Abstract
This paper examines Uruguay’s Fifth Review Under the Stand-By Arrangement and Requests for Modification of the Arrangement and Waiver of Nonobservance and Applicability of Performance Criteria. The macroeconomic framework is broadly on track, but progress with structural reform remains uneven. Fiscal performance has been better than programmed, reflecting buoyant revenues. The monetary and balance-of-payments targets of the program have been met. Although program risks have diminished further since the last review, important vulnerabilities remain, leaving no room for policy slippages.
1. Since issuance of the staff report for the Fifth Review, additional information on recent developments and policy measures has become available. This information does not alter the thrust of the staff appraisal.
2. Prior actions. All prior actions for completing the fifth review have been implemented (completion dates in parentheses):
Inventories of assets for each of the liquidation funds have been prepared (August 10).
The information on nonperforming loans obtained from the inventory has been submitted to the Bank Superintendency for inclusion in the credit registry (August 10).
Balance sheets, as of end-May 2004, have been prepared for each of the liquidation funds (August 9).
A full-time supervisor to oversee the implementation of the asset disposal strategy has been appointed (August 10).
An accounting firm has been hired for the preparation of financial statements for the funds’ operations since inception (July 25).
An audit firm has been contracted to carry out financial audits of the liquidation funds (July 25).
A firm has been contracted, through a competitive bidding process, to manage the assets in the liquidation funds of Banco Comercial, Banco Montevideo, and Banco Caja Obrera, and a first tranche of NPLs of at least US$300 million has been transferred to the asset management firm. While the prior action was completed only three days—rather than the customary five days—before the Board meeting (the contract with the asset management firm was signed on August 24), staff has been closely monitoring the bidding and contracting process,1 and can therefore assess with confidence that the prior action has been completed.
The liquidation funds’ end-July financial statements have been transmitted to the Ministry of Economy and Finance (MEF) and BCU (August 20).
A fiscal monitoring committee, comprising representatives from the MEF, BCU, BROU, and BHU, has been formed (May 26).
3. Safeguards assessment. Further progress has been made toward completing the recommendations of the safeguards assessment. A supplementary audit on the use of FSBS reosurces by Banco de Crédito has been completed (the audits on the use of FSBS resources for Banco Comercial, Banco Montevideo, and Banco Caja Obrera are still ongoing).
4. Bank resolution process. A proposal was recently presented in congress that would create a large publicly-run asset management company (AMC) to take over the resolution of the distressed assets of liquidated banks and BROU, which would deviate substantially from the bank resolution strategy in the program. Although the proposal seemed initially to gather significant support in congress, its progress has recently slowed (it remains under discussion in the Finance Commission of the Senate). The authorities are confident that the proposal will not prosper in its current form, and have explained to staff that they would veto any legislation that substantially deviates from the current asset resolution strategy (which is based on the outsourcing of asset management for the liquidated banks and an asset resolution trust for BROU).
The call for bids was done on July 20, and the winner was selected on August 10. The contract contains strong performance incentives for the asset manager, and the authorities have committed to monitor the collection effort closely and set performance measures in the context of future program reviews.