A Natural Skepticism

1. By the time the current Uruguayan government was elected, there was skepticism amongst some IMF staff and Executive Directors on the risks and benefits of a new Arrangement with Uruguay. Admittedly this skepticism seemed to be reasonable considering the prevailing figures. At the end of 2004, the public debt-to-GDP ratio was 92 percent, and despite the fact that the debt outlook had improved after the 2003 debt exchange operation (the average maturity of public debt was about 7 years), there were large amortization payments due over the next few years. Furthermore, many analysts had serious doubts on how the authorities could reach unprecedented fiscal primary surpluses consistent with debt sustainability, while meeting social and investment needs stemming from the 2002 crisis.

2. Meanwhile, Uruguay’s outstanding debt to the Fund was SDR 1,635 million, ranking fifth in terms of total Fund exposures, although it was the second largest in terms of a country’s quota (533.64 percent) and, by far the largest debt to the Fund relative to a country’s GDP (18 percent). The above-referred skepticism was clearly summed up in the staff report on “Assessment of the Risks and the Fund’s Liquidity Position” prepared by the Finance and Policy Development and Review Departments in June 2005. In this document, it was noted that “Uruguay represents a significant risk for the Fund”, concluding that “its financial impact would still be sizable, and it could also have broader ramifications, including reputational and credibility risks for the Fund”. Wondering whether it would be possible to achieve a significant reduction in exposure over a prospective program period, many Directors soundly recommended the country not to become a chronic Fund-dependent.

Dissipating Doubts

3. There were some important milestones that help explain how a cooperative environment between Uruguay and the Fund was built, which was key to promoting productive negotiations, and later on reaching a successful arrangement. First of all, even before this administration took office, the elected authorities underscored the critical role the Fund played to help Uruguay overcome the country’s worst financial and economic crisis in its history. They stressed that without the Fund’s timely and exceptional assistance, the Uruguayan people would have suffered substantially more severe and detrimental consequences. Likewise, the government clearly stated its strong commitment to fully honor Uruguay’s obligations and, more generally, to fully respect the rule of law, as has been Uruguay’s tradition.

4. Just before the new administration took office in January 2005, the Director of the Western Hemisphere Department and his staff working on Uruguay visited the country to participate in a workshop. The meeting took place with the participation of the whole incoming economic team and also several future Ministers. During the seminar the new authorities were impressed with the open-mindedness of the IMF staff and their gentle approach and realized that many of the views expressed by the staff were not as different to theirs as they might have previously thought. On the other hand, the staff noted that the incoming government was coming into office with a very well-qualified team with a strong ownership of the program. An absolute respect for the counterpart’s view prevailed in the meetings, and, any preconceptions tended to vanish.

5. An equally important step in building the cooperative environment to which we referred above was the Executive Board meeting on Ex-Post Assessment on Uruguay’s Longer-Term Program Engagement in March 2005, which further elaborated on the country’s future arrangement. The document representing the authorities’ position underscored some of Uruguay’s program targets, based on the critical need of substantially reducing financial, external, and social vulnerabilities. Among other aspects noted were the objectives of ensuring debt sustainability for which GDP growth would have the utmost importance together with a consistent primary surplus; further strengthening bank regulation and supervision; reforming the revenue administration and the tax system; increasing Central Bank reserves; continuing to diversify the country’s external markets; attracting private investment as the necessary condition to enhance the level and quality of employment; implementing a temporary program aimed at mitigating poverty conditions; and boosting social equity.

6. In March 2005, the situation of Cofac, a small but relevant cooperative bank, worsened. The authorities had to suspend the bank’s operations and used this moment as a window of opportunity to introduce a deposit insurance scheme, while demonstrating that the government was serious in no longer making guarantees or public funds available to bail out private creditors.

“This is the Economic Program of Uruguay”

7. In June 2005, the Executive Board approved an IMF supported program, which had one main characteristic: this was the authorities’ wholehearted ownership of the program. Immediately after the Board approved the Stand-By Arrangement, Uruguay’s Minister of Finance publicly stated that “this is the economic program of Uruguay and not of the Fund”, underscoring the authorities’ firm decision to fulfill the program’s targets and that this was just the beginning of Uruguay’s reform agenda. With the benefit of hindsight it is clear now that this statement was not just rhetoric but reflected a strong commitment and political leadership.

8. The authorities’ policies and their good results further enhanced confidence, which, meanwhile, allowed to streamline the program without putting any of its objectives at risk but rather reinforcing them. In this regard, it is worth recalling the episode related to the use of the proceeds resulting from the sale of Nuevo Banco Comercial. Underlining the indissoluble link between investment and growth, and the critical need to revamp Uruguay’s infrastructure so as to support private investment, the authorities considered it necessary to use part of those revenues to finance a few high-quality investment projects. Thus, in agreement with the Fund, an adjustor to the fiscal targets was introduced into the program as a way of accommodating higher investment coming from Public-Private Partnerships (PPP). Once again, the openness and flexibility of the staff, Management and Directors was important to reinforce and encourage ownership.

Walking Without the Fund’s Support

9. Since the beginning of this successful program the authorities have stressed their intention to establish a well-articulated exit strategy from the Fund’s financial support. This naturally depended on regaining access to external financial markets. Having established a strong IMF-supported program and fulfilled envisaged targets, Uruguay successfully attained access to external markets, in which the efficient and professional work undertaken by the Debt Management Unit -created last year as another of the government’s own conditionalities supported by the Fund- played a key role.

10. In addition to the bond issuance of US$ 400 million (in Indexed Units) in September 2006, Uruguay placed bonds for the equivalent of US$ 800 million (of which US$ 300 million was in Indexed Units) in October. Once this last issuance was concluded, the government offered to swap bonds -most of which were due between 2011 and 2015- giving the option to exchange them for bonds with a longer maturity and liquidity, or cash (for which the above-referred proceeds would be used). As another sign of confidence in Uruguay, the market exhibited an overwhelming preference for the new bonds instead of cash.

11. The latter, as part of a virtuous circle, allowed Uruguay to proceed with the early repayment of its outstanding debt to the Fund. This decision was fully consistent with the authorities’ strategy aimed at reducing debt costs and lengthening debt maturities. The choice of this early repayment decision was made without placing Uruguay’s macroeconomic stability and growth prospects at risk, and, it is worth emphasizing that the decision did not include any ideological aspects.

12. Although much remains to be done, substantial improvements have taken place since the beginning of the program, an accomplishment that the authorities and the Fund can be proud of. Among others, GDP is growing at a robust rate (about 7 percent in 2006); driven by skillful monetary policies, inflation (somewhat below 6 percent) is subdued and within the target-range established by the Central Bank (despite a full pass-through of hikes in oil prices and a severe drought); the primary fiscal surplus is fully in line with the program’s targets; capital inflows (a vast part of which is FDI) and exports (highly and increasingly diversified as result of Uruguay’s efforts to further strengthen its participation into the global economy, a process that will be deepened) have significantly risen; unemployment (although still high, is currently at 10.5 percent) and poverty rates (falling about 5 percentage points) have been reduced substantially; net international reserves exceed previous envisaged targets by wide margins; public debt-to-GDP ratio has drastically fallen (to about 65 percent) and the average maturity of public debt has increased to about 13 years. Moreover, the staff report underlines a number of structural reforms that have been achieved, while delays reflect an ambitious and front-loaded reform agenda that required building up political consensus. The government will pursue all pending reforms as well as others not contemplated in the arrangement with the Fund (we underscore the critical reform that will aim to comprehensively reform Uruguay’s public sector).

13. The new situation and the favorable outlook point eloquently to a promising future. The country is now moving on to a new stage, walking on its own, that is, without the Fund’s financial assistance. The authorities consider that the exit of the “Fund’s supported stage” must be orderly, diligent and responsible, consistent with Uruguay’s behavior and with its sentiment of gratitude for the IMF. Furthermore, the new period does not imply any decrease at all in the excellent level of relations with the Fund as the authorities are eager to continue receiving its technical assistance, and to hold periodical meetings with the staff in order to exchange opinions on the program’s issues.

Looking Forward

14. Beyond the macroeconomic indicators to which we referred, there are others, perhaps less noticeable but certainly not less relevant, that underpin our positive outlook. It is worth noting that the Economist Intelligence Unit placed Uruguay in a rather small group of countries that could be deemed to enjoy a full democracy, whereas the last report of Transparency International shows that the country is making ongoing improvements both in absolute and relative terms. Those countries that experienced a deep crisis will surely appreciate how difficult it is to preserve democratic checks and balances while dealing with social unrest and economic turmoil. Moreover, Uruguay has a competent workforce and the government continues to encourage developments in science and technology.¹ Finally, in cases as this, where the government has demonstrated a strong ownership of the program, the graduation from the Fund’s financial assistance means that a country is fully prepared to keep prudent macroeconomic policies and continue progressing with the structural reforms in order to continue paving the way for a higher and sustainable economic, human, and social development.