The appetite for bond yield regardless of risk has enabled tiny and poor Paraguay to enter the bond market for the first time, with 10 year bonds at 4.6%.
Paraguay is a landlocked South American country of six million people, and not to be confused with its smaller but more stable neighbor, Uruguay. Paraguay is only slightly wealthier than neighboring Bolivia, the poorest country in South America, who successfully offered ten year bonds at 4.6% last year. While Paraguay does not have Bolivia’s stunning history of nationalizations, it features a solid record of one party rule by strongmen whose semi-legal business dealings make or break in-country business and Paraguay’s international reputation. For example, Paraguay’s president was impeached in June and the current frontrunner ahead of the April elections owns cigarette factories and banks implicated in smuggling operations to Brazil and the U.S as well as drug-related money laundering.
Paraguay has experienced bouts of high inflation and violent fluctuations in growth, conditions that precipitated foreign debt defaults in its neighbors. While Paraguay is expecting 9% growth in 2013, its GDP tends to follow the fortunes of the soy crop, which is becoming a bigger portion of the country’s economy. If soy prices drop in the next ten years – a likely prospect for a cyclical commodity — Paraguay will face the difficult economic conditions that lead governments to default on bond payments.