Canadian Rating Agency Welcomes Uruguay’s Fiscal Consolidation, Shifts BBB Trend From Stable To Positive
Canadian credit rating agency DBRS Morningstar has confirmed Uruguay’s long-term foreign and local currency issuer ratings to BBB- and, at the same time, changed its outlook from stable to positive.
The positive trend reflects DBRS Morningstar’s view that Uruguay’s fiscal outlook has improved thanks to fiscal consolidation efforts and institutional improvements to the fiscal framework. While spending rigidities remain a medium-term credit challenge, the tight spending control by President Lacalle Pou’s administration and the phasing out of pandemic-related programs next year should help put public finances in line. a more sustainable position.
Part of the upward pressure on ratings also comes from the cumulative effects of the gradual diversification of Uruguay’s economy and the reduction in the country’s exposure to external shocks. Uruguay’s economy rebounded from the pandemic in the first half of 2021, but the recovery has been patchy. While a large wave of COVID-19 cases from March to June delayed the recovery in private consumption, investment and exports grew rapidly.
Fixed capital formation increased by 21% in real terms in the first six months of the year compared to the previous year. The investment boom was driven by the construction of a new large pulp mill in central Uruguay and an associated railway project. Exports of goods also increased significantly, driven by a recovery in global demand and rising prices for agricultural commodities.
While consumption has underperformed, the outlook is brighter for the second half of 2021 and 2022. New cases of COVID-19 are now at low levels and 75% of the population is fully vaccinated. Uruguay reopened its borders in November to vaccinate non-residents, which should support the tourism sector. In addition, high-frequency unemployment insurance data points to a recent strengthening in the labor market.
Overall, the outlook for growth looks better than before the pandemic. The IMF projects GDP growth of 3.2% in 2022 and 2.7% in 2023. Confirmation of Uruguay’s BBB rating (low) balances its strong political and macroeconomic fundamentals with its medium-term fiscal pressures , modest productivity growth, a partially dollarized financial system, and limited financial depth.
The policy environment is characterized by high quality public institutions, low levels of corruption and predictable macroeconomic policies, all of which are an important source of credit strength.
However, the risks associated with volatility in the region are high, but abundant foreign exchange reserves, prudent management of public debt, diversified export markets and sound regulation of the banking system strengthen the economy’s defenses against it. potential shocks.
The government has made progress in its multi-year fiscal consolidation plan. The central government deficit (excluding pension transfers in “cincuentones”) is expected to fall from 5.8% of GDP in 2020 to 4.9% this year, even as the government has continued to provide emergency support to households and businesses affected by the pandemic. As emergency spending expires and the cyclical recovery progresses, the deficit is expected to decline further to 3.1% in 2022, nearly a percentage point better than before the pandemic in 2019