Uruguay: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant agricultural and forestry resources
- Social homogeneity (universal health coverage, free education) and political stability
- Active reform policy (business environment, public finances, social security coverage)
- Favorable business environment
- Substantial foreign direct investment
- Member of Mercosur, preferential trade relations with the EU and the United States
- Economy vulnerable to commodity prices (soybeans, beef, dairy products, wood, rice)
- Dependent on Argentinian, Brazilian and Chinese economic conditions
- Inadequate transport infrastructure
- Reduced competitiveness due to high inflation and market rigidity
- Public debt (mitigated by a longer maturity and less and less in dollars)
Gradual economic recovery
The COVID-19 crisis had relatively little impact on Uruguay’s economy in 2020 compared with many of the country’s neighbors. Admittedly, manufacturing production and exports, mainly paper, were affected by the drop in global demand, and tourism, a mainstay of the economy (16.4% of GDP and 16.3% of employment in 2019), which had already been hurt by the Argentinian crisis, was reduced to almost nothing by travel restrictions such as border closures. Despite the construction of a second pulp mill by the Finnish group UPM (under negotiation with the government since 2016 and finally approved in July 2019), the unfavorable economic situation sapped investor confidence and FDI declined. Furthermore, in order to curb the epidemic, the government introduced restrictions, including the closure of schools, and recommended a two-month lockdown starting in mid-March.
Consequently, household consumption (67% of GDP in 2019) fell considerably and was also affected by rising inflation. To mitigate this trend, the government implemented assistance for the poorest and most vulnerable members of society through increased cash transfers, subsidized employment and deferral of certain tax obligations. Agricultural specialization, meanwhile, supported exports thanks to the resilience of demand and prices. In 2021, activity should pick up again, but slowly, as domestic restrictions are lifted, as assistance is extended (especially for domestic tourism) and as external demand returns to a stronger trajectory and is better-served thanks to the normalization of supply chains. With the new border, closure decided in November 2020 in response to the second wave of COVID-19 in other countries, particularly Argentina, tourism activity could be compromised until March 2021. Investment, especially foreign investment, should pick up again due to the political and social stability that makes the country attractive.
Public and external accounts in deficit, but comfortably financed
The public deficit swelled because of the crisis in 2020. This was partly due to the increase in expenditures related to COVID-19 (2.4% of GDP), while government revenues decreased. The new President Luis Lacalle Pou had committed to budget cuts of USD 900 million (2% of GDP) in 2020, with more targeted spending and better management of state-owned companies, without any impact on social spending. However, due to the health crisis, the government scrapped this commitment, deciding to prioritize support for the economy and social spending. Fiscal consolidation is not expected to occur in 2021, with some assistance being extended and a program to support tourism being implemented at the end of 2020. The public deficit is thus expected to shrink only slightly in 2021.
The current account went into deficit in 2020 because of the decline in the trade surplus and the downturn in tourism flows. Despite a probable resumption of exports, the trade surplus could be further reduced in 2021 by the increase in imports, particularly of equipment related to the UPM group's project, but also by higher prices for fuel purchases, which will weigh on the current account deficit. FDI and external borrowing should continue to largely finance the current account deficit and debt repayment, paving the way for a moderate increase in the already substantial foreign exchange reserves (13 months of imports in 2019). While public debt is large and has increased as a result of the crisis, the authorities have gradually increased the share denominated in local currency and held by residents (more than half in the second quarter of 2019, compared to barely 30% in 2007) and lengthened its average maturity (14 years), thereby reducing its vulnerability.
A well-established democracy
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% versus 47.48% of the votes). The president took office in March 2020 for a five-year term. The PN failed to win an outright majority in parliamentary elections held in October 2019. 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 was able to obtain a legislative majority. The coalition has 17 of 30 seats in the senate and 57 of 99 deputies in the lower house. Luis Lacalle Pou is the president with the weakest majority since the return of democracy in Uruguay, and the broad spectrum of parties in his coalition may be a source of political fragility. However, his effective handling of the health crisis will give him the political capital to implement a more restrictive fiscal policy and a conservative security line once the crisis is over. In 2020, Uruguay had one of the lowest crime rates in the region, demonstrating greater social and political cohesion. Furthermore, Uruguay is one of the most egalitarian countries (universal medical coverage, free education) in the region, which helps in reducing social risk.