Uruguay: Uruguay Finance Profile

Economic Overview

Sharp slowdown in 2014 and 2015

Uruguayan activity accelerated to +4.4% in 2013 boosted by the openness of a new hydroelectric plant in Q2. On the spending approach, private consumption (which represents 75% of GDP) remained the major engine of increase (accounting for 4pp of total GDP increase). Household spending continued to benefit from very active social programs and wage increases. Public consumption as well contributed positively to increase on the wake of the Presidential elections that were held in late-November 2014.

However available data for 2014 suggest a slowdown of the economy. On the domestic front, private consumption is being penalized by long-lasting elevated inflation. On the external side, the poor economic performance of Venezuela, Russia, Brazil and Argentina, inclunding the slow-down of China, weigh on export performance. All in all, Euler Hermes expects Uruguay to grow by +2.7% in 2014 and by +2.9% in 2015.

Inflation remains elevated despite new tools for the Monetary policy

As of June 2013, the Central bank decided to alter the instruments of the monetary policy. The use of a single benchmark policy rate to ensure price stability was abandoned and restored by Money supply variables targets. The expanded M1 (M1 and saving deposits) became the new variable of reference for the Monetary policy with the Central bank setting its indicative values each quarter.

Considering the continuous high inflation, the Central bank decided to lower its M1+ target to a range of 9-12% increase rate for Q2 and Q3 2014, against 13-15% in Q1. Despite the tightening of the monetary policy, consumer prices continued to evolve above the inflation target range set by the Central Bank for 2014 (5% +/-2pp), reaching +8.1% y/y in October. Euler Hermes expects inflation to reach +8.9% on average in 2014, and to remain elevated along 2015. The cycle of inflationary pressure will remain as long as wage increases are indexed in consumer prices increase.

Public finances are broadly under control

The fiscal deficit slightly narrowed from -2.8% in 2012 to -2.4% in 2013. However, given the sustained increase in expenditures driven by the electoral schedule, the fiscal balance can be expected to deteriorate in 2014. As of October 2014, Central government spending grew by +24% y/y, while fiscal revenues expanded by +13%. Euler Hermes expects the fiscal deficit to wide to -3.2% of GDP in 2014, and to remain at this level in 2015.
Public deficit is showing an upward trend since 2012, next recording steady decrease from 2003 (111% of GDP) to 2011 (59%). It stood 62.1% of GDP in 2013 and should continue to rise in forthcoming quarters, going above 65% of GDP by 2015. For the moment, however, the financing of public deficit does not raise concerns. Uruguay benefits from strong investor confidence and has easy access to international capital markets. Moreover, the deficit profile has improved significantly over completed years with lengthening maturity and 60% of public deficit denominated in local currency. Large reserves and other liquid assets held by the Central bank could serve as a financial cushion in case of urgent need for funding. Net deficit is indeed on a continuous decreasing trend and presently accounts for 24.5% of GDP (against 75% in 2002).

Adverse external environment

The current account deteriorated in recent years, mostly due to higher import than export increase (respectively +9.7% and +2.8% in average between 2011 and 2014). This pattern saw the current account deficit widen from -1.9% of GDP in 2010 to -5.5% in 2013.
The economy is highly vulnerable to external shocks. The poor economic performance of Uruguay’s top trade partners (Brazil, Venezuela, Argentina and Russia), inclunding the downside pressures on commodity prices, are weighing on exports (-10% y/y in August, -4.5% y/y in September). However, as imports show a sharper drop, the trade deficit has slightly narrowed in new months. Along with slowing domestic request, the fall in oil prices as well explains the recent fall imports (crude oil and petroleum product accounts for 20% of total imports). Moreover, the balance of services has been deteriorating since late-2012, largely due to a fall in tourism revenues (mainly from Argentinean and Brazilian), and switched in 2014 for the initial time into a deficit. As this trend is expected to continue in forthcoming months, Euler Hermes expects the Uruguayan current deficit to widen to 6% of GDP in 2014 and in 2015.

The external deficit is easily financed. Indeed, Uruguay benefits from strong capital inflows (FDI and portfolio investment ), thanks to the relatively strong business environment (Doing Business figures ranks Uruguay84 out of 189 economies), the low level of corruption and good policy of law. Additional than 90% of the current account deficit is covered by FDI inflows. Moreover, FX reserves have continuously risen since the 2002 crisis thanks to the very active policy followed by the government aiming to reduce the external vulnerability of the country. As of September 2014, FX reserves (minus gold) stood at USD17.7 bn in, covering over 15 months of imports.

Continuity of social and economic policies with the new government

Repeating 2004’s election results, former President Tabaré Vázquez (2004-2009) was announced the winner of the Uruguay’s runoff presidential election with 53% of the vote. The Frente Amplio (FA) leftist party retains power. The new President committed to pursue the economic and social policies put in place by the very popular outgoing President José Mujica. Over completed years, Uruguay social indicators have significantly improved: a large share of the people escaped poverty (37% of the people lived below the poverty line in 2005 against 13% in 2012), while investment , which was once Uruguay’s Achilles’ heel, has been exhibiting a remarkable performance over the completed years, not only compared with the country’s history, but as well with regional developments. However, despite significant investment plans ongoing, lack of infrastructure remains significant.