IMF Executive Board Concludes Article IV Consultation for Uruguay
February 20, 2020
On February 19, 2020, the Executive Board of the International monetary Fund (IMF) concluded the Article IV consultation [1] with Uruguay.
Recent Developments and Outlook
Uruguay is in an enviable position in many respects. The country enjoys political stability, strong governance and institutions, and a high degree of social cohesion. Following a decade and a half of robust growth, it also boasts high per capita income and low levels of poverty, inequality, and informality. Owing to prudent supervision and regulation, the financial sector remains resilient despite regional financial market volatility.
After a growth slowdown during 2018H2–2019H1, economic activity picked up in 2019Q3, with some recovery in consumption, exports, and private investment. The average growth in the first three quarters of 2019 was 0.2 percent. The current account balance has fluctuated around zero, with the positive trade balance offset by a negative income account. Inflation increased to 8.8 percent in December, outside of the target range, despite a negative output gap, due to both temporary factors and above-target expectations.
Spillovers from Argentina have been limited to the real sector and exchange rate channels. The financial sector—which had markedly reduced its exposure to Argentina—remains robust, and the sovereign spreads remain contained at low levels.
Fiscal balances deteriorated substantially. As the economy slowed, revenues declined, and current expenditures continued to increase. The budget for 2020—the last to be prepared by the current government—gives up on the achievement of the 2.5-percent-of-GDP deficit target and instead foresees a fiscal deficit for the consolidated public sector (CPS) of 4.6 percent of GDP in 2019 (excluding the cincuentones transactions [2] ) and 3.8 percent of GDP in 2020. As of November, the twelve-month CPS deficit stood at 4.7 percent of GDP, aided by the impact of a favorable debt management operation in September (0.3 percent of GDP) and by lower interest payments from the central bank. The authorities have successfully issued longer-term bonds at favorable rates to cover their financing needs.
GDP growth is expected to rebound from an estimated 0.5 percent in 2019 to 2.1 percent in 2020 and 2.5 percent in 2021, as private and infrastructure investment projects ramp up, offsetting adverse spillovers from Argentina. Growth is expected to decline after 2021 as these investments run their course—but the level of real GDP is expected to be permanently higher. Inflation is expected to remain at around 8 percent in 2020 and then to decline gradually to the upper limit of the target range as temporary factors wear off and private-sector wage increases follow the declining path agreed in the last round of negotiations.
There are sizable upside and downside risks to the outlook. On the downside, economic developments in Argentina remain an outsized risk, even though the likelihood of direct financial spillovers is small. A host of global factors (trade disruptions, lower growth, abrupt declines in risk appetite, large swings in energy prices) and of local ones (loss of credibility and further increases in debt due to insufficient fiscal adjustment or delayed reforms and PPP projects) may undermine the expected recovery and limit medium-term growth. On the upside, the growth boost from investment projects may be larger than expected, given uncertainty about possible indirect effects.
Executive Board Assessment [3]
Directors commended Uruguay’s favorable political economy, strong governance and institutions, a high degree of social cohesion, low levels of poverty, inequality, and informality, and the resilience of the financial sector. At the same time, they noted that domestic imbalances have emerged and debt has risen, while economic growth, investment, and employment have declined, and inflation has remained outside the target range. In this context, they stressed that the political and domestic economic landscape over the next few years presents an opportunity to decisively address these challenges.
Directors noted that, while gross financing needs are manageable due to the authorities’ pre-financing policy and robust buffers, a continuation of current fiscal trends could undermine debt sustainability. They agreed that there is a need to introduce a credible adjustment plan to put debt on a firm downward path and welcomed the authorities’ commitment in this regard. This would require limiting the increase in current expenditure and reducing tax expenditure, while maintaining adequate provision of key public services and safety nets and preserving capital spending. Pension reforms would also be needed to ensure sustainability and adequate retirement income for future generations. Directors noted that a credible fiscal anchor could be introduced by revamping the medium-term fiscal framework with a binding fiscal rule.
Directors agreed that in the absence of negative shocks, monetary policy should continue to be focused on getting inflation and inflation expectations firmly at the mid-point of the target range. They highlighted the need for further enhancements to the inflation targeting framework and welcomed continued efforts to reduce dollarization and indexation. Improving financial intermediation will also be important. Directors noted that the exchange rate should continue to be used as a shock absorber and that reserve buffers should be kept above prudential norms.
Directors emphasized the importance of structural reforms to raise potential growth and maintain social progress. Closing infrastructure gaps is critical but needs to be complemented by actions to increase productivity growth to raise private investment. They underscored the need to improve education outcomes to help boost youth employment. Further wage flexibility could provide incentives for firms to create more, stable jobs and invest in on-the-job training to reduce the high unemployment. Continued efforts to integrate migrants and women into the labor market will also be important. Directors stressed that corporate governance reform is needed to improve the management and efficiency of state-owned enterprises.
Uruguay: Selected Economic Indicators
|
Projections |
|||||||||||
|
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Output, prices, and employment |
|||||||||||
|
Real GDP (percent change) |
3.2 |
0.4 |
1.7 |
2.6 |
1.6 |
0.5 |
2.1 |
2.5 |
2.2 |
2.2 |
2.2 |
|
GDP (US$ billions) |
57.2 |
53.3 |
52.7 |
59.5 |
59.8 |
57.4 |
58.4 |
61.5 |
64.2 |
67.0 |
69.8 |
|
Unemployment (in percent, eop) |
6.6 |
7.5 |
7.9 |
7.9 |
8.4 |
9.2 |
8.4 |
7.7 |
7.5 |
7.5 |
7.5 |
|
Output gap (percent of potential output) |
2.7 |
0.3 |
-0.3 |
0.1 |
0.0 |
-1.1 |
-0.6 |
-0.1 |
0.0 |
0.0 |
0.0 |
|
CPI inflation (in percent, end of period)) |
8.3 |
9.4 |
8.1 |
6.6 |
8.0 |
8.8 |
8.0 |
7.5 |
7.0 |
7.0 |
7.0 |
|
Exchange rate (UY$/US$, average) |
23.2 |
27.3 |
30.2 |
28.7 |
30.6 |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate (percent change, eop) |
-3.1 |
0.6 |
-5.7 |
5.8 |
2.1 |
… |
… |
… |
… |
… |
… |
|
(Percent change, unless otherwise specified) |
|||||||||||
|
Monetary and banking indicators 1/ |
|||||||||||
|
Base money |
1.4 |
7.2 |
9.7 |
3.6 |
10.4 |
... |
... |
... |
… |
... |
... |
|
Broader M1 (M1 plus savings deposits) |
3.7 |
5.6 |
8.4 |
15.2 |
8.8 |
... |
... |
... |
… |
... |
... |
|
M2 |
6.4 |
9.0 |
14.4 |
13.4 |
10.4 |
... |
... |
... |
… |
... |
... |
|
Growth of credit to households (in real pesos) |
4.7 |
6.3 |
-0.5 |
2.5 |
1.2 |
... |
... |
... |
… |
... |
... |
|
Growth of credit to firms (in US$) |
6.8 |
2.8 |
1.5 |
-4.2 |
2.4 |
... |
... |
... |
… |
... |
... |
|
Bank assets (in percent of GDP) |
64.4 |
75.8 |
68.7 |
64.6 |
66.3 |
... |
... |
... |
… |
... |
... |
|
Private credit (in percent of GDP) 2/ |
27.1 |
30.2 |
28.1 |
26.1 |
27.4 |
... |
... |
... |
... |
... |
... |
|
(Percent of GDP, unless otherwise specified) |
|||||||||||
|
Fiscal sector indicators 3/ |
|||||||||||
|
Revenue NFPS |
29.1 |
29.0 |
29.3 |
29.7 |
31.3 |
30.8 |
30.6 |
30.4 |
30.5 |
30.5 |
30.6 |
|
excluding cincuentones transactions |
29.1 |
29.0 |
29.3 |
29.7 |
30.0 |
29.6 |
29.7 |
30.0 |
30.3 |
30.5 |
30.6 |
|
Cincuentones transactions |
0.0 |
0.0 |
0.0 |
0.0 |
1.3 |
1.2 |
0.9 |
0.4 |
0.2 |
0.0 |
0.0 |
|
Primary expenditure NFPS |
29.5 |
28.8 |
29.9 |
29.8 |
30.6 |
31.1 |
31.0 |
30.7 |
30.9 |
31.0 |
31.0 |
|
Primary balance NFPS |
-0.5 |
0.1 |
-0.5 |
-0.1 |
0.60 |
-0.6 |
-0.5 |
-0.3 |
-0.4 |
-0.5 |
-0.4 |
|
excluding cincuentones transactions |
-0.5 |
0.1 |
-0.5 |
-0.1 |
-0.7 |
-1.8 |
-1.4 |
-0.7 |
-0.6 |
-0.5 |
-0.4 |
|
Primary balance BCU |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
-0.1 |
|
Interest NFPS |
2.3 |
2.3 |
2.6 |
2.6 |
2.6 |
2.4 |
2.7 |
2.8 |
2.8 |
2.8 |
2.8 |
|
Interest BCU |
0.6 |
1.3 |
0.7 |
0.7 |
0.8 |
0.5 |
0.5 |
0.2 |
0.2 |
0.3 |
0.3 |
|
Overall balance NFPS |
-2.8 |
-2.2 |
-3.1 |
-2.7 |
-2.0 |
-3.0 |
-3.2 |
-3.0 |
-3.2 |
-3.3 |
-3.2 |
|
excluding cincuentones transactions |
-2.8 |
-2.2 |
-3.1 |
-2.7 |
-3.3 |
-4.2 |
-4.1 |
-3.4 |
-3.4 |
-3.3 |
-3.2 |
|
Overall balance PS 4/ |
-3.5 |
-3.6 |
-3.8 |
-3.5 |
-2.9 |
-3.5 |
-3.8 |
-3.3 |
-3.5 |
-3.7 |
-3.6 |
|
excluding cincuentones transactions |
-3.5 |
-3.6 |
-3.8 |
-3.5 |
-4.2 |
-4.7 |
-4.7 |
-3.7 |
-3.7 |
-3.7 |
-3.6 |
|
Gross debt NFPS |
55.5 |
62.9 |
61.4 |
60.7 |
63.2 |
66.8 |
66.7 |
66.8 |
67.5 |
68.5 |
68.9 |
|
Gross debt PS |
61.4 |
64.6 |
61.6 |
65.3 |
67.7 |
71.6 |
73.5 |
74.4 |
75.3 |
76.6 |
77.4 |
|
Net debt NFPS |
45.2 |
49.7 |
49.7 |
49.5 |
52.1 |
55.8 |
55.8 |
56.0 |
56.8 |
57.9 |
58.4 |
|
PS debt net of liquid financial assets 5/ |
30.3 |
31.3 |
35.9 |
36.5 |
38.8 |
42.8 |
43.8 |
43.9 |
44.7 |
45.6 |
46.1 |
|
PS debt net of total financial assets |
23.0 |
25.8 |
29.9 |
32.1 |
33.7 |
31.8 |
33.4 |
33.9 |
34.7 |
35.8 |
36.4 |
|
External indicators |
|||||||||||
|
Merchandise exports, fob (US$ billions) |
13.8 |
11.1 |
10.4 |
11.1 |
11.5 |
12.0 |
12.7 |
13.4 |
14.5 |
16.2 |
17.4 |
|
Merchandise imports, fob (US$ billions) |
11.8 |
9.8 |
8.5 |
8.7 |
9.1 |
9.3 |
11.2 |
12.2 |
13.1 |
13.3 |
14.2 |
|
Terms of trade (percent change) |
3.5 |
3.5 |
3.7 |
0.7 |
-0.5 |
3.6 |
5.2 |
2.5 |
1.9 |
1.6 |
0.8 |
|
Current account balance |
-3.2 |
-0.9 |
-0.1 |
0.7 |
0.1 |
0.2 |
-2.7 |
-3.4 |
-3.4 |
-1.7 |
-1.8 |
|
Foreign direct investment |
-4.4 |
-1.5 |
1.4 |
3.8 |
1.9 |
1.7 |
0.5 |
0.5 |
1.1 |
1.4 |
1.5 |
|
Total external debt + non-resident deposits |
74.9 |
89.5 |
74.4 |
68.1 |
69.3 |
71.9 |
75.6 |
77.1 |
79.6 |
81.6 |
83.8 |
|
Of which: External public debt |
33.7 |
37.1 |
31.6 |
30.4 |
32.6 |
36.1 |
36.8 |
38.3 |
40.8 |
42.9 |
45.1 |
|
External debt service (in percent of exports of g&s) |
65.5 |
90.2 |
87.9 |
68.2 |
62.5 |
56.7 |
58.3 |
60.2 |
59.3 |
57.0 |
55.9 |
|
Gross official reserves (US$ billions) |
17.6 |
15.6 |
13.5 |
15.9 |
15.5 |
14.5 |
15.6 |
16.8 |
17.8 |
18.8 |
19.8 |
|
In months of imports of goods and services |
12.6 |
13.5 |
13.7 |
15.4 |
14.2 |
13.0 |
12.1 |
12.3 |
12.2 |
12.5 |
12.5 |
|
In percent of: |
|||||||||||
|
Short-term external (STE) debt |
188 |
173 |
196 |
242 |
255 |
246 |
251 |
257 |
260 |
263 |
267 |
|
STE debt plus banks' non-resident deposits |
228 |
220 |
210 |
317 |
314 |
261 |
265 |
269 |
269 |
273 |
281 |
|
Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and Fund staff calculations. |
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|
1/ Percent change of end-of-year data on one year ago. |
|||||||||||
|
2/ Includes bank and non-bank credit. |
|||||||||||
|
3/ The non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, local governments, and Non-Financial Public Enterprises. |
|||||||||||
|
4/ Total public sector (PS). Includes the NFPS and Banco Central del Uruguay. |
|||||||||||
|
5/ Gross debt of the public sector minus liquid financial assets of the public sector. Liquid financial assets arecalculated by deducting from total public sector assets the part of central bank reserves held as a counterpart to required reserves on foreign currency deposits. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The proceeds from the large transactions related to the pension reform (cincuentones) are recorded as revenue in line with the Fund’s methodology.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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