Fitch Places Paraguay’s BB+ Sovereign Rating on Negative Watch After Ueno Collapse
Key Facts
Fitch Ratings placed Paraguay’s BB+ sovereign rating on negative watch on November 11, opening the door to a possible downgrade after the collapse of Ueno Bank and the political turmoil that followed. Reuters reported that the agency said the move reflected the possibility that the bank’s collapse and its political fallout could spill over into the banking system and public finances. Fitch added that the crisis could also affect economic growth. The action means the rating is under review for a possible downgrade; the agency has not announced a final downgrade. It puts sovereign creditworthiness under pressure as the government faces existing fiscal challenges.
Fitch said Ueno’s problems add to existing fiscal difficulties and setbacks in some major investment projects. The agency sees the combination of these factors as reducing the prospects for a rating improvement reflected in its previous positive outlook. This indicates that the risk assessment extends beyond the fallout from the bank’s collapse to include the public finances’ ability to manage existing pressures. Paraguay’s rating had been supported in part by macroeconomic indicators that the agency described as prudent and generally consistent. The watch action does not announce a predetermined path for the rating, but reflects a shift in the balance between supporting factors and risks.
According to Fitch, rating strengths include prudent and generally consistent macroeconomic policies, low public debt and strong external liquidity. By contrast, the agency said weak governance indicators, low revenue collection and limited domestic capital market depth constrain the rating and government financing. This contrast between strengths and constraints underscores the importance of the crisis spilling over into public finances, one of the risks the agency explicitly cited. The possibility of growth being affected adds an economic dimension to concerns about the government’s financing capacity. Fitch thus links the bank’s fallout and political turmoil on the one hand with the country’s fiscal and economic outlook on the other.
While warning that the crisis could spill over, Fitch said it does not currently expect broader risks to financial stability in the country. It attributed this to the solvency and liquidity of the other systemically important banks. The central bank had placed Ueno, the country’s sixth-largest bank, into resolution. The bank accounted for 9% of total deposits and held accounts for about half of the adult population, according to Reuters. The size of its customer base and its share of deposits put the authorities’ focus on protecting depositors in context, while Fitch’s assessment indicates that the condition of other banks currently limits the risk of disruption spreading across the system.
On November 3, Paraguay’s central bank unanimously announced the start of resolution proceedings for Ueno after its solvency ratio fell below half the required minimum. The central bank said the case concerned a single institution and did not reflect conditions across the financial system, and that the resolution aimed to protect depositors and preserve financial stability. Depositors’ accounts were initially frozen, sparking protests, Reuters reported. The agency said the authorities were working to transfer accounts to other banks and pay funds covered by deposit insurance. The central bank also said that depositor protection would be accompanied by investigations into responsibility for the case.
The central bank set the deposit guarantee cap at 75 monthly minimum wages, equivalent to 228.3 million guaraníes per depositor at each institution, not per account. On November 5, it announced that the first payment phase would cover depositors with no more than 10 million guaraníes, provided they had no debts to the bank and held an account at another financial institution in the country. The bank said subsequent payment groups would be announced in turn. The Associated Press reported that the cap was equivalent to about $38,000 and, according to preliminary estimates, fully covered about 97% of Ueno’s depositors. The agency added that the law provides for payment within 15 days of the takeover, with the deadline extendable once.
Fitch’s action followed an annual review published on September 30, in which the agency affirmed Paraguay’s BB+ rating with a positive outlook, citing prudent economic policies, low public debt and strong external liquidity. In an earlier report on that outlook, Fitch projected growth of 4.8% in 2025, after growth of 4.2% in 2024, followed by 4.3% in 2026 and 4.0% in 2027. These figures provide context for the agency’s earlier growth estimates, before it later warned that the crisis fallout could affect output. Reuters said President Santiago Peña was impeached and removed over his links to the bank’s parent company, before the negative watch announcement. It also reported that criminal investigations had been opened and eight Ueno executives arrested as of November 11.