Uruguay

Tepid regional recovery is a positive

Country Rating BB2

Strengths

  • Robust democratic political system with a good degree of social consensus.
  • Relatively high levels of foreign reserve (though declining).

    Weaknesses

    • Persistent high inflation and public debt-GDP ratio.
    • Banking system highly dollarized with large non-resident deposits.
    • Vulnerable to external shocks particularly via trade and financial links with low performing neighbours, Brazil and Argentina.

     

     

    Economic Overview

    Domestic growth is back on track

    In 2016 real GDP growth came in at +1.5%. Growth was weighed down by deep recessions in Brazil and Argentina. Low wheat and beef prices, which together represent one third of Uruguay’s exports, combined with lagging regional demand saw exports contract in 2016. We expect growth to benefit from a regional recovery in the near term together with a strengthening of domestic private consumption. Real GDP is set to grow by +3.0% in 2017, given the high Q1 performance of +4.4% y/y. The 2018 estimate stands at +2.5%.

    Inflation remained high in 2016 at 9.6%. We expect it to fall to 6.5% in 2017 and then stay within the Central Bank target range of 5% +/- 2pps, supported by a negative output gap and ongoing wage negotiations. Monetary policy remains relatively tight but its transmission has been constrained by the high dollarization and the low level of peso denominated credit. In 2016 fiscal policy remained neutral with a deficit of -3.9% of GDP. It should narrow to -3.4% in 2017. In line with the government’s aim to reduce the deficit to 2.5% by 2019, the Uruguayan Parliament is expected to implement tax increases and expenditure cuts.

    (Still) Dependent on foreign partners

    Uruguay has cut its current account deficit by a factor of four since 2014. International reserves have stabilized above recommended norms. In 2017 we expect the current account deficit to narrow to -0.7% of GDP. Chiefly, in 2016 FDI was sufficient to fully finance the current account deficit and we expect this to continue.

    Following a 69% devaluation which culminated in Central Bank intervention in foreign exchange markets in early 2016, the Uruguayan Peso has recovered to September 2015 levels. Foreign reserves are back up to USD14bn as of June 2017, covering around 16 months of imports. This is still far below the USD18bn recorded two years ago, before the intervention.

    Despite the solid level of reserves, stable FDI financing, lessened regional economic dependency, a slower-than expected recovery in Argentina and Brazil could still weigh on the economy. Uruguay also remains vulnerable to developments in China, a major trade partner.

    The Uruguayan economy relies on private consumption (74% of GDP) while total investment accounts for 20% of GDP. Yet Uruguay benefits from political stability and a sound business environment, which could boost investment. President Tabaré Vázquez is expected to continue his predecessor’s reforms. The country ranks 90th out of 190 in the 2017 World Bank Doing Business index, above Brazil (123rd) and Argentina (116th).

    Last review: 2017-21-09
      Uruguay

      Uruguay

      BB2

      GDP

      USD52.42bn
      (World ranking 76, World Bank 2016)

      Population

      3.44mn
      (World ranking 113, World Bank 2016)

      Form of state

      Republic

      Head of government

      Tabaré VÁZQUEZ

      Next elections

      2019, presidential and legislative (4-year term)

      Last reviewed: 22/09/17

      Uruguay

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