Economic Analysis
Uruguay

Uruguay

Population 3.5 million
GDP per capita 16,023 US$
A4
Country risk assessment
A3
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 0.4 -5.9 3.2 3.0
Inflation (yearly average, %) 7.9 9.8 7.8 6.1
Budget balance (% GDP) -3.4 -6.1 -5.5 -3.8
Current account balance (% GDP) 1.6 -0.6 -1.0 -1.0
Public debt (% GDP) 60.7 74.3 73.0 72.0

(e): Estimate (f): Forecast

STRENGTHS

  • Abundant agricultural and forestry resources
  • Social homogeneity (universal health coverage, free education) and institutional stability
  • Active reform policy (business environment, public finances, social security coverage)
  • Substantial foreign direct investment
  • Member of Mercosur, preferential trade relations with the EU and the United States

WEAKNESSES

  • Vulnerability to commodity prices (soybeans, beef, dairy products, wood, rice)
  • Dependent on Argentinian, Brazilian (tourism) and Chinese (commodities) economic conditions
  • Inadequate transport infrastructure
  • Reduced competitiveness due to high inflation and market rigidity
  • Public debt (mitigated by a longer maturity and diminishing denomination in dollars)

RISK ASSESSMENT

Activity will recover to the pre-pandemic level in 2022

The economy will return to its pre-COVID-19 level in 2022, albeit growth should marginally lose momentum. Household consumption (63% of GDP) is expected to drive activity, as the unemployment rate continues to fall, notably amid a full rebound in tourism in 2022. The sector is a mainstay of the economy and accounted for 16.4% of GDP and 16.3% of employment in 2019, before the COVID-19 shock. The country has implemented one of the fastest COVID-19 vaccination campaigns in the region, which has contributed to a sharp improvement in the health crisis. On 1 November 2021, Uruguay reopened its borders to fully vaccinated foreigners. However, the lower depreciation of the Uruguayan Peso in comparison with the currencies of neighbouring Brazil and Argentina could somewhat refrain the country´s tourism impulse. Meanwhile, exports expansion (which includes bovine meat, soybean, dairies, rice and wood products, and accounts for 25% of GDP) will decelerate from the strong showing in 2021, as growth momentum in its main trade partners (China, Brazil and European Union) weakens. Moreover, the La Niña represents a downside risk to the 2021/2022 crop. Finally, gross fixed investment should continue to grow and be mostly directed towards export-related industries and the continuation of the construction of the UPM pulp factory (pulling both construction and employment). 

 

Current account deficit will remain mild, slow fiscal consolidation set to continue

The current account deficit slightly widened in 2021, majorly driven by a higher primary income deficit due to greater repatriation of foreign companies’ profits. Moreover, the services account shifted to a deficit, as freight expenditures increased and travel revenues dropped further. In fact, Uruguay was hit by COVID-19 in March 2020, thus right after the tourism high season that goes from late December to February. However, in 2021, borders were closed until early November. Still, the trade balance registered a higher surplus, as export recovery outpaced the rise in imports. On the financing side, foreign direct investment rebounded in 2021and was able to comfortably cover the current account deficit. Finally, as of September 2021, foreign currency reserves stood at USD 17.1 billion, covering roughly 21 months of imports. In 2022, the current account deficit should remain quite stable. On the one hand, the trade surplus should narrow somewhat, driven by lower global growth momentum and higher oil imports amid high international prices. Conversely, the services balance is expected to return to a surplus, thanks to a recovery in travel revenues.

 
Regarding the public account, the fiscal deficit posted a timid narrowing in 2021. This was majorly driven by the improvement in tax revenues amid activity resumption, while expenditure remained high due to the extension of emergency pandemic spending. This year, the gradual fiscal consolidation should continue. The 2022 budget considered spending cuts notably related to salaries and social transfers, but also for investments and operating expenses. Nonetheless, this could prove politically difficult and be somewhat watered down by fierce union opposition. In addition, the government continues to count on one of the lowest borrowing costs in Latin America. While public debt is large and increased because of the crisis, the authorities have gradually increased its share denominated in local currency (47.3% in Q2 2021, compared to barely 11.5% in 2005) and lengthened its average maturity, thereby reducing its vulnerability.

 

President Lacalle Pou’s high popular support will likely help to prevent a partial repeal of its Urgent Consideration Act (LUC)

Luis Lacalle Pou of the centre-right Partido Nacional (PN), who took office in March 2020 for a five-year term, does not count with an outright majority in Uruguay´s bicameral General Assembly. However, thanks to a "rainbow” coalition including the PN and four other parties ranging from the centre-right (Partido Independiente) to the far right (Cabildo Abierto), the president was able to obtain a legislative majority. The coalition has 17 of 30 seats in the senate and 57 of 99 deputies in the lower house. In July 2020, President Lacalle enacted the Urgent Consideration Act (LUC), a central pillar of his governmental agenda. It consists of 476 articles and covers broad topics, such as toughening sentences for crime, restricting the right to go on strike, reforming education, implementing fiscal constraints and increasing the role of the private sector. Nonetheless, it has faced strong rejection from the centre-left Frente Amplio party and labour unions, notably the Pit-Cnt union.  In addition to promoting strikes, they collected the needed signatures to call for a public referendum in March 2022 against the matter. More precisely, they want to repeal 135 articles of the law that, in their view, would raise poverty and exclusion, while also increasing concentration of power and wealth. Despite this, preliminary polls have indicated that support for the articles’ reversal is unlikely to be achieved. In fact, Mr. Lacalle Pou has conserved a high political support (his approval rating stood at 61% in September 2021), thanks to his relatively effective handling of the health crisis. Lastly, regarding foreign trade policy, the ruling government has defended the possibility that Mercosur countries could negotiate free trade agreements separately from the other members of the bloc. It also stated in July 2021 that it would negotiate a trade agreement with China on its own (currently the major export destination).

 

Last updated: February 2022

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