Abstract
This paper examines Uruguay’s Fourth Review Under the Stand-By Arrangement and Requests for Modification of the Arrangement. The macroeconomic framework is broadly on track, but progress with structural reform has lagged. With regard to the quantitative performance criteria, there was a small deviation from the target on the combined public sector primary balance. The restructuring of the public banks and the disposal of assets of liquidated banks are taking longer than expected. The authorities have reaffirmed their commitment to the primary surplus targets for 2004 and beyond.
Right of Reply Document
Since the Staff Report for the Fourth Review Under the Stand-By Arrangement was issued in February 2004, critical advances have taken place in the restructuring process at the state bank BROU. In addition, several favorable developments have been observed in the financial system reflecting the economic recovery and the progress of reform efforts. The Uruguayan authorities would like to update relevant information and make some comments on the Appendix II of this document.
At end-September 2003, when the restructuring plan was initiated, BROU’s financial condition was poor: the Bank was suffering operating losses, had nonperforming loans to total loans ratio of 33 percent, its capital was barely above adequacy requirements, and faced potential liquidity problems. These problems were noticeable on both sides of the balance sheet, which were compounded by serious operating inefficiencies.
However, some figures have been revised since the issuance of the staff report. The return on total assets for 2003 was about 0.1 percent compared with a negative 1.5 percent estimated when the staff report was issued. Furthermore, the Bank met its capital adequacy requirements with an excess of 25 percent in September 2003, that margin increased to 29 percent in March 2004.
The authorities have developed a restructuring plan to address the balance sheet problems of BROU and assure its viability. The restructuring plan has entailed more favorable developments than the estimates used when the staff report was issued. BROU had an operating profit of 5% of capital in the first quarter of 2004, the capital adequacy ratio is clearly above requirements, and liquidity conditions have improved.
The volume of NPLs and other nonperforming assets was excessive. However, after some steps envisaged in the restructuring program, the NPL ratio has already decreased sharply to 11 percent at the end of the first quarter, and it is estimated that it will continue to fall reaching about 10 percent by the end of 2004. At the same time, NPL ratio for BROU’s private sector loans has significantly fallen to 25 percent at the end of the first quarter of 2004.
The second tranche of reprogrammed deposits, those falling due during August 2004 – July 2005, have already been repaid. BROU has built up liquidity covering about two thirds of these deposits, and has been successful in retaining the first and second tranche. Despite this success, BROU maintains its cautious approach towards reprogrammed depositors and continue its efforts to build-up the liquidity needed to meet the next tranche of deposits falling due beginning in August 2005.
In addition to the liquidity concerns, the reprogrammed deposits carried an interest rate of 6 percent, well above market rates and resulting in a significant drag on earnings. Considering the repayments and the favorable developments in the financial sector, the authorities have reduced the interest rate on reprogrammed deposits to 3.5 percent, thus helping BROU’s net operational earnings. BROU also suffers from high operating costs that are due to excessive personnel and branches, aspect that is also being addressed in the restructuring program.