US embassy cable - 05ASUNCION453

UNCLAS SECTION 01 OF 02 ASUNCION 000453 
 
SIPDIS 
 
STATE FOR WHA/BSC, EB/IFD/OIA, AND NEA/IPA 
STATE PASS TO USAID FOR LAC/AA 
STATE PASS TO USTR FOR SCRONIN AND LYANG 
NSC FOR KIM BREIER 
TREASURY FOR OSIA MAUREEN WAFER 
TREASURY FOR OTA WARFIELD, VAN KOCH, MILLAR 
COMMERCE FOR ITA SARAH COOK 
SOUTHCOM FOR POLAD DAN JOHNSON 
 
E.O. 12958: N/A 
TAGS: PGOV, PREL, ECON, PBTS, MOPS, PINR, PA 
SUBJECT: PARAGUAY POLITICAL AND ECONOMIC UPDATE, MARCH 
24-APRIL 1 
 
 
1. Summary 
---------- 
--Cabral and Rienzi votes postponed 
--Paraguay establishes diplomatic relations with Palestine 
--Border problems continue, 150 Brazilians expelled 
--Paraguayan Navy called into action vs smuggling 
--Standard & Poor's maintains Paraguay's credit rating 
--2005 growth estimate revised downward 
 
Cabral and Rienzi votes postponed 
--------------------------------- 
2. On March 30, the Senate postponed scheduled votes on both 
the reappointment of Supreme Court Justice Wildo Rienzi and 
the promotion of police officer Aristides Cabral to the rank 
of Police Commissioner.  In both cases, the bloc of Colorado 
Party (ANR) senators stopped votes when neither proposal 
appeared to have adequate support to pass.  Juan Carlos 
Molas, a lawyer and confidant of Vice President Luis 
Castiglioni, told PolOff that Rienzi can remain on the Court 
as long as no successor is named and confirmed, and that the 
Duarte Administration plans to keep him on the court in this 
manner for two years, when he will reach the mandatory 
retirement age of 75.  In Cabral,s case, the nomination for 
promotion remains active, and according to various sources, 
still has Presidential support.  ANR senators intend to bring 
the promotion to a vote at a later date. 
 
Paraguay establishes diplomatic relations with Palestine 
--------------------------------------------- ----------- 
3. On March 26, the GOP announced the establishment of full 
diplomatic relations with the Palestinian Authority via a 
signed agreement between FonMin Leila Rachid and Palestinian 
"Foreign Minister" Nasser al-Kidwa.  The agreement is the 
latest in a series of moves by Rachid to broaden Paraguayan 
relations with the Arab world.  While the Israeli Ambassador 
referred to the establishment of relations as a 
disappointment during a meeting with the Ambassador, Foreign 
Ministry staffer Edgar Ynsfran told PolOff that relations are 
not likely to deepen, as the Ministry has no resources to 
open new missions in the region (beyond the one being opened 
in Beirut) or to increase diplomatic staffing.  He added that 
overtures to the Arab world are primarily a personal interest 
of the Minister rather than a larger GOP policy. 
 
Border problems continue, 150 Brazilians expelled 
--------------------------------------------- --- 
4. The war of words between the Paraguayan and Brazilian 
governments over attempts to stop smuggling in the Tri-Border 
Area continued, with FonMin Rachid accusing Brazil during her 
Senate testimony of implementing "exacerbated and 
out-of-proportion" control measures along its borders with 
Paraguay.  At the same time, Rachid conceded that Paraguay is 
responsible for much of the smuggling in the region, stating 
that Ciudad del Este is based upon a commercial model that 
cannot survive, and that Paraguay must show that it is 
serious about fighting smuggling and piracy.  Brazil did 
agree to increase the quota for duty-free personal purchases 
in CDE from $150 to $300, but streessed that they will 
prevent efforts to use this as a means to import goods for 
commercial purposes. 
 
5. Paraguay has responded to the Brazilian crackdown by 
expelling 150 Brazilians working illegally in Ciudad del 
Este.  Many Ciudad del Este shopkeepers are Brazilian 
nationals who reside in the Brazilian city of Foz do Iguacu 
and cross the border daily to tend their businesses.  A 
significant portion of these individuals do not have the 
legal documents to work in Paraguay, while others are legal 
permanent residents of Paraguay who do not maintain 
residences here as required.  The Immigration Department 
estimates that approximately 7,000 Brazilians work illegally 
in Ciudad del Este.  Carlos Liseras, the Director of 
Migrations, denied that the measures are in retaliation for 
the anti-smuggling operations carried out by Brazilian forces 
in the border region. According to the press, the operation 
has reduced trade volume in Ciudad del Este by 80 percent. 
Other press accounts claim that over 3,000 businesses in 
Ciudad del Este have folded during the last three years. 
 
Paraguayan Navy called into action against smuggling 
--------------------------------------------- ------- 
6. President Duarte ordered the Paraguayan Navy to assist 
Customs enforcement at Ciudad del Este.  Several small 
vessels are involved in the operation, including one that was 
deployed from Asuncion.  Customs officials are working 
directly on naval vessels on the Parana River.  Though the 
president's order did not provide an end date for this 
operation, it's believed it may last approximately another 
week. 
 
Standard & Poor's maintains Paraguay's credit rating 
--------------------------------------------- ------- 
7. On March 17, S&P issued a rating report for Paraguay in 
which it maintained Paraguay's B-rating, with a stable 
outlook.  The stable outlook was based on an expectation that 
macroeconomic stability would be maintained, but also that 
political pressure would stall structural reforms, especially 
of the State-Owned Enterprises (SOEs).  The report states 
that renewed success in carrying out reforms could lead to a 
higher credit rating, and characterized Paraguay's 
institutional framework as the major constraint on the rating. 
 
2005 growth estimate revised downward 
------------------------------------- 
8. The Central Bank announced that it was reducing its 2005 
real economic growth estimate downward from 4 percent to 3.5 
percent due to the drought that has reduced soy and cotton 
output.  The inflation target for 2005 will be 5.5 percent 
plus or minus 2.5 percent, a slight adjustment from the 6 
percent plus or minus 2 percent target noted in the most 
recent IMF review document.  Annual inflation for 2004 was 
2.8 percent, the lowest level in three decades. 
KEANE