Abstract
Uruguay has consolidated economic gains, supported by strong macroeconomic policies and a broadly favorable external environment. Growth has exceeded expectations, unemployment has reached record lows, and poverty has continued to fall, while economic vulnerabilities have been significantly reduced. Despite strong credit growth, financial system soundness indicators have improved, showing a well-capitalized banking system, low nonperforming loan ratios and high liquidity levels. Executive Directors have welcomed the measures the authorities have taken to reduce inflationary pressures, including increases in the policy rate and banks’ reserve requirements and tax administrative measures.
October 22, 2008
1. This statement reports on developments in Uruguay since the Staff Report was issued on October 9. Although downside side risks have increased, the thrust of the staff appraisal remains unchanged.
2. The intensification of international financial market turbulence has been felt in Uruguay. Bond prices have fallen, pressures on the peso have persisted, and country risk has shot up to around 550 basis points. Still, despite limited intervention, since October 1 the currency has depreciated by 3.4 percent and gross reserves have declined modestly from US$6.40 billion to US$6.20 billion. Bank deposits have remained stable.
3. Pressures on the peso lessened after the central bank tightened banks’ liquidity in early October. It raised its target rate by 50 basis points to 7.75 percent and the interest rate on its Lombard facility from 10 to 20 percent; and, closed the one-day financing facility. As a result, and with banks seeking to purchase dollars, interbank rates have shot up, temporarily reaching around 30 percent.
4. Median survey inflation expectations for end-2008 have risen to 8.5 percent, compared to 8 percent in September. For end-2009, inflation expectations remained broadly stable at about 7 percent.
5. Economic activity is slowing. Non-refinery manufacturing output rose 5.3 percent in August, compared to 13.1 percent in July (year-on-year).
6. The Portuguese company Portucel confirmed plans for a new large-scale investment project in Uruguay. The company intends to build a pulp and paper mill in the eastern part of the country, as well as a sea port; total investment is estimated at more than US$4 billion.
7. The central bank reform was approved by the Senate. Approval by the Lower House is expected to occur before end-October. The draft law also reforms financial supervision and the banking resolution framework.