Tracking global economic growth is a risky business – nobody has a crystal ball after all. In addition, the sheer volume of regional predictions from international financial institutions, government agencies, consultancy services and so on, can often make a clear picture practically impossible. In Latin America, the view can be particularly scattered due to regional volatility. On one point however, research does converge: Paraguay, Panama and Peru are doing very well indeed.

In April 2013, the World Bank report As Tailwinds Recede: In Search of Higher Growth concluded that the global tailwinds that spurred recent growth and social inclusion in Latin America and the Caribbean (LAC) were receding and that Latin America was going to have to start working to secure its long-term economic future. Nevertheless, it forecast an average growth rate of 3.5% for Latin America during 2013, while highlighting Paraguay, Panama and Peru as the regional stars for the year. The World Bank maintained this view in its October semiannual report, Latin America’s Deceleration and the Exchange Rate Buffer, predicting ‘Asian-style growth rates’ of 12%, 8% and 5.5% for Paraguay, Panama and Peru respectively.

Rise of Paraguay

Out of the three new star economies, Paraguay is perhaps the most unknown quantity. However its investment profile has rocketed on the back of President Horacio Cartes’ commitment to boosting its $26bn economy through public and private investment. Although the economy shrank by over 1% in 2012, growth is expected to hit double figures in 2013 on the back of strong agricultural yields – it is a major exporter of soybeans. The industrial sector currently accounts for a quarter of the country’s gross domestic product (GDP), but that is 11% less than a decade ago. It also benefits from one of the lowest debt-to-GDP ratios in the region (14.7%) and a substantial energy surplus, as one of the world’s largest exporters of electrical energy.

Paraguay is ideally positioned to become the next global boom economy; built upon an incredibly stable macro economy and conservative fiscal policies, Paraguay is united in regard to opening up the country’s wealth of opportunities to foreign investors,” says Néstor Loizaga, managing partner at FERRERE’s Paraguay office. “It is utilizing strong government incentives and structures developed to promote investments and local partnerships in a manner that will promote a sustainable, transparent economy that will benefit Paraguay and foreign investors who seek opportunities rarely present in emerging markets.

The most thriving economic sectors in Paraguay are agribusiness, real estate and river transport, and foreign investors are lining up to become part of the action.

Agribusiness in soy and cattle is generating investment from very important players in that area such as Cargill, ADM, Bunge and Louis Dreyfuss, amongst others. These companies are investing in crushing plants to produce soy and canola oil as well as purchasing barges and push boats to have their own fleet and secure transportation,” says Loizaga. “In the real estate area, there are about 30 buildings (residential and corporate) in construction, with an estimated investment of around $600 million.

FERRERE is winning a good share of that work. Headquartered in Uruguay, the firm also has a platform in Bolivia as well as Paraguay, ensuring a high profile in the region. Loizaga recently led the firm’s advice to Bunge, Lineas Panchita and Aceites Generales Deheza in the structuring of a $60 million joint venture between the three companies to provide freight services on the Riverway Paraguay Paraná and to provide management services to other riverway convoys. Of course maritime work is flourishing across the region and Panama is a particularly attractive jurisdiction for this type of investment.

Incentivizing growth

The common thread that sows all three of these countries together is their commitment to establishing a more competitive and transparent investment regime.

Paraguay has a relatively simple investment regime and has one of the lowest tax burdens in the region: corporate tax is 10% and VAT is 10% - some industries are levied at a 5% VAT rate.

The country also has two regimes that investors may resort to when investing in Paraguay.

The Maquila Regime is aimed at industrial processes or services for the transformation, elaboration, repair or assembly for goods of foreign origin subsequently to be re-exported. Benefits, amongst others, include strong government support and recovery of VAT by endorsable Tax Credit Certificates,” says Loizaga. “Then the National and Foreign Investment Tax Incentive Regime (Act 60/90) aims to promote investments in general by granting exemptions on taxes. It is important to note that investors can apply for Maquila and Law 60/90 jointly.

The country also has two pieces of legislation currently with Congress.

The new PPP law aims to attract the private sector into investing jointly with the government in roads, ports, and airport infrastructure,” says Loizaga. “And the investment stability act aims to secure the conditions under which an investment was made. For a given period of time the investor will be protected against changes in legislation such as new tax rates.

The PPP law is particularly interesting for foreign investors. It provides for a new streamlined legal system to accommodate public infrastructure projects and reduces risks for private investors through the requirement of a collateral fund to guarantee that the state follows through on payments. The country’s Public Works and Communications Ministry believes that it could generate investment opportunities worth $30 billion over the next decade.

Adapt or Die

Law firms are not just striving to keep up with legislative developments. As some of the world’s most high-profile companies continue to flock to their shores, lawyers are pushing themselves to reach international standards in all possible areas.

The cumulus of investors and financing has helped the legal market develop in two ways,” explains Loizaga. “Firstly, sophistication: the deals have become more complex, requiring lawyers to become more sophisticated. Secondly, interaction between Paraguayan firms and world class firms and lawyers: contracts have become more complex and lengthy, drafted under New York or English law, with arbitration clauses. Clients have also become more sophisticated in demanding these types of services.

Article published in Latin Focus on December 2013.