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IMF Executive Board Concludes 2018 Article IV Consultation with Uruguay

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
February 2019
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On February 13, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Uruguay.

Recent Developments and Outlook

In a deteriorating external environment, Uruguay has successfully differentiated itself from its neighbors, thanks to progress in export market diversification, a prudent and coordinated public-sector asset-liability management, pre-financing of sizeable external financing needs, lower banking sector vulnerabilities, and ample reserves. As a result, public sector borrowing costs have remained subdued despite significant depreciation pressures, and, although growth has slowed—to an estimated 2.1 percent—it remains positive. Still, private investment has remained sluggish, and labor market outcomes are weak.

Inflation has risen above the central bank’s target range—partly reflecting temporary factors— and is now at around 8 percent. The central bank has reduced the monetary indicative targets, but medium-term inflation expectations remain somewhat above the target range.

Fiscal deficit reduction has stalled, and the time to reach the target of 2.5 percent of GDP has been extended to 2020. The 12-month rolling fiscal deficit stood at 3.8 percent of GDP in November 2018 (excluding the impact of a large transaction related to pension asset transfers), suggesting that attainment of the 2018 objective (3.3 percent of GDP) and 2020 target is difficult.

The current account has turned to deficit in the first three quarters of 2018, because of negative investment income, higher oil prices, lower exports to neighboring countries facing difficulties (such as Argentina and Brazil), and lower agricultural exports due to the drought. High-frequency data point to portfolio outflows during the last quarter of 2018, as seen in many emerging markets. The authorities ably took advantage of favorable financing conditions through mid-2018 by issuing bonds in global markets at long maturities.

Despite the regional market turmoil, the financial sector has remained resilient, reflecting limited linkages to Argentina and enhanced supervision since the 2002 crisis. With the improvements in regulatory capital to risk-weighted assets ratio and bank profits, the banking sector has comfortable buffers.

There are both sizeable downside and upside risks to the outlook, given the more difficult external environment and large infrastructure projects. An abrupt tightening in global financial conditions, caused by a sharp increase in international risk premia coupled with a further strengthening of the U.S. dollar, could have negative repercussions for Uruguay’s economy. A further slowdown in trading partners could also worsen the growth outlook. At the same time, prudent macroeconomic policies and strong institutions have improved Uruguay’s ability to withstand regional shocks, and plans for the construction of a large cellulose plant, an associated railway system, and other infrastructure projects are a major upside risk. Over the medium-term, low investment and declining employment, if not reversed, could lower potential growth.

Executive Board Assessment2

Executive Directors noted that prudent macroeconomic policies combined with strong reform implementation, and quality institutions have enabled Uruguay to maintain macroeconomic stability, accumulate sizeable buffers, improve social outcomes, and differentiate itself in the region. Directors noted that policy priorities ahead should focus on maintaining resilience, keeping public debt on a sustainable path, sustaining low inflation, and implementing structural reforms to boost the economy’s growth potential.

Directors welcomed the authorities’ commitment to maintain fiscal sustainability. They considered that the postponement of the fiscal deficit target by a year is appropriate given the current outlook. However, Directors underscored that additional fiscal measures would be needed to achieve the deficit target. They highlighted that fiscal sustainability could benefit from a medium-term fiscal framework which focuses on the nonfinancial public sector and is supported by an appropriate fiscal rule. Directors encouraged the authorities to introduce measures to put public debt on downward path. They also recommended that adjustment efforts should focus on reducing current expenditure while further improving its efficiency to increase capital spending. Priority should also be given to making further progress on the reforms of the pension system and the state-owned enterprises.

Directors welcomed the authorities’ commitment to bring inflation to within the central bank’s target range. Looking ahead, they encouraged the central bank to further strengthen the monetary policy framework by addressing the high degree of dollarization and enhancing its communication strategies, thereby better anchoring inflation expectations. Directors underscored the need to maintain exchange rate flexibility and limit interventions to address disorderly market conditions. They acknowledged the resilience of the financial sector and encouraged the authorities to remain vigilant about the non-performing loans and continue their efforts to increase financial inclusion while ensuring that it remains resilient in the face of regional shocks.

Directors welcomed Uruguay’s success in reducing poverty and inequality. To foster inclusive growth and ensure continued income convergence to advanced country levels, they encouraged the authorities to sustain implementation of structural reforms. Directors highlighted that reform efforts should focus on further increasing public investment, employment and labor force participation, enhancing competitiveness, and improving overall business environment and educational outcomes.

Uruguay: Selected Economic Indicators
Projections
20132014201520162017201820192020202120222023
Output, prices, and employment
Real GDP (percent change)4.63.20.41.72.72.11.93.03.03.03.0
GDP (US$ billions)57.557.253.352.759.260.260.163.466.970.574.5
Unemployment (in percent, eop)6.56.67.57.97.98.38.78.47.87.67.4
Output gap (percent of potential output)3.32.70.2-0.9-0.8-0.9-1.5-1.2-0.8-0.4-0.1
CPI inflation (in percent, average)8.68.98.79.66.27.67.57.27.27.07.0
CPI inflation (in percent, end of period))8.58.39.48.16.67.87.57.07.07.07.0
Exchange rate (UY$/US$, average)20.523.227.330.228.730.7
Real effective exchange rate (percent change, eop)7.7-2.91.0-5.85.7
(Percent change, unless otherwise specified)
Monetary and banking indicators 1/
Base money12.91.47.29.73.6
Broader M1 (M1 plus savings deposits)15.03.75.68.415.2
M213.76.49.014.413.4
Growth of credit to households (in real UY$)9.94.76.3-0.52.5
Growth of credit to firms (in US$)16.26.82.81.5-4.2
Bank assets (in percent of GDP)60.863.672.565.561.6
Private credit (in percent of GDP) 2/26.027.130.228.126.3
(Percent of GDP, unless otherwise specified)
Public sector indicators
Revenue 3/29.529.129.029.329.931.231.030.730.029.929.7
of which: cincuentones transactions0.00.00.00.00.01.21.11.00.40.20.0
Non-interest expenditure 3/29.129.528.829.930.030.129.929.729.729.729.7
Wage bill4.95.05.05.15.25.25.15.15.15.15.1
Primary balance 4/0.4-0.60.0-0.5-0.21.21.10.90.20.1-0.1
Primary balance excluding cincuentones transactions0.4-0.60.0-0.5-0.20.00.0-0.1-0.2-0.1-0.1
Structural primary balance 5/-0.9-1.4-0.6-0.7-0.6-0.10.40.20.00.2-0.1
Interest 4/2.72.83.63.33.33.73.53.23.13.23.2
Overall balance 4/-2.3-3.5-3.6-3.8-3.5-2.5-2.4-2.3-2.9-3.1-3.3
Overall balance excluding cincuentones transactions-2.3-3.5-3.6-3.8-3.5-3.7-3.5-3.3-3.3-3.3-3.3
Gross non-financial public sector debt43.344.852.651.251.854.254.253.353.153.153.0
Gross public sector debt60.261.464.661.665.869.670.670.070.270.470.4
Public sector debt net of liquid financial assets 6/34.435.939.742.543.447.748.948.448.448.648.7
Public sector debt net of total assets24.222.925.829.932.435.937.337.437.738.138.4
External indicators
Merchandise exports, fob (US$ millions)13,27713,76911,14510,38010,77911,55612,00012,72313,51714,35015,298
Merchandise imports, fob (US$ millions)12,19911,7839,8388,4638,6719,1089,1209,91910,87511,76812,750
Terms of trade (percent change)0.22.61.82.3-1.1-2.71.11.00.81.00.7
Current account balance-3.6-3.2-0.90.60.7-0.6-0.6-1.0-1.3-1.6-1.8
Foreign direct investment-4.8-4.4-1.62.13.70.3-0.5-0.6-0.8-1.0-1.2
Total external debt + non-resident deposits69.074.989.574.468.167.870.270.771.271.572.3
Of which: External public debt31.933.737.131.630.432.332.432.833.433.834.6
External debt service (in percent of exports of g&s)16.616.830.225.724.420.521.722.622.722.722.8
Gross official reserves (US$ millions)16,27917,57415,63713,47315,93915,55115,89116,52117,45518,40519,355
In months of imports of goods and services1113131416151514141413
In percent of:
Short-term external (STE) debt181.8187.2173.2194.6245.6234.5240.2237.5238.8239.8239.7
STE debt plus banks’ non-resident deposits277.9227.6220.4216.6320.8294.5295.2288.4289.3287.7283.0
Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and Fund staff calculations.

Percent change of end-of-year data on one year ago.

Includes bank and non-bank credit.

Non-financial public sector excluding local governments.

Total public sector. Includes the non-financial public sector, local governments, Banco Central del Uruguay, and Banco de Seguros del Estado.

Total public sector. Includes the non-financial public sector, local governments, Banco Central del Uruguay, and Banco de Seguros del Estado. Excludes cincuentones and transfers from the Energy Stabilization Fund.

Gross debt of the public sector minus liquid financial assets of the public sector. Liquid financial assets arecalculated by deducting from total public sector assets the part of central bank reserves held as a counterpart to required reserves on foreign currency deposits.

Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and Fund staff calculations.

Percent change of end-of-year data on one year ago.

Includes bank and non-bank credit.

Non-financial public sector excluding local governments.

Total public sector. Includes the non-financial public sector, local governments, Banco Central del Uruguay, and Banco de Seguros del Estado.

Total public sector. Includes the non-financial public sector, local governments, Banco Central del Uruguay, and Banco de Seguros del Estado. Excludes cincuentones and transfers from the Energy Stabilization Fund.

Gross debt of the public sector minus liquid financial assets of the public sector. Liquid financial assets arecalculated by deducting from total public sector assets the part of central bank reserves held as a counterpart to required reserves on foreign currency deposits.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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