IMF says Uruguay growth to remain tepid in 2016
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.