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Paraguay is Latin America鈥檚 star economy, South America鈥檚 sole Taiwan ally, and long a faithful friend to the United States. Yet in early August, Paraguay asked the State Department to 鈥渁ccelerate鈥� the departure of the US ambassador in Asunci贸n.

The unusual tensions reflect Paraguay鈥檚 odd political moment. Since taking office a year ago, President Santiago Pe帽a has sought to please two constituencies: Colorado Party technocrats who see Paraguay鈥檚 integration into global markets and relationship with Washington as key to growth, and the party鈥檚 leader, former President Horacio Cartes, one of Paraguay鈥檚 wealthiest businessmen and a target of US sanctions.

Pe帽a seems more at ease with the technocrats. But it was Cartes who, after leaving office in 2018, handpicked Pe帽a, his former finance minister, to run for president as the candidate of Cartes鈥檚 conservative Colorado Party faction, Honor Colorado.

That balancing act has complicated the normally automatic friendship between the United States and Paraguay. In January 2023, the Treasury Department鈥檚 Office of Foreign Assets Control  for 鈥渟ignificant corruption,鈥� allegations he denies. Earlier this month, it  Cartes鈥檚 former tobacco company, Tabesa, alleging that the firm continues to channel millions of dollars to Cartes.

The sanctions on Tabesa appeared to trigger the Paraguayan government鈥檚 request to expedite the departure of US Ambassador Marc Ostfield. The ambassador鈥檚 tenure was already nearing its end; in July, President Biden nominated career diplomat  as his replacement. In any event, Cartes will remain a third wheel in this important US relationship in Latin America.

In any event, Cartes will remain a third wheel in this important US relationship in Latin America.鈥�

Before his administration鈥檚 recent retaliation against 鈥淟a Embajada,鈥� Pe帽a made multiple trips to the United States as president, including to meet with National Security Adviser Jake Sullivan and SOUTHCOM Commander Laura Richardson. He has expressed interest in stronger security ties to help combat transnational organized crime.

But the scale could tip the other way. Pe帽a鈥檚 cabinet chief, Lea Gim茅nez, resigned on August 15, leaving the president without his strongest technocratic ally. In July, the Senate passed legislation to impose stringent transparency requirements on civil society organizations that critics fear will muzzle voices critical of the government. Earlier this year, Honor Colorado lawmakers impeached vocal opposition Senator Kattya Gonz谩lez.

Lacking political capital of his own, Pe帽a is struggling to escape Cartes鈥檚 shadow. So far, Pe帽a has opted to steer clear of the Colorado-controlled Congress, focusing on marketing Paraguay to foreign investors in frequent overseas trips. Overdue reforms to key institutions such as the judiciary are on hold, despite persistent investor anxiety over corruption.

Pe帽a still has accomplishments to show. Late last year, he oversaw an operation to restore order to Paraguay鈥檚 sprawling Tacumb煤 prison, a de facto headquarters for local gangs and Brazilian cartels. In May, Paraguay struck a deal with Brazil to raise electricity rates at the binational Itaip煤 dam, increasing revenue from Paraguayan power exports. Overall fiscal revenue is also up, and the International Monetary Fund expects Paraguay to again outperform the region this year, with 3.8% GDP growth.

Paraguay鈥檚 Ministry of Economy and Finance earned another notch in its belt in July, when Moody鈥檚 awarded Paraguay investment grade rating. That was recognition of prudent macroeconomic policies implemented by successive governments, which Pe帽a hopes to transform into increased foreign investment and jobs and to diversify the economy.

Even as Pe帽a modernizes parts of Paraguay鈥檚 economy, Paraguay鈥檚 old political machine and compromised criminal justice system remains largely in place.鈥� 

But even as Pe帽a modernizes parts of Paraguay鈥檚 economy, Paraguay鈥檚 old political machine and compromised criminal justice system remains largely in place. That has consequences for growth and Paraguay鈥檚 foreign relationships.

Fears of corruption and clientelism shadow Pe帽a鈥檚 roadshow, sapping foreign investment that otherwise might pile into a country that offers fertile soil, clean power, low taxes, stable public policy, and a youthful workforce.

Meanwhile, the red lines that hem in Pe帽a鈥檚 reform agenda also color Paraguay鈥檚 international ties. Regional partners, including Washington, are eager to see Paraguay strengthen its rule of law to cooperate in the fight against transnational criminal groups that use the country as a trafficking corridor. Paraguay could also serve as a nearshoring option for US firms eager to reduce their dependency on China.

Much of that international agenda, however, lives in a state of suspended animation, as Pe帽a navigates plenty of political constraints at home.