Uruguay: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
Growth contraction due to an unfavorable external economic environment
In 2016, Uruguayan growth is likely to remain modest, affected par the poor performances of its two main economic partners, Brazil and Argentina. Foreign trade should continue to suffer from the fall in demand from the neighboring countries and from China, which receives close to a quarter of the country’s exports, as well as the relatively low commodity prices (soybeans in particular). Despite the depreciation of the local currency, manufacturing and agricultural exports are unlikely to gain in competitiveness since all the region's currencies have depreciated. The stagnant external demand should also contribute to a decline in business confidence and to a slowdown in private investment in manufacturing industry. Given the rather gloomy economic outlook for the short term, congress has exceptionally accepted to increase the budget for spending earmarked for welfare programs and infrastructures, which ought to boost public investment. Household consumption will probably also remain rather buoyant thanks to the indexation of wages to food prices. Inflation should remain above the target range (3%-7%) set by the central bank, sustained by the indexation of wages and the depreciation of the currency.
A fiscal consolidation program postponed to 2017
The slowdown in the Uruguayan economy can be expected to jeopardize the fiscal consolidation program announced by President Tabaré Vazquez when he took office in March 2015. The government wanted to conduct a more restrictive fiscal policy to curb the rise in the public debt, which has grown continuously over the past four years and which is expected to increase further in 2016. Even though the 2015-2016 budget provides for a gradual reduction in the fiscal deficit while preserving welfare spending (especially on education), the exceptional increase in government spending approved by the congress in October 2015 will probably postpone the fiscal consolidation process to 2017. The local authorities’ objective is to post a primary surplus of 1% of GDP by the end of the presidential term in 2019 (versus a 0.6% deficit in 2014). The government is in particular counting on an increase in tax revenues linked to the vigor of household consumption rather than on creating duties and taxes. The budget also factors in an increase in export revenues thanks to the expected recovery in the neighboring countries’ economies out to 2017 as well as an increase in the contribution of state-owned companies to the government budget.
A current account deficit made worse by the fall in trade
External trade should still be negatively affected by the fall in trade in volume and value terms. The low level of prices on raw and semi-processed agricultural products (soybeans, meat and dairy products) combined with the fall in demand from the main trading partners (China, Brazil and Argentina) are contributing to the country’s poor export performance. Exports of traditional manufactured goods (clothing, chemical products, and building materials) are also likely to be negatively affected by the fall in demand. The imports should continue to benefit from the relatively low level of energy prices, especially oil which accounts for close to 20% of imports. The services balance will probably continue to be hurt by the decline in the number of Argentinean tourists (close to 60% of the visitors) and the income balance by the high level of repatriations of profits and of interest paid on the debt. Despite the slowdown in Brazilian and Argentinean investments, Uruguay remains one of the favored destinations for FDI in South America, thanks in particular to the country’s good governance and political stability. Foreign exchange reserves remain high (13.5 months of imports) and are contributing to the country’s resilience to external shocks.
Political stability despite some division within the governing left
President Tabaré Vázquez and his center-left party have the majority in both chambers of the congress. His government in place since March 2015 is continuing the orthodox macroeconomic policies of his predecessor, José Mujica, while paying particular attention to issues such as education, infrastructure and security. However, it seems that the coalition in power is divided between those who want to maintain a high level of welfare spending and those who want to implement a more restrictive fiscal policy amid an economic slowdown. In terms of foreign policy, president Vázquez is putting pressure on Brazil and Argentina to make progress in the negotiations under the free trade agreement between Mercosur and the European Union (dating back to 1995). The tensions with Venezuela after the Uruguayan president expressed concerns about the protection of human rights in this country may be rekindled after the victory of President Mauricio Macri in Argentina, a fierce opponent to the Venezuelan government’s policy.