I studied the soldier’s crisp brown uniform. It looked like something you’d wear to a dress party. His black patent leather shoes matched his belt and the peak of his hat. The gold buttons on his sleeve were so shiny they could decorate a Christmas tree.

The politician turned to the soldier. He took a whispered message. Then he dismissed him with a flick of the wrist…

Tito Saguier is a senior member of Paraguay’s government. Last week, Tito invited me to the senate for a cup of coffee and a discussion about Paraguay’s future.

Soldiers escorted us everywhere we went. Other soldiers opened doors and saluted as we walked past. A female soldier stood at attention at the door to Tito’s office. She wore the same pressed uniform as the male soldiers, except, instead of trousers, she wore a mini skirt with knee-high Nancy Sinatra boots.

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Paraguay has a new government. It just won power. The old government held power for 61 years. I wanted to know how this new government would behave. Would those in power continue to steal? Would they decrease the size of government? Would they decrease regulation and taxes?

An investor has several reasons to take a close look at Paraguay… Itaipu is the world’s largest hydroelectric dam. Thanks to Itaipu, Paraguay generates 10 times more electricity than it needs. Per person, Paraguay has access to more free energy than any other country on Earth. This energy will never run out… and it’s clean.

There are few taxes in Paraguay… and a small government. It has no external debt and no currency restrictions. The Paraguayan currency – the guarani – has risen almost 50% against the dollar in the last couple of years… and is the best performing currency in the world this year.

Paraguay has this interesting geographical location right between Brazil and Argentina. Both of these countries have huge populations compared to tiny Paraguay. Paraguay can make a fortune trading with both. Plus, Paraguay is a member of the Mercosur, the free trade agreement that also includes Brazil, Argentina, and Uruguay. Goods produced in Paraguay are not subject to Brazilian and Argentine tariffs.

Paraguay is very cheap and unknown. There is no industry, and the stock market is tiny. And there’s a potential trigger for a rally: The Argentine government has raised export duties on soybeans to 40% and banned the export of beef. I found evidence Argentine farmers are about to rush into Paraguay, where ranchland is cheap and the politicians don’t steal their profits.

Unfortunately, I didn’t get the answers I was looking for from Tito Saguier. At one point, I asked him for details on Argentine and Brazilian import duties. He didn’t have an answer. He wasn’t familiar with the trade terms of his neighbors.

And he was full of bland generalizations. “We want to increase economic production… and encourage foreign investment,” he would say without any further explanation.

I think Paraguay is ripe for investment. Let’s hope the government doesn’t get in the way…

Good investing,

Tom

Source: What I Heard from a Government Official in a Small Tax Haven

Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

Ciudad Del Este is a smuggling town. It’s on the eastern edge of Paraguay, about a five-hour drive from Asuncion. It sits on the border with Brazil and Argentina. It’s the “three-frontier town.”

Here’s the thing about Ciudad Del Este. There’s no tax in Paraguay, so the city has become the largest inland trading post in South America. You can sell anything you want at cost from Asia. Electronics are the big market… laptops, cell phones, and digital cameras. Brazil and Argentina have high import and value-added taxes. So bandits come from Brazil and Argentina, buy cheap merchandise in Ciudad Del Este, and smuggle it back.

Huge quantities of cocaine and marijuana flow through this town into Brazil. The same is true of real Paraguayan passports and guns. (I was asking for an AK-47 not because I needed one, but I was curious to see how easy it would be to buy one here.)

You can buy anything in Ciudad Del Este’s huge, open-air market. I spent the afternoon wandering around, browsing fake DVDs, Rolexes, shoes, clothes, computers, perfumes. I could have bought a Sony Vaio laptop for under $1,000… a dozen socks for a dollar… or a 30 milliliter bottle of designer perfume for $23. The market is dirty and loud. It goes on for blocks and blocks. I never found the edge.

Ciudad Del Este has huge populations of Koreans, Taiwanese, Lebanese, Syrians, and Chinese. They run import-export businesses. The Russian, Nigerian, and Chinese mafias all operate here.

It’s also a safe house for Arab terrorists. The State Department says Ciudad Del Este is a significant source of funding for both Hezbollah and Hamas. In 2001, CNN said this town is “a terrorist paradise.”

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I drove back and forth between Brazil and Paraguay five times. I didn’t need a passport… a visa… money… identification… nothing. When I checked in at the airport in Asuncion, they had no computers behind the check-in counter. They filled in my boarding pass by hand.

The scene in Ciudad Del Este is pure raucous capitalism… and I couldn’t wait to see where the taxi driver took us to buy guns. I was hoping for an illegal warehouse or some cinderblock shack in the shantytown, but he went to a fishing and hunting store. We looked at Glocks, Turkish rifles and other guns, but they were more expensive than the same guns in the U.S.

“We have to bring these in across a lot of borders,” explained the woman behind the counter…

Paraguay is a landlocked country with low taxes. So it serves as a “trampoline” for merchandise into other countries. That should make Paraguay a very attractive place for capital. According to one person I met, Ciudad Del Este is the second-largest free-trade area in the world, after only Hong Kong. It generates 60% of Paraguay’s GDP.

But corruption is the problem. Every time large firms try to start a project, the local bureaucrats steal everything… including the machinery. Also, most of the capital leaves Paraguay with the Asian and Lebanese traders… and with the smugglers. It doesn’t stay in Paraguay. So 40% of Paraguayans live in terrible poverty.

This year, Paraguay has a new government… for the first time in 61 years. If the new administration can clean up corruption and resist the temptation to raise taxes, Paraguay could be a fantastic place to invest over the next 10 years.

In my next DailyWealth column, I’ll show you how…

Good investing,

TomSource: You’ve Never Considered the Next Great Emerging Market

A few months ago, I visited the largest coal-fired power plant in America, Plant Scherer. When Scherer operates at full capacity, it produces 3.5 gigawatts of power. A nuclear reactor produces around one gigawatt of power

Itaipu produces 14 gigawatts of power. In other words, it’s four times the size of America’s largest coal power plant… and 14 times the size of most nukes. Itaipu provides 93% of Paraguay’s power and 25% of Brazil’s power.

I can’t explain in words what a beast this dam is. It stretches four miles across and 65 stories high. The iron and steel used to build it would give you 380 Eiffel Towers. It’s one of the seven modern wonders of the world, alongside the Panama Canal and the Golden Gate Bridge.

According to their joint agreement, Paraguay gets 50% of the electricity from the dam. Brazil gets 50%. But Paraguay is a small country. It has a population of 6 million people… versus 200 million in Brazil. So Paraguay only keeps 5% of Itaipu’s power and sells the rest back to Brazil.

This makes Paraguay the largest exporter of hydroelectric power in the world.

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Here’s the thing: Paraguay sells its electricity to Brazil at $3 per kilowatt-hour. Right now, Brazil can sell the same unit of electricity to its private utilities at $150 per kilowatt-hour. There is an electricity crisis in Latin America right now, especially in Chile, and electricity prices are very high. It’s immediately obvious Brazil is not paying Paraguay the right price for its power. And Paraguay is losing billions of dollars.

Corrupt politicians set this low price in 1973… under a 50-year contract. The Brazilians bribed the Paraguayan government to sell them power at a rate that’s far too low. Now, there are calls to change this rate, but who knows if that’ll happen…

The thing is, Paraguay doesn’t have to sell its power to Brazil. It could consume the power itself. I think it would be a great business to set up an aluminum or zinc smelter here. These businesses are electricity-intensive. The problem is, Paraguay is a poor country and has absolutely no industry. It’s all agriculture here.

According to the people at Itaipu, the energy the dam creates every day is the equivalent to 433,000 barrels of oil. That’s about half of what Canada’s Athabasca oil sands produce each day. Except it’s renewable, it’s clean, and it takes no energy to produce.

This cheap electricity is one of the reasons I like Paraguay as an investment. But it’s hard to get your money into the country…

Paraguay has no stock market… only a small bond market. So to invest in Paraguay, you’ll have to go there yourself and buy assets from the locals. That’s a good thing. It means everything is cheap.

In Paraguay, for example, you can buy companies for book value… that pay 45% dividends, according to one broker I met. You can buy real estate with 10% rental yields. And cattle farms with 18.5% cash yields.

Good investing,

Tom

P.S. The Three Gorges Dam in China will be the largest hydroelectric dam in the world by volume. It will operate at full capacity by 2011. China hopes it’ll produce 18 gigawatts. That’s bigger than Itaipu.

Our tour guide wasn’t convinced Three Gorges would be able to produce that much power. “The Yangtze isn’t as powerful as the Parana,” he said. “We’ll see…”

P.P.S. There is talk of a hydro plant twice the size of Three Gorges in Africa, on the Congo River. But it’ll never happen. For a start, only 10% of Africans have access to the grid… What will they do with all that power? And secondly, it will require cooperation from seven different central African countries… and hundreds of billions of dollars in loans.

Source: The Largest Electricity Exporter