Uruguay is posting close to Chinese levels of GDP growth as its economy diversifies. Crucially, the country also has low inflation and prudent fiscal and monetary policies, underpinning future growth.
At the close of this year, Uruguay will have experienced 24 consecutive quarters of economic growth, reaching an average annual rate over five years of 8.1%, unprecedented since the existence of official statistics and well over the average growth in Latin America of 5.4%.
This year, the Uruguayan economy is forecast to grow at 7.5%, within a framework of prudent macroeconomic policies, balanced fiscal accounts, low inflationary levels, and a balance of payments surplus associated with increasing direct foreign investment.
The growth in this five-year period, although general, was led by three sectors that achieved average annual growth rates over 10%. They are manufacturing, which was boosted by both external and internal demand; commerce, restaurants and hotels, boosted as a result of the increase in commercial activities and spending by tourists; and transport and communications, with cellular phones and transportation of goods and passengers as key drivers. Agriculture also grew, posting average annual growth of 6.5%.
This expansion was supported by sustained external demand as well as growth of investment and private consumption.
External demand for Uruguayan products has remained strong since the end of 2003, resulting in real annual export growth of 15% over the past five years, and export prices that have stimulated national production. This is despite the increase in the price of imports, mainly oil, which has caused a deterioration in the terms of trade.
The expansion of internal demand was supported by the spectacular performance of private investment, which increased by 20% a year over the past five years, and a rise in private consumption (8% a year on average) which resulted from an increase in real salaries and a decrease in unemployment, which has reached historical lows.
Prudent macroeconomic policies
The application of sound macroeconomic policies has allowed the consolidation of economic growth as well as a substantial reduction in vulnerabilities. Prudent macroeconomic management, both monetary and fiscal, has enabled economic expansion to be accompanied by low inflation and reduced fiscal deficits. This has increased the economy’s capacity to endure adverse external circumstances.
Fiscal policy has been an essential anchor and public accounts have been balanced, bringing down the fiscal deficit from 3.2% of GDP in 2003 to 0.4% in 2007.
The increase in economic activity and higher efficiency in tax collection have stimulated income growth, while public spending has increased more slowly due to lower interest rates paid on the national debt and government spending increases that have not outstripped GDP growth.
Inflation has been kept under control despite strong inflationary pressures resulting from the rise in the international price of commodities and adverse weather conditions. These pressures have meant economic policies, both fiscal and monetary, had to be tightened to comply with the goals of the Monetary Policy Committee of the Central Bank of Uruguay.
This year, inflationary pressures seem to have lessened due to the reduction in oil prices and the stability of commodities, which had caused the median of expected inflation to be near the upper limit of the Central Bank over the next 12 months.
The balance of payments and external indebtedness
Two of the most important aspects of the Uruguayan economy in recent years are the balance of payments performance and external indebtedness.
The balance of payments has shown a significant surplus as a result of a positive balance in the current account and significant capital inflows from foreign direct investment. As a consequence, by June, the reserves of the Central Bank had increased significantly, reaching $6.1bn, its highest level in recent years and accounting for more than 50% of the public sector gross external debt.
Furthermore, an investment-oriented policy and favourable international context have led to sustained growth in foreign direct investment over the past five years. In 2007 such investments were more than double the level of 2003.
Significant progress has been made in public debt management in ‘de-dollarisation’ (moving from issuance of US dollar to local-currency denominated bonds) and extending tenors. The issuance of debt in local currency IUs (Indexed Units, linked to inflation) has altered the currency composition of the debt profile.
It should be pointed out that less than 30% of the national debt will mature in the next five years because long-term debt was issued to take advantage of the exceptional conditions prevailing until mid-2007. This strategy, and the reduction of the public debt burden on GDP as a result of the cancellation or the repurchase of obligations, among other measures, has significantly reduced refinancing risk. This is clearly a very important element in times of worldwide financial instability.
All this has resulted in improvement to the Uruguayan sovereign debt rating. Standard & Poor’s, which in July published the most recent review of the country, highlighted “Uruguay’s diminishing economic vulnerabilities” and noted that the country “remained solidly committed to sound macroeconomic policies support[ing] the upgrade. Over the past four years, Uruguay has achieved high economic growth levels with only moderate inflation, within a context of balanced fiscal accounts and only minor current account deficits. We expect that the net general government debt will decline to 45% of GDP by the end of 2008 compared with about 89% after the crisis in 2003. In addition, net public-sector external debt will likely reach 60% of current account receipts by the end of 2008 compared with 200% in 2003.”
Fernando Calloia is president of Banco de la República Oriental del Uruguay.
