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AmericasAugust 29 2010

Central Bank of Paraguay on the country's need to diversify

Jorge Raúl Corvalan, governor of the Central Bank of ParaguayIn his two years as governor of the Central Bank of Paraguay, Jorge Raúl Corvalan has presided over a dramatic cut in interest rates (though these are now rising again to prevent the economy overheating) and increased access to banking services and mortgages. The country has stepped up bank regulation and is enjoying increasing GDP with no fiscal deficit. Mr Corvalan speaks to The Banker about the need to diversify Paraguay's economy and the measures he is taking to improve training for central bank staff. Writer Silvia Pavoni
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Central Bank of Paraguay on the country's need to diversify

Q: You took on the role as central bank governor at a very difficult time, in 2008, just before the financial crisis hit Paraguay, and took some tough measures to tackle it, such as reducing interest rates from 16% to less than 3%. What was the market's reaction?

A: I think our monetary policy was very successful. When I became central bank governor, the rest of the world had interest rates close to 0%. If we hadn't reduced ours, we would have run the risk of a disproportionate exchange rate appreciation, which would have affected our exports. Paraguay relies on agriculture and is very sensitive to international prices.

Lowering interest rates also put local banks in a position to provide more liquidity to the system. Before the crisis, banks had lots of cash - which was reassuring for both banking customers and the banking regulator. Now, things are going the other way. Paraguay's economy has grown by almost 10% in the first quarter of 2010, year on year. Aggregate demand is growing more than aggregate supply, so we plan to increase interest rates gradually.

At the last meeting of the country's monetary policy committee, we raised interest rates by 0.5%. We took advantage of international conjuncture [the economic climate created by the convergence of international events] - followed it on the downside, followed it on the upside. The banks didn't take it that well to start with. But looking at their investment portfolios, none of them invest in the BCP [Central Bank of Paraguay] for more than 15% of their total investments. When they saw that BCP's rates were lowering, the banks started becoming more aggressive and looking for clients.

This achieved the collateral effect, which we also wanted, of increasing the level of access to banking services. Last year, the financial system grew by almost 20% - both deposits and loans grew by around that percentage. This was achieved by finding new clients - we stopped being a client and the banks looked for new ones.

Q: How is the central bank helping to increase the level of access to banking services?

A: The payments system that we use is archaic and it takes six or seven hours to settle positions; during this time, banks are left not knowing about their liquidity position. We want to eliminate this risk. We plan to launch a real-time system in October or November next year. We already have the software, hardware and the consulting team in place. We have invested about $3.5m in this system and received technical assistance from the World Bank.

Q: What about banking regulation and stability?

A: We had a cleansing process with the crises [that affected Paraguay between 1995 and 2005]. Our supervision needed improving. The fittest banks survived and regulation became stronger.

Something that we're happy to see is the beginning of long-term financing. We never had it before and now we have some mortgages that are for more than 20 years, issued in the local currency and inflation-linked. The previous government created the Agencia Financiera de Desarollo [financial development agency] and this generates the bridge for long-term loans. Now, longer-term loans are being granted to agricultural and meat businesses too.

The Central de Riesgo [central risk-assessment system] helps the banking system assess the credit situation of clients, and this helps with stability.

The cattle-raising industry is very important here - there are almost 12 million cattle for just 6 million people. Those businesses are now getting financing from the banks. They are getting good rates and good maturities. There is more competition among the banks. And we know this from clients who tell us, not just from the banks.

What is needed is financing for industry and the development of public-private partnerships (PPPs) for airports, highways and increasing the depth of rivers. The PPP law will be finalised at the end of the year. Three airports are involved in the PPP proposals: Silvio Pettirossi in Asunción, Guarani in Ciudad del Este and and airport in Mariscal Estigarribia in the Chaco.

Everybody agrees that we need infrastructure and everybody agrees that, with our fiscal pressure, [the government] doesn't have the money to finance it, so it will have to be financed through a PPP.

Q: The Paraguayan banking system is well regulated now, but one-third of the financial sector is held by co-operatives, which have much weaker supervision. How big a risk do they pose?

A: What we're seeing over time is that the market share of co-operatives is becoming smaller. The financial sector is growing faster than they are. If there is a problem, it's contained, not growing. The banking system in Paraguay is now much more modern [in its operations than it was] and has bigger prestige, so that's why clients go to banks. Moreover, banks have the state's seguros de depositos [guaranteeing clients' deposits], which is something the co-operatives don't have.

We published a report on financial security in July, the first time we have done something of this sort. We plan to do it twice a year. The aim is to inform the public.

There is a supervisory body for co-operatives and there are plans to strengthen this oversight, partly thanks to a loan from the Inter-American Development Bank (IDB). This will take time - it took us years to strengthen our banking supervision. In the interim, the co-operatives supervisory body will have to improve the flow of financial information, improve the technical abilities of its staff and improve its technology. If it does this, everything will go well.

We have carried out many stress tests with the assistance of the World Bank. Luckily, [the risk level of the co-operatives] is not serious and it is very localised. Co-operatives tend to do business with each other and [the risk] doesn't permeate the system.

At the same time, five years ago the co-operatives made up 27% of Paraguay's financial system, but now they are less than 20%. There is a risk, it's a reality, but there is also an antidote - strengthening their supervision - and we received a loan from the IDB to do this.

Q: As with the rest of Latin America, Paraguay was only marginally affected by the international financial troubles. What is the risk of infection from European-generated problems and possible foreign exchange problems?

A: The troubles with Europe do affect us because we have many Paraguayans working in Spain and their remittances have been affected. Paraguayans tend to go and work in Argentina, the US and Spain. Now the emigration flows have changed, and some of these people are coming back.

If we keep on growing [economically], we'll absorb this increased labour force. Otherwise, we have lost the pressure release valve that emigration was giving us, and that's a risk.

We know that we can't affect the world, but the world affects us, and we have some barriers in place to protect us against the shocks. The first one is our reserves. The second is that our fiscal situation is in order; we don't have a fiscal deficit.

Debt on gross domestic product [GDP] is very low in Paraguay. We saw this on the most recent trip that we made to the International Monetary Fund with finance minister Dionisio Borda; everybody wanted to offer us money. When you manage the macroeconomic data well, you're a good client for the world.

cp/96/GET_Paraguay_oranges.jpg

Oranges and melons: a fruit market in Asunción. Paraguay's economy depends heavily on food production

Q: Estimates have Paraguay's GDP growing at between 6% and 10% this year. Is there a risk of overheating the economy?

A: It is a risk in the short term and that's why we have started to raise interest rates again. The aggregate demand is higher than the aggregated supply. This means that the country is at its maximum capacity.

We need to break the constrictions of infrastructure. The economy could overheat before the right level of infrastructure is achieved. When you start working on developing infrastructure, you immediately generate employment. But if the world keeps on demanding the quantity of food that it is demanding, overheating could hit us. So what can we do to awaken the other sectors?

The agricultural sector is very important but it doesn't permeate the rest of the economy because it is very capital-intensive and it doesn't require many services.

We need to open up other sectors. A lot of this has to do with infrastructure. Industries need to work 'just in time' and now they can't do it. If there is a drought and the river doesn't flow, how do you transport the goods?

As the country is very open [to imports], if a product is too expensive, you import a cheaper one and the price gets 'colder'. But the cost of non-importable products, such as construction services and government salaries, goes up.

We're raising interest rates so that we don't have inflationary pressures. Our maximum target for inflation is 5%. Over its history, Paraguay has had an average inflation of 11%. We have never had hyperinflation. This [lack of high inflation] creates the virtuous cycle of having people thinking long-term, with no surprises on the horizon.

Q: What makes you most proud of your work at the central bank?

A: I started to work at the central bank when I was 15 years old, delivering papers and making tea. My father used to work at the bank and when he prematurely died in a car accident, I was offered a job here. It was tradition then that the first-born son would get into the bank. Since I wasn't old enough to work as a bank official, I used to do menial kinds of work. Then I moved to the private sector.

This government called me [in 2008] and here I am. I enjoyed the private sector; I made friends there and I did a lot of interesting work, but the temptation to go back to the central bank was too strong.

My history was here, my profession took shape here. There are 900 people at the bank, and I easily know 600 of them. It's almost a family.

I'm very proud of what the management of the bank is doing. We want people with experience abroad to work here. Two of our bank officials were admitted to Duke University in the US, others to universities in Argentina, Chile, Colombia and Spain. For the ones that can't travel for personal reasons, we're paying for their post-graduate programmes here in Paraguay.

We want our officials to be as good as those of any other central bank. We need a clever, able bureaucracy.

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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