IMF says Uruguay growth to re­main tepid in 2016

The Pak Banker - - COMPANIES/BOSS -

The Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund (IMF) to­day con­cluded the Ar­ti­cle IV con­sul­ta­tion with Uruguay. Uruguay has achieved more than a decade of high and in­clu­sive eco­nomic growth, sup­ported by so­cial sta­bil­ity and re­duced re­gional link­ages. In­ter­na­tional fi­nan­cial mar­kets have rec­og­nized Uruguay's sta­bil­ity and strong fi­nan­cial buf­fers.

Yet, eco­nomic ac­tiv­ity in Uruguay markedly slowed in 2015, trig­gered by a re­gional down­turn and weak­en­ing prices of its ex­port com­modi­ties. Real GDP growth is es­ti­mated to have fallen to 1.5 per­cent in 2015, as in­vest­ment and con­sump­tion growth have de­clined from re­cent highs.

Mean­while, in­fla­tion re­mains en­trenched above the cen­tral bank's 3-7 per­cent tar­get range. De­fy­ing the clos­ing out­put gap, a rel­a­tively tight mon­e­tary stance over the past two years, and low in­ter­na­tional food and en­ergy prices, head­line in­fla­tion has edged up to more than 9 per­cent since July. De­pre­ci­a­tion pres­sures in­ten­si­fied dur­ing 2015, broadly in line with the re­gional and global trend among emerg­ing mar­kets.

Do­mes­tic de­posit dol­lar­iza­tion picked up, al­though more than half of the in­crease was driven by val­u­a­tion ef­fects rather than a port­fo­lio shift.

Gross in­ter­na­tional re­serves have dropped by US$2.6 bil­lion since June, as the cen­tral bank has ex­ten­sively in­ter­vened in the for­eign ex­change mar­ket to con­tain the de­pre­ci­a­tion of the peso. The medi­umterm bud­get for the new govern­ment's 5year term fore­sees an im­prove­ment of the pri­mary fis­cal bal­ance by 1.5 per­cent of GDP over 2015-2019. The 2015 pri­mary bal­ance is es­ti­mated at close to zero, in line with the bud­get, as lower tax rev­enues were off­set by a sharper re­duc­tion in pub­lic in­vest­ment.

The over­all fis­cal deficit in 2015 is es­ti­mated at 3.6 per­cent of GDP, 0.3 higher than in the bud­get, be­cause of higher in­ter­est pay­ments. GDP growth is pro­jected to re­main tepid in 2016 as ex­ter­nal con­di­tions re­main weak and con­sumer con­fi­dence has dropped.

The fur­ther slow­down in fis­cal spend­ing and con­sump­tion is likely to tem­per do­mes­tic de­mand. In the medium term, growth is ex­pected to rise back to a po­ten­tial rate of 3.1 per­cent.

Risks to the out­look are mostly ex­ter­nal. Al­though Uruguay's re­gional eco­nomic link­ages have less­ened, a worse-thanex­pected slow­down in Ar­gentina and Brazil could sig­nif­i­cantly weigh on Uruguay's econ­omy. A global slow­down would af­fect Uruguay's com­mod­ity ex­ports, and in­creased volatil­ity in oil prices would im­pact on im­port costs. A tight­en­ing in global fi­nan­cial con­di­tions could raise fi­nanc­ing costs.

Near-term fi­nan­cial risks seem lim­ited. There is no ev­i­dence of a credit bub­ble or ex­ces­sive pri­vate sec­tor lev­er­age. The 2015 uptick in non-per­form­ing loans, from low lev­els, does not, at this stage, seem a cause for sig­nif­i­cant con­cern. Uruguay's strong liq­uid­ity buf­fers should fa­cil­i­tate an or­derly ad­just­ment to shocks.

Ex­ec­u­tive Di­rec­tors com­mended the Uruguayan au­thor­i­ties for their sound macroe­co­nomic poli­cies, in­sti­tu­tions, and re­forms, which have sup­ported strong and in­clu­sive growth over the last decade and have helped achieve one of the low­est poverty and in­come in­equal­ity rates in Latin Amer­ica.

While the econ­omy's strong fun­da­men­tals po­si­tion the coun­try well to weather the re­cent slow­down, Di­rec­tors en­cour­aged the au­thor­i­ties to con­tinue im­ple­ment­ing pru­dent macroe­co­nomic poli­cies and struc­tural re­forms to fur­ther strengthen the econ­omy's re­silience, lower per­sis­tently high in­fla­tion, and boost po­ten­tial growth.

Di­rec­tors em­pha­sized that con­tin­ued ex­change rate flex­i­bil­ity is es­sen­tial to ab­sorb ex­ter­nal shocks. They wel­comed the au­thor­i­ties' in­ten­tion to limit for­eign ex­change in­ter­ven­tions to smooth ex­ces­sive volatil­ity, which should also help avoid pre­ma­ture ero­sion of the coun­try's re­serve buf­fers.

Di­rec­tors stressed the im­por­tance of con­tin­ued ef­forts to put in­fla­tion on a down­ward path. They sup­ported the au­thor­i­ties' tight mon­e­tary pol­icy, and noted that a pru­dent fis­cal stance should help the mon­e­tary pol­icy ef­fort.

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