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. - Source: Coface

Business Climate Rating

A3
The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.

Strengths

  • Abundant agricultural and forestry resources
  • Social homogeneity and political stability
  • Active reform policy (business environment, public finance, social security coverage)
  • Favorable business environment
  • Substantial foreign direct investment
  • Member of Mercosur, preferred trade relations with the EU and the United States

Weaknesses

  • Economy vulnerable to commodity prices (soybeans, beef, dairy products)
  • Dependent on Argentine, Brazilian and Chinese economic conditions
  • Inadequate transport infrastructure
  • Reduced competitiveness due to high inflation
  • Public debt (mitigated by a longer maturity and less and less in dollars)

Current Trends

Weak expansion in an unfavorable environment, despite brisk investment

The Uruguayan economic slowdown worsened in 2019 due to low regional demand (recession in Argentina, sluggish in Brazil), lackluster international financial markets and the domestic fiscal situation. In 2020, inflation will remain above the target (3% to 7%), causing household purchasing power to be flat or even decline, with wage increases not only being set by agreement at between 6% and 8%, but is also limited by the high unemployment rate (9.5% in 2019). Growth will therefore remain moderate and will be driven by increased investment linked to the construction of a second pulp mill by the Finnish group UPM (after negotiating with the government since 2016, the group finally gave the official go-ahead for the project in July 2019). Worth more than USD 3 billion, this project (UPM2) is the largest private investment ever made in the country. It will boost FDI inflows, which have been negative for four years, but also stimulate construction and employment. Public investment is also set to increase under the Ferrocarril Central rail infrastructure project, which aims to facilitate the transport of goods to the port of Montevideo (public-private financing estimated at USD 800 million). In addition, as the effects of the Argentine crisis (the main source of FDI and tourists) continue to be felt, the external contribution to growth is expected to remain negative, despite the slight pick-up in Brazilian demand. Uruguay mainly exports agricultural products (soybeans, wood, and beef in particular), which are therefore vulnerable to international price fluctuations.

Stepping up fiscal consolidation

Public accounts deteriorated again in 2019 as weak economic activity affected tax revenues. Luis Lacalle Pou’s new government has committed to budget cuts of USD 900 million (2% of GDP) in 2020 through more targeted spending and better management of state-owned enterprises, but without reducing social expenditure. Nevertheless, with growth likely to be weak again next year, revenues are expected to remain sluggish, while the deficit will stay above the 2.5% target set in the fiscal consolidation program of the 2015 five-year finance law introduced under the previous government. While public debt is large and on an upward trend, the government has gradually increased the share denominated in local currency and held by residents (more than half in the second quarter of 2019, up from just 30% in 2007) and extended the average maturity (14 years), thus reducing its vulnerability.

The trade surplus is expected to narrow further due to higher capital goods imports related to the UPM2 project. Although moderate, the improvement in the economic situation of Brazil, which is the main trading partner after China, should support growth in goods exports. The balance of services will be particularly affected by the reduced purchasing power of Argentines (60% of tourists) due to the considerable depreciation of the Argentine peso. Unlike the balance of goods and services, the income balance is structurally in deficit, due to the repatriation of dividends generated by foreign investments and the payment of debt interest (2.7% of GDP). FDI and foreign borrowing are expected to more than offset the current account deficit and debt repayment, paving the way for a moderate increase in the already substantial foreign exchange reserves (15 months of imports in 2018).

The opposition wins the October general election by a tight margin

Luis Lacalle Pou of the center-right Partido Nacional (PN) won the second round of the November 2019 presidential election, beating his rival from the center-left Frente Amplio (FA) coalition, Daniel Martinez, by a slender margin (48.74% against 47.48% of the votes). The FA led the country for 15 years, but rising crime, low employment growth and a gloomy economic situation contributed to its electoral defeat. President Lacalle Pou, who will take office on March 1, 2020 for a five-year term, promised a more restrictive fiscal policy and a conservative stance on security. The PN failed to win an outright majority in parliamentary elections that took place in October. However, thanks to a “rainbow” coalition including the PN and four other parties ranging from the center-right (Partido Independiente) to the far right (Cabildo Abierto), the President should be able to count on a legislative majority. The coalition holds 17 seats out of 30 in the Senate and 57 seats out of 99 in the lower house. As a result, Luis Lacalle Pou will be the President with the weakest majority since the return of democracy in Uruguay, and the broad spectrum of parties in his coalition could be a source of political fragility.

Source:

Coface (02/2020)
Uruguay