Statement by Mr. David Vogel Alternate Executive Director for Uruguay November 9, 2009

This 2009 Article IV Consultation highlights that the Uruguayan economy has held up considerably well in the face of the global recession. The impact of the crisis appears to have been relatively short lived. Private consumption and investment decelerated while the unemployment rate rose only little and temporarily. The policy response to the crisis has sought to balance different risks. Executive Directors have welcomed the achievement of single-digit inflation over the last several years, while noting that inflation remains relatively high.


This 2009 Article IV Consultation highlights that the Uruguayan economy has held up considerably well in the face of the global recession. The impact of the crisis appears to have been relatively short lived. Private consumption and investment decelerated while the unemployment rate rose only little and temporarily. The policy response to the crisis has sought to balance different risks. Executive Directors have welcomed the achievement of single-digit inflation over the last several years, while noting that inflation remains relatively high.

From Uruguay’s Worst Crisis …

1. Seven years ago, Uruguay suffered the deepest economic, financial, and social crisis in its history. In about six months, the country’s financial system lost almost half of its deposits; after the abandonment of the crawling band, the exchange rate followed an overshooting process and depreciated more than 80 percent (at the end of 2002 relative to the end of 2001); unemployment rates steadily climbed to almost 20 percent; the gross public sector debt-to-GDP ratio increased to above 100 percent and the rollover of the public debt highlighted a critical issue which was exacerbated when some analysts confused liquidity with solvency aspects, and temporary with permanent effects. The crisis drove a large number of the population to poverty, while many others decided to emigrate.

… to a Promising Future

2. The current situation is completely different. After exhibiting an average economic growth of approximately 7 percent over the last five years, Uruguay’s GDP will end this year with a positive variation, as economic activity has already increased in the second quarter of 2009; unemployment rate is just above 7 percent; the country is continuing to attract a significant amount of direct investment; inflation is fully under control; the financial sector is showing a remarkable, sound performance; public debt indicators have improved substantially; and poverty rates have significantly declined together with migration flows.

What Happened in the Meantime?

3. During bad times, and when daunting challenges had to be faced, Uruguay relied on its solid traditions and democratic institutions. The country ratified its strong tradition of honoring its debts and commitments in general; and, once again, Uruguay’s political system demonstrated a noteworthy responsibility to deal with sensitive issues. Following the rule of law, Uruguay was able to overcome the crisis and contain social tensions.

4. Uruguay enjoys a high level of political stability which is critical. For instance, with regard to some last episodes, it is worth highlighting that in October 2009 the President invited three former Presidents from two opposition parties to inaugurate a significant investment from a foreign company aimed to further increase Montevideo’s seaport infrastructure, allowing the country to enhance its position as a key hub in the region. Something similar occurred in early October when the President invited his predecessor—from an opposition party—to the inauguration of a new airport under whose government this private investment was decided to be implemented. Beyond the critical importance of the above-referred investments, these facts once again reveal Uruguay’s political stability. Meanwhile, recent national elections were held in a sound democratic environment, as usual.

5. Alleviating the conditions of the most vulnerable sectors of society has been a high priority. Needless to say, an economic and financial crisis such as Uruguay endured mostly affects these sectors, and improving their conditions largely exceeded the recovery of economic growth. Beyond the role of the automatic stabilizers in this regard, the situation required decisive plans (particularly the Plan de Emergencia Social) which were implemented in a transparent manner, having been of vital importance to meet imperious social needs. It is important to note that, as envisaged, the Plan de Emergencia Social was temporary, and after its completion new social plans have been implemented, which are more focused on removing the roots of poverty, and giving the most vulnerable people the necessary instruments and conditions to reemerge economically and socially. In 2008, poverty rates continued decreasing from 26 percent in 2007 to 20.5 percent, while extreme poverty (indigence) declined from 2 percent to 1.5 percent.

6. Policies have aimed at attaining economic and social sustainability. Meeting these objectives together is not only possible but essential to enter a virtuous cycle. Therefore, with a pragmatic approach, the government implemented fiscal policies fully consistent with the objective of ensuring fiscal sustainability, while implementing the above-referred social plans. Fiscal policies have been gradually set up, considering the imperious need to attain fiscal consolidation and give strict priority to social policies, for which there has been a critical reorganization of expenditures.

7. Public debt indicators have shown tremendous progress. Gross public sector debt-to-GDP ratio is currently below 60 percent (and net public debt-to-GDP-ratio has exhibited a dramatic decline, considering also the increase of international reserves). Furthermore, and beyond this specific case, when comparing debt dynamics across countries, it is necessary—among other things that could allow us to compare more consistently among indicators—to take into account the burden of future pensions on public debt indicators. In this regard, Uruguay’s debt indicators fully include the effects of a major pension system reform implemented more than a decade ago. Indeed, nearly US$ 4 billion (about 13 percent of GDP) of public debt are held by the Pension Fund Administrators (AFAPs).

8. The skillful and professional work of the Debt Management Unit (created in 2005) has also allowed the country to strengthen its fiscal position while creating more space for social expenditures. Thus, Uruguay has been able to lengthen public debt maturities (from 7.4 years in 2004 to 12.8 years in 2009), take firm steps in its de-dollarization (89 percent of the debt was denominated in foreign currency five years ago while 71 percent is currently), and reduce its interest costs. The country’s financing needs are well covered for the coming years, with most of the debt being at fixed rates; and Uruguay has been able to obtain some contingent lines, all of which have driven the country to substantially minimize vulnerabilities and risks in this regard.

9. Monetary policies have aimed at keeping inflation in check, which is essential not only to further improve the investment environment, but also as a critical way to protect the most vulnerable sectors of society. During a period where the rise in international commodities prices exerted significant pressures on domestic prices, the Central Bank implemented the needed measures to address the situation. When many countries, including Uruguay, exhibited a temporary deviation of inflation rates from their targets, the authorities were especially eager to prevent inflation rising above 10 percent, which would have fed inflationary pressures through second-round effects due to the introduction of indexation mechanisms, making it even more difficult to reach the target range (from 3 percent to 7 percent). Therefore, the government, demonstrating again its commitment to maintaining low and stable inflation rates, and incurring a fiscal cost, collaborated, under exceptional circumstances, with the monetary policy to avoid the possibility of the above-referred second-round effects. Currently, twelve-month inflation (6.5 percent in October) and inflationary expectations (6.15 percent in October 2009-September 2010) are well within the Central Bank’s target range.

10. Maintaining a flexible exchange rate system and without pushing against the wind, the Central Bank has simply intervened in the exchange rate market to smooth volatility. Interventions have led to an increase in international reserves, allowing Uruguay to build up a considerable financial buffer in this regard. The authorities fully agree with the staffs conclusion that “there is no evidence of competitiveness problems and a potential misalignment of the real exchange rate”.

11. Labor market developments provide another sample of the efforts towards reinforcing economic and social stability. After a substantial decrease in real wages during the crisis (about 20 percent in 2002 and 4 percent in 2003), a considerable rise has been observed in recent years, which should be seen in the context of a recovery from the deep decline. This process was also accompanied by a significant increase in productivity. Unemployment figures (showing historic low levels) along with those associated with economic activity, inflation and investment clearly demonstrate that income policies and labor reforms have been meticulously carried out, considering the need to be consistent with the authorities’ broad concept of stability.

12. Regulation and supervision of the financial system has been substantially strengthened. The Financial Sector Assessment Program (FSAP) undertaken by the IMF and World Bank staff has provided an important input in this regard, and its suggestions were carefully considered by the authorities when the reforms were analyzed and implemented. Among other things, it is interesting to note a recent IMF Working Paper on Uruguay1, which concludes "the gradual but persistent reforms have brought financial regulation and supervision generally up to international best practices, while also embracing innovative elements such as dynamic provisions and explicit liquidity requirements". Furthermore, after having successfully faced arduous challenges, public banks (BROU and BHU) are exhibiting noticeable transformations, where functioning and incentives have changed dramatically.

13. Market and product diversification allows Uruguay to be substantially less dependent on regional events. We also note a substantial decrease in non-resident deposits, which, of course, further weaken regional economic and financial linkages. Chapter III of the Selected Issues is very eloquent in showing Uruguay’s current situation and outlook as less exposed from occurrences in the surrounding region. Of course, regional developments do not pass inadvertently in Uruguay, but diversification and structural changes have significantly minimized risks of contagion.

14. Support from the international community has been key, although it does not necessarily ensure success, as it critically depends on the authoritiesownership. We recall once again that just after the Stand-By Arrangement was approved in June 2005, Uruguay’s Minister of Finance at the time publicly underlined “this is the economic program of Uruguay and not of the Fund” establishing a powerful proof of political leadership. In the Buff statement issued on June 6, 2005, the authorities’ strong commitment to make Uruguay “a successful case for the benefit of the Uruguayan people and also for the Fund” and “their firm willingness to establish a well articulated exit strategy from the Fund’s financial support” was underscored.

15. Effectively, the exit strategy was well-articulated, and after Uruguay repaid its outstanding debt to the Fund—based on economic and financial arguments—the authoritiesownership of the program was demonstrated once again. They have continued to be extremely successful in approving the envisaged reforms established in Uruguay’s agenda. Among many others, these reforms included those on the tax system and revenue administration, autonomy to the Central Bank, the approval of the bankruptcy law, and the above reforms on the financial system and BHU.

16. Until 2008, Uruguay and the rest of the world enjoyed a favorable external environment; as noted in other occasions, positive cycles can be capitalized to establish pillars for higher and sustainable growth or may sometimes lead to dilapidation. Clearly, Uruguay chose the first option. At the same time, it is important to underscore that the favorable external environment was less benign in Uruguay than in many other countries, to the extent that Uruguay is an oil importer (as noted by the staff "the concurrent oil price shock has led to a deterioration in Uruguay’s terms of trade) and, combined with years of severe drought (oil products were necessary to substitute the lack of hydroelectric power), substantial fiscal costs were incurred. Admittedly, the international situation until 2008 generated an abundance of liquidity, and Uruguay, based on its sound policies, reforms and traditions, has been able to benefit from the situation to successfully attract direct investment, although it seems to be well beyond the international environment, to the extent that it has continued to benefit even after the crisis erupted.

Facing the International Crisis

17. A year ago, during the last Article IV Consultation on Uruguay, precisely when the international crisis started to demonstrate its powerful virulence, the Uruguayan authorities’ confidence in the country’s position to face the crisis was emphasized. Evidently, the authorities’ confidence was well based. Of course, as a small and open economy, Uruguay has been affected by the crisis, exhibiting a slowdown from the high growth rates of past years. However, the effects have been very moderate and the country only showed a decline in GDP in the first quarter of 2009, having continued to grow thereafter. It is worth underlining that the above-referred growth performance during the crisis has been attained in the context of extremely moderate countercyclical fiscal policies, which allows Uruguay to present a sound fiscal outlook, to the extent that its solid basis are maintained, and the situation was temporarily affected especially by the drought. Meanwhile, revenues (relative to GDP, which has continue rising) will increase in 2009 in comparison with 2008. In this regard, it is important to give an appropriate interpretation of the situation and outlook without confusing temporary with permanent factors. Moreover, financial indicators show a remarkable resilience. Therefore, Uruguay’s economic outlook is seen as promissory, which have driven to the continuation of a positive process in terms of investment -especially FDI which, meanwhile, entails positive effects on the labor market (it exhibits records in terms of employment and unemployment) all of which more than offsets the negative effects of the international crisis.

Looking at the World and the Future

18. The authorities are fully aware of the need to continue implementing structural reforms and basically share many of the staffs views in this regard. Clearly, further progress in the energy and public sectors is warranted to continue enhancing Uruguay’s business environment and boost potential growth; as usual in every country, macroeconomic policies need to be refined consistently with new circumstances and future challenges (for example, to the extent possible, the authorities are eager to continue progressing towards a more formal framework of countercyclical fiscal policies); and, of course, although many important advances have been made so far, much remains to be done with respect to social issues.

19. At the same time, the authorities are very satisfied with the efforts made and outputs obtained so far. Policies and reforms have been guided by their firm conviction of the need to increase opportunities for all, encouraging not only access to knowledge but also generating it by boosting research, while further inserting the country into the global economy. Although there have been many structural reforms in recent years in different areas—for instance, the substantial transformation of the provision of public health services—perhaps the most emblematic has been the Plan Ceibal, whereby one laptop with Internet connection has been provided to every child in public schools. This may be the reform which best reflects the authorities’ objectives to achieve higher and sustainable growth, enhance the level and quality of employment, improve social conditions, and increase social equity.


“Modernizing Bank Regulation in Support of Financial Deepening: The Case of Uruguay”, IMF Working Paper 09/199.

Uruguay: 2009 Article IV Consultation: Staff Report; Staff Statement and Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Uruguay
Author: International Monetary Fund