Uruguay: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: A4
Risk Assessment2
Slower but still strong growth in 2011
The economy proved very resilient to the crisis, supported by counter cyclical policy that contributed to a sharp economic rebound in 2010. GDP growth was driven by a strong private investment recovery and by household consumption buoyed by the decline in unemployment and the increase in purchasing power. It also got a boost from the improving trend in demand from Brazil, Argentina, China, and Russia (cellulose, food products, automotives, tourism).
Growth will slow in 2011 in phase with the economic trends for the main trading partners. Private investment will continue to grow at a fast pace fuelled by large public and private infrastructure projects. Moreover investor confidence was bolstered by the stamp of approval Uruguay received from rating agencies for its strong growth and prudent macro-economic policies. A high employment rate and the growth of wages are expected to continue to support household consumption. The foreign sector will likely make a negative contribution to growth as a result of a slowdown in foreign demand while the demand for imported products, (particularly consumer durables and capital goods) is unlikely to decline.
The rise of prices is expected to ease in 2011 amid the economic slowdown. But inflation will be unlikely to remain below the 6% limit set by the Central Bank considering the dynamism of consumption, the low level of interest and the rapid expansion of credit.
Twin deficits under control
The contraction of the public sector deficit is expected in 2011. The reduction of tax evasion in conjunction with strong growth will continue to increase fiscal revenues with only a moderate increase in public spending expected. A high proportion of that spending is expected to be devoted to priority programmes (education, housing, security, health, and infrastructure) for which preference will be given to public/private partnerships. Government plans for reducing macro-economic vulnerability and strengthening public administration are backed by multilateral organisations. Economic growth has contributed to easing the relative weight of the public debt, which nonetheless remains high.
The external financial situation presents no particular difficulty. Virtually in balance in 2010, the current account could show a moderate deficit in 2011 due to the slowdown of exports, which had grown strongly a year earlier. The invisibles surplus is expected to shrink as a result of increased profit repatriation by investors and a likely slowdown of tourism (mainly by Argentines). Financing needs are expected to be covered by foreign direct investment and borrowing abroad. Foreign exchange reserves will likely remain high, providing a safety net underpinning the country's capacity to withstand the possible non-renewal of short-term debt.
Continuity of political moderation
President José Mujica, in office since March 2010, belongs to the same centre-left formation as his predecessor, Tabaré Vázquez. Backed by only a small parliamentary majority (resulting from the elections late 2009) and obliged to reconcile the pragmatic and radical wings of the government coalition, Frente Amplio, the president is expected to pursue moderate economic and social policy. Despite the economic growth and the increase in purchasing power, public unrest remains intense.
Strengths
- Abundant agricultural, forestry, and livestock-breeding resources
- Reduced vulnerability to exogenous shocks
- Mercosur founding member, privileged trade relations with the European Union and the United States
- Active reform policy (improvement in the business environment, consolidation of public finances in progress)
- Stable democratic system with relatively good social indicators and an improving business environment
- Social policy conducive to poverty reduction
Weaknesses
- Economy vulnerable as a result of its relatively small domestic market and its open character
- Exports, mainly agricultural, exposed to fluctuations in world prices
- Public sector debt in decline but still high, improvement in its structure notwithstanding
- Vulnerable banking system due to extensive dollarization
- Reforms pending in various areas: education, civil service, public sector
- Shaky social climate