Population 3.381 million
GDP 49.716 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
| GDP growth (%) |
8.9 |
5.7 |
3.8 |
4 |
| Inflation (yearly average) (%) |
6.7 |
8.1 |
8.2 |
8.6 |
| Budget balance (% GDP) |
-1.1 |
-0.9 |
-2.5 |
-1.8 |
| Current account balance (% GDP) |
-2.2 |
-3.1 |
-2.8 |
-2.2 |
| Public debt (% GDP) |
58 |
57.8 |
52.3 |
52.1 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Abundant resources in agriculture, forestry and cattle rearing
- Active reform policy (improvement in the business environment, consolidation of public finances under way)
- Founding member of Mercosur, privileged trading relations with the EU and the United States
- Social policy contributing to poverty reduction
WEAKNESSES
- Small-size economy vulnerable to external shocks
- Public debt being reduced but still high
- Banking system vulnerable because of high dollarisation (50% of loans, 70% of deposits)
Risk assessment
Sustained growth but persistent inflationary pressures
Economic growth is expected to increase slightly in 2013. Activity will be driven by an influx of foreign investments in the infrastructure sector in the framework of public-private partnerships. Private consumption will still be an essential engine of growth, sustained by a historically low level of unemployment and a rise in real wages (wages index-linked to food prices). However, the moderation of external demand is expected to dampen the dynamism of the economy.
Inflation is expected to increase in 2013 due to higher public spending and sustained domestic demand. The continuous rise in inflation affects not only the credibility of the Central Bank, which has failed to keep inflation near its target (4-6%), but also the country’s competitiveness because it generates a clear and real appreciation of the peso.
To combat inflation, the Central Bank raised its key rate to 9% (against 8.75% in December 2011). But in view of inflation above 8%, this policy is actually accommodating. Face with the influx of foreign investments, which has led to upward pressure on the peso, it had to react by introducing capital controls (obligation on the part of foreign investors set up peso reserves with the Central Bank equal to 40% of the value of their investment). Despite these controls new upward pressures on the national currency are expected in 2013.
Twin deficits contained and re-rating of the country as “investment grade”
The current account balance will remain in deficit in 2013, reflecting the trade imbalance. The trade deficit will continue to widen, due to increased imports of goods used in investment projects. The growth of exports (meat, cereals, wool and leather, dairy products) will be restricted by weak demand in advanced countries, falling price-competitiveness (resulting from the peso’s appreciation) and the protectionist measures of the country’s main trading partners (Argentina, Brazil). The current account deficit will, however, remain manageable and will be largely covered by foreign direct investments. This influx of foreign direct investments will, moreover, boost the Central Bank’s foreign exchange reserves (9 months of imports).
2012 was marked by the reduction in the national debt. Public debt (45% of which is external) will remain stable as a percentage of GDP in 2013. Meanwhile, the public deficit is expected to contract, benefitting from a slight increase in revenues resulting from income tax changes. Spending growth is expected to be contained, with spending directed more to priority programmes (education, housing, security, health and infrastructures).
According to the IMF, the authorities’ management of the public debt sets an example to other countries. The rating agencies subscribe to this positive analysis and in 2012, the country regained its “investment grade” status (BBB-) from two rating agencies.
Persistent tensions in the governing coalition
José Mujica’s government is expected to continue a policy focused on macro-economic stability, improving the business environment and promoting investment. Social issues will, however, remain central, under pressure from the left wing of the governing coalition, the Frente Amplio (FA). Tensions between the coalition’s different factions will remain one of the main challenges of Jose Mujica’s term. However, despite the internal tensions and the fall in the President’s popularity, the FA remains well placed regarding the impending electoral deadlines (legislative and presidential elections planned in 2014). Previous president Vasquèz, also from the FA, and who is likely to stand again, enjoys great popularity. Finally, at regional level, Uruguay’s relations with its Mercosur partners seem increasingly tense. The non-tariff barriers imposed by its main trading partners (Argentina, Brazil) are creating difficulties for Uruguayan exports while the exchange controls imposed by Argentina are adversely impacting Uruguayan tourism revenues.
