Leadership Insights: Q&A With Paraguay Central Bank Governor Jos Cantero Sienra

Central Bank of Paraguay Governor José Cantero Sienra discusses the banking system and future plans for the bank.

Global Finance: What is the economic outlook for Paraguay in the coming year? What is the main risk?

José Cantero Sienra: Paraguay is characterized for maintaining its sound macroeconomic foundations, in spite of the confluence of multiple exogenous shocks occurring over the past four years. The high commitment to macroeconomic stability and the results that have been achieved have allowed Paraguay to be one of the few economies that has not retroceded in its country rating, remaining one credit rating below investment grade.

The platform of macroeconomic soundness allows us to anticipate an important recovery in 2023, following a year of drought that has had a negative impact on output in the agricultural sector and which extended the adverse effect to the manufacturing and services sectors. 

This projection is based, in part, on the accelerated diversification process that our country is experiencing through private sector investments in new sectors of the economy, such as the biofuels, energy, forestry and mining sectors, industrial manufacturing, and infrastructure. The generation of new economic engines by means of a diversified production approach tends to reduce the damage caused by exogenous shocks, such as those stemming from climate change, in a context of less dynamism in the global economy.  

The more restrictive financial conditions at the international level—resulting from the increase in international interest rates, the prolongation of the armed conflict between Russia and Ukraine, and the probabilities of a global deceleration—constitute the most relevant risks for the economic performance of the merging countries. At the regional level, the growth prospects for Paraguay’s most important trade partners, while currently low, continue to be positive for 2023. In this sense, these prospects for growth will continue to contribute to our own domestic economic activity.

The great challenge of economic policy is to navigate this decade with a measure of prudence and determination, and to make each policy decision with thoughts placed on the mitigation of short-term costs without jeopardizing the medium- and long-term macroeconomic foundations.

GF: After the health crisis and the war in Ukraine, is there something that should prompt central banks to change policy?

Cantero Sienra: In a scenario of uncertainty, the main task of a central bank is to broaden the credibility of monetary policy. In this context of high pressure on prices, the commitment of a central bank to maintain low and stable inflation must be noticeable and steadfast.

The unwavering commitment to maintain stability must be complemented with clear and precise communication that encompasses a rational discourse, which pleas for understanding that inflationary pressure is due to a challenging external context rather than domestic vulnerabilities. In turn, this reason-based narrative must convey an understanding of the high costs signified by inflation, since their damaging effects spread to all economic and social strata over the course of time. It is important to make clear that contractive monetary policy is a very bitter potion, but one that is far more preferable than suffering a prolonged disease. Within the region, one can appreciate the high commitment of the central banks that have adopted inflation targets, since we have been continually adjusting the monetary policy rate over the past 12 months. Central bank communication must also be clear about the path that inflation will take as it converges upon the inflation target. When commitment, credibility and transparency exist, inflation expectations shall be contained and the convergence of inflation to the target will be more pronounced.  

It has been observed that various central banks have left “forward guidance” to one side in their respective monetary policy press releases, highlighting the importance of making decisions based on available data from meeting to meeting instead of anticipating the magnitude of coming adjustments in a context of great uncertainty.  

GF: How strong is the banking sector and lending to businesses?

Cantero Sienra: The Paraguayan banking system has been navigating this context of external shocks with great solvency, liquidity and dynamism. The Tier II Solvency level stands at 18%, far above the regulatory solvency level of 12%. Liquidity stands at around 35% and the loan portfolio grows by around 12%, with a non-performing loan level of 2.8%.

Despite the operative difficulties imposed by the Covid-19 pandemic, all the activities foreseen as regards to regulatory and supervisory matters have been carried out in a normal manner and with a high degree of efficiency, in order to foster the solvency and integrity of the financial system. The Superintendence of Banks continues with the process of strengthening the system of supervision with a focus on risks, suitability with respect to best practices, and conformance with international standards. Along these lines, this supervisory agency has been calibrating the quantitative indicators of the Comprehensive Risk Matrix for Supervised Financial Intermediaries.

Likewise, studies have been initiated for updating the methodological guidelines for the different risks to which supervised bodies are exposed. The objectives of the guidelines are to propose courses for action in supervision and to maintain adequate levels of patrimonial solvency. In addition, various regulatory initiatives are under study to facilitate the generation of new financial products, take full advantage of technologies and improve the services offered to financial customers.

To foster the financial inclusion and sustainability of both individuals and micro, small and midsize businesses, the Central Bank of Paraguay participates actively in updating the National Strategy for Financial Inclusion. 

The Superintendent of Banks has the authority to establish accounting principles under which banks must prepare their financial reports and records. These reports and records must be audited annually by external independent auditors. In addition, the Superintendent of Banks requires that banks publish annual and quarterly financial statements, together with the names of directors and managers, in a national newspaper. The Superintendent of Banks[MC1]  may also require the disclosure of any other financial information that it deems necessary to present to the public.

Banking law requires financial institutions to maintain a minimum Tier 1 capital-to-risk-weighted assets [RWA] ratio of 8%, and a minimum of total [Tier 1 and Tier2] capital-to-RWA ratio of 12%. The Central Bank of Paraguay has the regulatory authority to increase this ratio up to 14%. As of June 30, 2022, all Paraguayan banks complied with the central bank’s capital adequacy requirements.

In addition to accounting standards and capital adequacy requirements, the central bank imposes cash and liquidity reserve requirements. In determining their compliance with various central bank standards and requirements, banks must classify loans according to specific categories. On the one hand, the category used for classification depends on the debtors’ ability to pay, and on the other hand, on the length of time a loan obligation has been past due. The most recent regulation provides a new scale of provisions and terms of past due loans. A loan is deemed non-performing after obligations under the loan have been past due for more than 60 days.

Paraguay continues to strengthen its regulatory framework and supervision of the financial sector. Reforms include more stringent information requirements for the granting of loans, stricter conditions for classifying assets and a higher level of reserves requirement. Since 2007, regulation compels for improved risk assessment and the establishment of an assets/reserves ratio that provides better coverage for credit risks. The scale provided in the 2007 regulation for past due terms and provisions was changed in 2011. In addition, further regulation introduced in 2007 established stricter prudential rules for the classification of assets, credit risk and reserves.

Other institutional reforms introduced include the adoption of new regulations regarding the opening of financial institutions and the strengthening of on-site and off-site supervision and the supervisory capacity of the Superintendence of Banks through the creation of various Intendancies. With respect to forward strategy for supervision, financial institutions continue to improve compliance with Basel principles. According to the IMF and the World Bank FSAP report, the degree of compliance with Basel principles, which stood at 17% in 2005, had increased to 63% by the end of 2010.

As of June 30, 2022, Paraguay’s financial sector consisted of 17 banks, including one state-owned bank, nine private domestic banks and seven branches of foreign banks. As of June 30, 2022, assets of banks operating in Paraguay totaled approximately 176.06 billion guaraníes (US$25.7 billion), equivalent to approximately 63.0% of 2021 GDP and 65.8% of GDP in 2020, while bank deposits totaled G124.79 billion (US$18.2 billion).

It should be noted that the banking system operates with comfortable capital levels that allow it to absorb eventual losses and withstand stress situations that might arise in the Paraguayan economy. In recent years, the banking system has satisfactorily weathered stress caused by periods of drought, fire, and floods and the effects of the Covid-19 pandemic.

With all this, the profitability levels of the banks remained in the order of 2 to 2.5% and the return on equity is close to 18%.