The credit rating agency Moody's warns that Paraguay's low revenue collection capacity, combined with an increasingly rigid budget, limits the country's fiscal space, leaving it vulnerable to economic shocks. The analysis, which compares 18 Latin American economies, highlights that, although Paraguay maintains one of the lowest levels of public spending in the region, the growing portion of the budget committed to mandatory expenditures reduces the government's room for maneuver.
The report "Latin America: Spending Rigidity and Political Polarization Limit Fiscal Consolidation Prospects" points out that, on average between 2021 and 2025, Paraguay's total spending remained around 17% to 18% of Gross Domestic Product (GDP), an austerity position only surpassed by Guatemala in the analyzed group. However, budgetary rigidity increased: in 2019, rigid expenditures (such as wages, subsidies, and interest) represented about 13% of GDP, rising to approximately 14% in 2024.
This increase in mandatory spending occurred at the expense of public investment. From 2019 to 2024, government capital investment recorded a drop of almost one percentage point of GDP. Wages constitute the main component of Paraguay's rigid spending, followed by subsidies and other current transfers. Interest payments, in turn, still represent a smaller proportion than in economies such as Brazil and Colombia.
Moody's acknowledges that Paraguay, which has a sovereign rating of Baa3 (investment grade), has a greater capacity to absorb shocks compared to other countries in the region, thanks to stable debt and a framework of fiscal responsibility. Public debt was maintained around 41% of GDP in 2025, with projections to stabilize at approximately 37% in the medium term. However, the agency emphasizes that the country's revenue base remains low, which in itself restricts overall budgetary flexibility.
The report concludes that, although Paraguay's Fiscal Responsibility Law has provided an important anchor, difficulties in reaching political agreements and low revenue collection limit the government's ability to reduce deficits and sustain infrastructure investment, crucial factors for long-term economic growth.