Geoeconomic and policy analysis 2026-04-26 10 minute read

Paraguay Under Pena: Itaipu Renewal, Investment Grade, and the Mercosur Arbitrage

Santiago Pena's Colorado government is converting a low tax, low debt, hydropower surplus economy into a credible investment grade story. The 2024 Itaipu Anexo C settlement at 19.28 dollars per kilowatt locked in a five year transition, Moody's upgraded sovereign debt to Baa3 in March 2024, and beef plus soy exports lifted GDP by 4.7 percent. The remaining bet is whether Pena can hold the Mercosur EU FTA window open, sustain Taiwan diplomatic ties against PRC pressure, and keep the Cartes faction inside the rule of law perimeter the United States redrew when OFAC lifted Section 7031c sanctions on December 26, 2024.

Santiago Pena Palacios was inaugurated on August 15, 2023, after winning the April 30, 2023 election with 42.74 percent against Efrain Alegre's 27.49 percent, returning the Asociacion Nacional Republicana to the presidency with a Senate and Chamber majority anchored by the Honor Colorado faction of former president Horacio Cartes. The Banco Central del Paraguay reported real GDP growth of 4.7 percent in 2024, headline inflation of 3.8 percent in December 2024 inside the 4 percent target, and a policy rate held at 6.0 percent. Moody's upgraded the sovereign to Baa3 with a stable outlook on March 6, 2024, S and P moved to BB plus on April 24, 2024, and Fitch lifted the rating to BB on September 26, 2024, leaving Paraguay one notch from investment grade across all three agencies. The August 28, 2024 Lula Pena agreement on Itaipu Annex C set a transition tariff of 19.28 dollars per kilowatt for the August 2024 to August 2026 period, the first commercial settlement since 1985, with full Annex C renegotiation deferred to the 2026 to 2031 window. Tax reform Law 6380 holds corporate tax at 10 percent and VAT at 10 percent while implementing the OECD Pillar Two 15 percent global minimum and a parallel 1 percent domestic minimum. The Treasury Department lifted OFAC Section 7031c sanctions on Cartes on December 26, 2024, removing the largest single overhang on bilateral US relations. This brief assesses the macro trajectory, the Itaipu settlement mechanics, the Mercosur tariff arbitrage opportunity, and the political economy risks that constrain investment grade conversion.

The Pena mandate and the Cartes architecture #

Santiago Pena, a former finance minister under Cartes and ex IMF economist, won the April 30, 2023 election with 42.74 percent against 27.49 percent for Concertacion candidate Efrain Alegre and 22.91 percent for outsider Paraguayo Cubas, returning the Asociacion Nacional Republicana to the executive after a campaign the United States had framed as a referendum on corruption. Three months before the vote, on January 26, 2023, the Treasury Department designated Horacio Cartes under Section 7031c for being significantly corrupt, with parallel OFAC sanctions on Cartes affiliated entities. Pena won anyway, and the Honor Colorado faction consolidated control of both chambers, the Tribunal Superior de Justicia Electoral, and the Fiscalia General.

The implication is straightforward. Pena governs with a unified Colorado bench, a disciplined Cartes Senate faction, and a vice president, Pedro Alliana, who is himself a Cartes loyalist and former ANR president. There is no domestic veto player capable of blocking presidentially backed reform, which explains the speed of the 2024 fiscal and tax legislative agenda. The constraint was external. Until December 2024, the US sanctions on Cartes operated as a continuous reminder that the governing faction sat outside the Western anticorruption perimeter. The Biden administration lifted them on December 26, 2024, in a final OFAC action before transition, citing changed circumstances. The Pena cabinet read this as recognition of cooperation on extradition, asset transparency, and the August 2024 Itaipu accord, and as a green light for deeper US engagement.

Macro trajectory: from drought rebound to credible disinflation #

The Banco Central del Paraguay closed 2024 with real GDP growth of 4.7 percent, the strongest print since the 2021 reopening rebound and a sharp recovery from the 2022 drought year contraction. Growth was led by agriculture, which expanded 7.3 percent on the back of a record 11 million ton soy harvest, livestock, which grew 4.2 percent, and electricity generation, which rose 9.1 percent as Itaipu and Yacyreta returned to normal hydrology. Construction added 5.6 percent, lifted by public investment under the Ruta PY corridor and private logistics buildout in Villeta and Mariano Roque Alonso. Headline inflation closed December 2024 at 3.8 percent year on year, inside the BCP's 4 percent point target with a plus or minus 2 percent tolerance band, and core inflation tracked at 3.4 percent. The BCP held the monetary policy rate at 6.00 percent through Q4 2024 and Q1 2025 after a cumulative 250 basis point easing cycle from the 2023 peak.

The fiscal arithmetic is the cleanest in the Southern Cone. Central government debt closed 2024 at roughly 35 percent of GDP, against an emerging market median above 60 percent, and the consolidated public sector deficit landed at 2.6 percent of GDP, on a glide path to the 1.5 percent Fiscal Responsibility Law ceiling by 2026. Hacienda placed a 1.1 billion dollar 12 year sustainability linked bond in January 2024 at 5.85 percent, followed by a 1.5 billion dollar issuance in February 2025 at a 280 basis point spread, the tightest pricing ever for a Paraguayan sovereign. International reserves at the BCP stood at 9.5 billion dollars at year end 2024, roughly 7 months of imports.

Indicator	2022	2023	2024	2025e
Real GDP growth, percent	0.2	5.0	4.7	3.8
CPI inflation, percent year end	8.1	3.7	3.8	3.6
Policy rate, percent year end	8.50	6.75	6.00	5.75
Public sector deficit, percent of GDP	3.0	4.1	2.6	1.9
Public debt, percent of GDP	33.7	34.5	35.1	34.6
Reserves, billion USD	9.7	9.9	9.5	9.8
Beef exports, thousand tons	294	281	290	300e

Paraguay headline indicators. Sources: Banco Central del Paraguay, Ministerio de Hacienda, IMF Article IV 2024.

The Itaipu Annex C settlement and the 2026 negotiating window #

Itaipu Binacional, the 14 gigawatt hydroelectric plant on the Parana River jointly owned by Paraguay and Brazil under the 1973 treaty, paid off its construction debt in February 2023, triggering the Annex C renegotiation clause that governs pricing of unused energy. Paraguay consumes roughly 14 percent of its 50 percent share and sells the surplus to Brazil. Until 2023, the surplus was priced at the cost of service, a formula that critics in Asuncion argued transferred 4 to 7 billion dollars of value to Brazil over the life of the dam. The Lula government opened renegotiation in 2023 at roughly 16 dollars per kilowatt of installed capacity. The Pena government, advised by former Itaipu director Justo Zacarias and by Hacienda minister Carlos Fernandez Valdovinos, demanded a step toward market pricing.

The August 28, 2024 Lula Pena settlement set a transition tariff of 19.28 dollars per kilowatt for August 2024 to August 2026, a 20.5 percent uplift over the prior formula. The deal yields Paraguay roughly 1.4 billion dollars in additional energy receipts over the two year window, with a portion channeled through the Fondo Nacional de Inversion Publica y Desarrollo. The substantive Annex C renegotiation, including whether Paraguay can sell its surplus directly to third parties or to private Brazilian distributors rather than only to Eletrobras at regulated rates, is deferred to the 2026 to 2031 window. This is the single largest geoeconomic decision facing the Pena administration. A liberalized Annex C, allowing Paraguay to bilateral contract its 4,000 megawatt unused share to Brazilian industrial offtakers or to data center operators in Foz do Iguacu and Ciudad del Este, would lift the implicit value of the surplus by a factor of 3 to 4 against the current regulated price, on Brazilian wholesale prices observed in 2024.

Mercosur tariff arbitrage and the EU FTA window #

Paraguay's Mercosur position is structurally different from Argentina's and Brazil's. The country runs the lowest corporate tax rate in the bloc, 10 percent under Law 6380, against 34 percent in Brazil and 35 percent in Argentina. VAT is 10 percent against 19 to 25 percent in the partners. The maquila regime under Law 1064 charges a single 1 percent tax on value added for export production, and roughly 250 maquila firms now operate, predominantly Brazilian owned, employing more than 35,000 workers and exporting 1.2 billion dollars in 2024 per the Camara de Maquiladoras. The arbitrage logic is direct. A Brazilian auto parts, textile, or medical device producer that relocates final assembly to Hernandarias or Villeta pays 1 percent on value added, ships into Brazil under Mercosur zero tariff origin rules subject to regional content thresholds, and accesses energy at roughly half the Brazilian industrial price.

The Mercosur EU agreement, signed at political level in Montevideo on December 6, 2024, is the second leg. It removes EU tariffs on 99 percent of Mercosur industrial exports and 82 percent of agricultural exports over a 10 to 15 year phase in. Paraguay's beef and soy exporters gain a 99,000 ton tariff rate quota for beef at a 7.5 percent in quota duty and zero duty processed soy access. The political risk sits on the EU side. President Macron declared the deal unacceptable on November 18, 2024, and Polish, Irish, and Austrian governments have signaled opposition. The Pena administration, having held Mercosur pro tempore presidency in H2 2024, is investing diplomatic capital in 2025 to push ratification through Berlin and Madrid before the window closes.

The third dimension is Paraguay's relationship with Taiwan, the last in South America. Pena reaffirmed ties in his August 2023 inaugural and during a June 2024 Taipei state visit that produced a 5 billion dollar Taiwanese investment pledge over five years across a beef processing complex, a Villeta electronics plant, and a co investment vehicle. The PRC has responded with selective restrictions on beef routed through Uruguay and pressure through CELAC and BRICS Plus. Pena's calculation is that Taiwan delivers concentrated value and US alignment, while foregone PRC market access is bounded so long as beef reaches Chinese buyers via Brazilian and Argentine slaughterhouses under origin neutral certificates.

Lever	Paraguay	Brazil	Argentina	Uruguay
Corporate income tax, percent	10	34	35	25
VAT standard rate, percent	10	17 to 25 by state	21	22
Maquila or free trade tax on value added, percent	1	n.a.	n.a.	n.a.
Industrial electricity, USD per MWh 2024	45 to 55	95 to 110	75 to 90	85 to 100
Sovereign rating, Moody's	Baa3	Ba1	Caa1	Baa2
Public debt, percent of GDP 2024	35	76	85	62

Mercosur tax and macro arbitrage map. Sources: Ministerio de Hacienda Paraguay Law 6380, Receita Federal Brasil, AFIP Argentina, DGI Uruguay, ANDE, Eletrobras, CAMMESA, UTE, Moody's, IMF WEO October 2024.

Beef, deforestation, and the EUDR pressure point #

Beef is Paraguay's third largest export complex after soy and electricity, and the most politically exposed. SENACSA certified 290,000 tons of beef shipments in 2024 per BCP data, generating 1.97 billion dollars in foreign exchange. Buyer composition shifted: Chile took 22 percent, Russia 18, Israel 14, Taiwan 9, the United States 8 under FMD recognized status secured in November 2023, and the EU 6. The cattle herd stands at 13.6 million head against a population of 6.8 million. Unit value rose from 5,920 dollars per ton in 2023 to 6,790 in 2024, lifted by US market opening and tight global supply.

The EU Deforestation Regulation, originally set for enforcement on December 30, 2024, was deferred twelve months to December 30, 2025, after pushback from the Mercosur four, the United States, and EU industry. The deferral matters disproportionately for Paraguay because the Chaco frontier carries the bulk of the deforestation footprint and because cattle traceability for EU bound supply chains is incomplete. INFONA reported 2024 Chaco deforestation of roughly 271,000 hectares, the highest absolute number in three years, with Global Forest Watch confirming the trend. Pena is investing in the SITRAP traceability system and in geolocation compliance through the Camara Paraguaya de Carne, but the binding question is whether traceability extends to feeder cattle moved across the Chaco before December 2025.

Recommendations: how to play Paraguay 2026 #

For sovereign creditors, the Paraguayan curve is a high conviction long. A sub 35 percent debt to GDP ratio, a primary surplus on the Fiscal Responsibility Law glide path, three rating agencies one notch from investment grade, and the Itaipu cash flow uplift through August 2026 support compression of the Paraguay 2031 sustainability linked bond toward the BBB minus median. The asymmetric risk is the Cartes factor. If a future US administration revisits the December 2024 OFAC delisting, the political risk premium widens by 50 to 80 basis points overnight. Position sizing should treat that scenario as a tail risk, not a base case.

For agribusiness, the play is paired. Beef processing capacity in Boqueron and Alto Paraguay captures the EUDR compliant premium if traceability lands by December 2025, while US and Israel demand absorbs displaced volume if it does not. Soy crush expansion in Villeta and Encarnacion captures the Mercosur EU zero duty preference on ratification, and Hidrovia exports under a stable guarani if not. FX cover at 7 months of imports is consistent with continued stability under the BCP managed float.

For cross border infrastructure and energy investors, the pre 2026 Annex C window is the entry point. Project development for industrial offtake of Paraguayan surplus electricity, through Brazilian aluminum smelting, ammonia, and AI training data centers in Foz do Iguacu and Ciudad del Este, requires positioning before the renegotiation lands. The base case is partial liberalization, with Paraguay gaining the right to direct contract a fraction of its surplus and lifting the realized energy price by 30 to 50 percent against the Eletrobras regulated rate. The upside case is full liberalization at Brazilian wholesale prices, doubling the realized value and justifying 4 to 6 billion dollars of incremental capex into Paraguayan side industrial parks. Either outcome rewards land and grid interconnect optionality acquired in 2025.

Sources #

Cite this brief

@misc{hossen2026paraguaypena2026,
  author = {Hossen, Md Deluair},
  title  = {Paraguay Under Pena: Itaipu Renewal, Investment Grade, and the Mercosur Arbitrage},
  year   = {2026},
  url    = {https://deluair.com/consultancy/insights/paraguay-pena-2026},
  note   = {Deluair Consultancy briefs}
}

Hossen, M. D. (2026). Paraguay Under Pena: Itaipu Renewal, Investment Grade, and the Mercosur Arbitrage. Deluair Consultancy briefs. https://deluair.com/consultancy/insights/paraguay-pena-2026

Hossen, Md Deluair. "Paraguay Under Pena: Itaipu Renewal, Investment Grade, and the Mercosur Arbitrage." Deluair Consultancy briefs, 2026-04-26. https://deluair.com/consultancy/insights/paraguay-pena-2026.

Related insights

Adjacent reading.

Geoeconomic and policy analysis