SUBJECT: Impact of the ruling Colorado Party's victory in local government elections.

SIGNIFICANCE: The result will encourage President Nicanor Duarte Frutos to press ahead with his intention to reform the constitution so as to enable him to stand for re-election in 2008.

ANALYSIS: The Colorado Party won a comfortable victory in local government elections on November 19, winning control of 150 of 231 municipalities. This was a net gain of four municipalities from its performance in 2001 -- it gained control of 29 municipalities and lost control of 25. The preliminary voting shares announced by the Electoral Commission give the Colorado Party 46% of the total votes, followed by the Partido Liberal Radical Autentico (PLRA) with 32%, the Partido Patria Querida (PPQ) with 7% and the Partido Union Nacional de Colorados Eticos (PUNACE) with 5%. At 50%, turnout was lower than in 2001 (54%).

The Colorado Party retained control of Asuncion, where its candidate Evangelista de Gallegos, a popular former Minister of Tourism and TV presenter, became the first-ever female mayor in the capital. She won 46% of the vote, compared with 35% for Miguel Carrizosa of the PPQ and 16% for Jorge Leoz of the PLRA:

* The failure of the PPQ and PLRA to agree on a single candidate led to bitter recriminations between the two parties.

* PUNACE, supporters of the imprisoned former army chief, Lino Oviedo, did not stand a candidate.

However, the Colorado Party lost its absolute majority on the 24-seat Asuncion council, winning only eleven seats. The recently formed PPQ, standing in municipal elections for the first time, won six seats, two more than the PLRA. Elsewhere, the Colorado Party did well, beating opposition alliances in the second and third largest cities, Ciudad del Este and Encarnacion, and regaining ground in the municipalities of the densely populated Central Department surrounding Asuncion.

The PLRA won control of 79 municipalities, up from 66 in 2001, although mainly in small municipalities. It was strengthened by the new experience of electoral alliances, being the lead party in 107 of the 131 municipalities where these were forged and in 34 of the 39 municipalities where the alliance was victorious. Most of the alliances were between the PLRA and PUNACE, thereby consolidating a pact that began in the 2001 vice-presidential election, when PUNACE support was instrumental in the victory of the PLRA candidate, Julio Cesar Franco. This will encourage the PLRA to insist that their candidate should lead any opposition alliance bid for the presidency in 2008.

Duarte endorsement? President Nicanor Duarte Frutos had stated repeatedly that victory in the local government elections would be regarded as a public endorsement of his administration and would justify his plans to stand for re-election when his current term expires in 2008. This would require amending Article 229 of the 1992 Constitution, which currently prohibits presidential re-election. This article was introduced precisely to counter the dangers of the previous 1967 Constitution, which had enabled President Alfredo Stroessner to stand for re-election on numerous occasions during his 1954-89 regime.

Opposition parties thus resist any move that would allow Duarte to stand again :

* Relations between the executive and opposition-dominated legislature soured in December 2005, after Duarte refused to castigate senior members of the armed forces who issued a military communiqué criticizing the delay in approving annual military promotions, and worsened after Duarte won a convincing victory in the internal Colorado Party elections in February and immediately raised the spectra of his own re-election.

* Relations have become increasingly fraught since, with Congress blocking the passage of major legislation in its efforts to force Duarte to drop his re-election ambitions. The most significant bill affected aims to reform the decrepit state banking system by creating a second-tier bank, Agencia Financiera de Desarrollo (AFD), to provide much-needed medium-term loan capital to the private sector. The World Bank and Inter-American Development Bank (IDB) have tried unsuccessfully to mediate and in recent weeks senior leaders of domestic business organizations have accused the opposition of sacrificing economic recovery by refusing to approve the AFD legislation.

Re-election reform. The opposition argues that Duarte's bid for re-election is tantamount to subversion of the constitution. However, in late November the Colorado Party canvassed the opinion of three eminent jurists, who stated that such a move would not be illegal. Days after receiving this opinion, on November 24 the Colorado Party formally announced that it would press for an amendment of Article 229, enabling Duarte to stand for a second term. It is now likely to present this request to Congress by year-end. In order to pass the amendment, the government will need a simple majority in both Houses. It is counting on support from dissident Colorado deputies for the 41 votes needed in the Lower House. However, the 23 votes needed for a Senate majority will be more difficult to obtain, and observers suggest that this may require buying the votes of several wavering senators who are 'open to suggestion'. Moreover, Senate president Enrique Gonzalez Quintana (PUNACE) is bitterly opposed to the amendment and could ensure that the motion is not discussed until his term expires in July 2007. If, despite these difficulties, approval is obtained, the Electoral Commission will then carry out a referendum to obtain popular endorsement of the proposed amendment.

Colorado candidates. Despite his absence in the political arena, Vice-president Luis Alberti Castiglioni is the best positioned in different pools. In the event that constitutional amendment proves impossible, Castiglioni will likely win the candidacy. The other two main alternative contenders for the Colorado presidential candidacy in 2008 -- Victor Bernal, Paraguayan director of the Itaipu hydroelectric plant, and Julio Cesar Velazquez, -- have been jockeying for political advantage through bankrolling their favorites in the municipal elections:

* Bernal's star appears to be rising after his use of discretionary funds from Itaipu proved influential in the party victories in Ciudad del Este and Coronel Oviedo.

* By contrast, Velazquez suffered a setback when his chosen mayoral candidate lost to the PLRA on his home territory in Fernando del la Mora, a suburb of Asuncion.

Outlook. As it demonstrated in the recent municipal elections, the Colorado Party remains a powerful electoral machine and Duarte still commands considerable support among the electorate. Current indications are that, if allowed to stand, he would probably win the 2008 presidential elections, especially as the Paraguayan electoral system does provide for a second-round run-off. The opposition is thus unlikely to soften its hostility to the proposed constitutional amendment in the coming period for fear of the electoral threat posed by Duarte himself in 2008. The PLRA has been emboldened by its good showing compared to the PPQ in the municipal elections and is likely to insist that its chosen candidate should represent any opposition alliance in 2008. It remains confident that its alliance candidate could beat any Colorado Party candidate other than Duarte. However, although the opposition won in 39 of the 131 municipalities where they agreed an alliance, these were overwhelmingly alliances between the PLRA and PUNACE, not between the PLRA and the PPQ. The failure of the PLRA and PPQ to agree on a unity candidate for the post of Asuncion mayor bodes ill for prospects of an opposition alliance in the 2008 presidential elections.

CONCLUSION: Continued opposition hostility in Congress towards Duarte's re-election plans suggests that governance is unlikely to improve in the approaching election period, a factor that risks jeopardizing the slow but steady economic recovery now under way.