Uruguay

Tepid regional recovery is a positive

BB2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD 52.420bn (World ranking 76, World Bank 2016)
Population 3.44 million (World Ranking 133, World Bank 2016)
Form of state Republic
Head of government Tabaré VÁZQUEZ
Next elections 2019, presidential and legislative
  • Robust democratic political system with a good degree of social consensus
  • Relatively high levels of foreign reserves
  • Stable FDI inflows
  • Persistent high inflation and public debt-GDP ratio
  • Banking system highly dollarized with large non-resident deposits
  • Vulnerable to external shocks particularly through trade and financial links with neighbors Brazil and Argentina and main merchandise export partner China

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).

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Brazil 17%
1
19% China
China 13%
2
18% Brazil
United States 6%
3
13% Argentina
Argentina 5%
4
7% United States
Netherlands 3%
5
5% Germany

Trade structure by product

(% of total)

Exports Rank Imports
Meat and meat preparations 23%
1
10% Petroleum, petroleum products and related materials
Oil seeds and oleaginous fruits 12%
2
8% Road vehicles
Cork and wood 10%
3
6% Power generating machinery and equipment
Cereals and cereal preparations 10%
4
5% Electrical machinery, apparatus and appliances, n.e.s.
Dairy products and birds' eggs 8%
5
5% Telecommunication and sound recording apparatus

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Georges Dib

Economist for Latin America, Spain and Portugal

georges.dib@eulerhermes.com 

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