April 7, 2017 / 7:09 PM / 4 months ago

Paraguay president’s re-election bid unsettles his corporate allies

ASUNCION, April 7 (Reuters) - Paraguayan business groups are urging the country's Congress to abandon a proposal that would allow President Horacio Cartes to seek re-election, fearing popular outrage could jeopardize his administration's progress in attracting foreign investment.

While they generally back Cartes' center-right government, they have said he should give up on running in 2018 for a second five-year term to preserve economic growth in the world's No. 4 soy exporter and keep on track the country's progress towards a coveted investment-grade credit rating.

Last Friday, a closed-door Senate vote approving a constitutional amendment for presidential re-election drove opponents to set fire to Congress. Police also stormed the opposition Liberal Party's headquarters and shot dead one protester.

"This harms the country's image. It conspires against our narrative, and our plan of action," said Daniel Elicetche, president of the Paraguayan-American Chamber of Commerce, which includes local units of 3M Co, British American Tobacco PLC and several major grains processors.

Fresh in the memory of the business sector is the 63.8 percent decline in net foreign direct investment after the political chaos surrounding former socialist President Fernando Lugo's 2012 impeachment.

Beltran Macchi, head of the Paraguay Association of Banks, said the violence was a "warning sign" to investors. Members of the association include Citigroup Inc, Itau Unibanco Holding SA and BBVA.

Many businesses prefer the re-election amendment not be enacted, at least for now. The congressional lower house still has to vote on the measure.

In local newspaper ads, the Federation of Production, Industry and Commerce urged politicians to not "try to change the law in a time of social tension." The group includes the local units of grains processors Archer Daniels Midland Co , Bunge Ltd and Cargill Inc.

Elicetche and other business leaders said they would be open to a reform allowing for consecutive re-election beginning with the next president, and would even support a run by Cartes in five years but were wary of what appeared to be an effort to hold onto power. Paraguay's constitution does not allow for consecutive or non-consecutive presidential terms.

'UNPREDICTABLE CONSEQUENCES'

The Senate vote and ensuing mayhem could pose a setback for Paraguay's bid to promote an image of democratic stability following the 35-year dictatorship of military strongman Alfredo Stroessner, which ended in 1989.

Flourishing local businesses also want to overcome the country's long-time reputation as a hotbed of contraband goods.

They seek to highlight the country's steady economic expansion driven by higher prices for its soy and beef exports and tax breaks attracting manufacturing companies mostly from neighboring industrial powerhouse Brazil.

Cartes, a former soft-drink and tobacco businessman who took office in 2013, has raised Paraguay's presence in international bond markets. Last month, it sold $500 million in debt.

But the landlocked South American country of 6.8 million people is not immune to political crises and the fallout on investment.

Net Foreign Direct Investment (FDI) fell by $445 million in 2013 from the previous year when Lugo was impeached and removed from office by Congress, central bank figures showed.

If the government does not withdraw the proposal, the effect of the current crisis could resemble the FDI decline of five years earlier, said corporate financial adviser Amilcar Ferreira of the SEI consultancy in Asuncion.

"If the crisis deepens, Paraguay will go down a path of substantial destabilization with unpredictable consequences," Ferreira said.

The president of the lower house said he would not call a vote on the re-election amendment as long as the government's dialogue with the opposition continued. These talks were scheduled to go through at least Friday.

"It's still very early," said Samar Maziad, a sovereign credit risk analyst with Moody's Investor Service, which upgraded Paraguay to a Ba1 credit rating, one notch below investment grade in 2015, and reaffirmed that in 2016.

"The country was making an effort to present Paraguay as a destination for FDI, and investors, when they see uncertainty, they hold back," she said.

Standard and Poor's and Fitch Ratings each peg Paraguay at "BB," two notches below investment grade.

Investment grade ratings can unlock the door to many foreign funds. They also tend to decrease the cost of borrowing. (Reporting by Luc Cohen; Additional reporting by Daniela Desantis and Monica Machicao; Editing by Caroline Stauffer)

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