand for higher-yielding debt.

The landlocked South American country is looking to issue about $500 million in bonds to yield 5 percent, in line with a recent sale by neighboring Bolivia, Finance Minister Manuel Ferreira said in a telephone interview from Asuncion today. The exact amount and date is being worked out with underwriters Citigroup Inc. and Bank of America Merrill Lynch, he said.

“We want to exploit favorable market conditions to raise funds for a major infrastructure investment program,” Ferreira said. “We have similar debt and economic metrics to Bolivia and we believe we can repeat its success.”

Bolivia returned in October to the international bond market for the first time since the 1920s, selling $500 million of 10-year debt to yield 4.875 percent. Yields on the securities have since risen to 5.2 percent, according to data compiled by Bloomberg.

Paraguay’s debt fell to about 13 percent of gross domestic product this year from 58.4 percent in 2002.

The government will channel the funds from the bond sale into investment projects such as roads and electricity networks, Ferreira said.

‘Desperate For Yield’

Benchmark interest rates close to zero in Europe, the U.S. and Japan have led investors to buy bonds from countries including Bolivia, Mongolia and Zambia in search of higher yields. Latin American sovereign debt yielded an average 5.26 percent on Dec. 28, according to JPMorgan Chase & Co.’s EMBIG indexes.

“People are desperate for extra yields,” Tiago Ventura, who helps manage $950 million of Latin American fixed-income funds at Santander Asset Management, said in a phone interview from Madrid yesterday.

Paraguay’s BB- credit rating was put on negative watch by Standard & Poor’s after the impeachment of President Fernando Lugo in June, which provoked the country’s suspension from the Mercosur regional trade bloc, which includes neighboring Argentina, Brazil and Uruguay. Paraguay’s rating puts it in the same category as Vietnam and Bangladesh.

The caretaker government of President Federico Franco has calmed investors by continuing his predecessor’s fiscal policies and strengthening financial institutions, said Richard Francis, a Latin America analyst at S&P.

Post-Impeachment Policy

“The policy environment has actually been somewhat better after the impeachment,” Francis said in a Dec. 21 interview from New York.

Paraguay’s April 21 presidential elections are not expected to change the country’s economic policies, said Daniel Correa, chief economist at Asuncion-based consultancy Investor Economia.

“The top three candidates all support the finance ministry’s bond project,” Correa said in a Dec. 22 phone interview.

The finance ministry recapitalized Paraguay’s central bank on Dec. 18 in preparation for the bond issue.

The central bank sold the ministry 3.9 trillion guaranis ($922 million) of local bonds at a 0.5 percent adjustable interest rate, erasing the bank’s current account deficit.

Shrinking Economy

Paraguay has South America’s second-lowest GDP per capita after Bolivia, according to the World Bank. The country relies on agriculture for 20 percent of GDP, Ferreira said. A decline in soybean exports during a drought earlier this year caused the economy to contract 1.2 percent in 2012, according to central bank estimates. That makes it the only country with a shrinking economy among 33 Latin American and Caribbean nations surveyed by the International Monetary Fund.

“A lot of people are going to buy Paraguay bonds not to miss out on the allocation, but after that it’s going to be more difficult to find support, because there is little positive news coming from these countries,” said Ventura, whose Santander funds own about $9.5 million of Bolivian bonds.

Paraguay’s prospects will improve next year with growth of as much as 11 percent, according to the IMF.

“As favorable weather conditions reappear, the economy is expected to rebound sharply in 2013,” IMF wrote in its last country statement in May.

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