Uruguay faces two more “difficult” years of weak growth as recessions in its larger neighbours acts as a drag on its economy, the country’s finance minister warned yesterday.
“We are going to have two years of intense economic policy work, and probably in 2018 will we be approaching the level of economic growth that we used to have,” Danilo Astori told Emerging Markets.
Uruguay used to have the image of a small but open and vibrant economy with most of its macroeconomic fundamentals in place. This is no longer the case. The South American country has suffered big external shocks. Not only have its large neighbours plunged into recession, but many of its most important traditional trading partners, such as China and India, are slowing down.
As a result, Uruguay has tepid economic growth, double digit inflation and a decline in investment. Growth was only 1% last year — the first time it was under 3% in 10 years — and the fiscal deficit reached 3.5%, as public spending was not cut in line with the economic slowdown.
The debt to GDP ratio is close to 70% and is still expected to increase, according to some independent Uruguayan economists. Meanwhile, the sharp depreciation of the peso on the foreign exchange market — over 60% compared to the dollar in the past three years — has fuelled inflation, which ended 2015 at 10.5%.
Astori said this year was going to be another “difficult” year, and that 2017 would also be “relatively complicated”.
“It will take a couple of years before the situation in Brazil and Argentina — especially in Brazil — starts to stabilise,” Astori said in a reference to its two big neighbours who are also fellow members of Mercosur, the Southern Cone customs’ union.
LOCAL CURRENCY BONDS
Brazil is in its worst recession since the early 1930s and its worst political crisis since the impeachment of president Fernando Collor in 1992. “Brazil used to be our main trading partner,” Astori said.
China has become Uruguay’s main export market, but demand has also declined there. Uruguay has also been hit by the crisis in Russia, one of its five main clients, Astori said.
Meanwhile, exports to Venezuela have virtually ground to a halt. “It is a very important market for dairy products. Sales have declined and when they do, they would not pay,” said Astori.
On the capital markets front, Astori said Uruguay would rather focus on local currency bond issues rather than Eurobonds. “We want to focus on local currency bonds, on inflation-indexed bonds for instance,” he said.
“We are doing weekly issues, and this has gone well, with a real interest rate of around 5%. We are going to continue to prioritise local currency bonds because we want to avoid the dollarisation of our debt.”
Meanwhile, Uruguay has not turned its back on the international capital markets, as it still plans to issue up to $1.5bn this year in Eurobonds to prefund for next year, according to an official debt report released earlier this year. The country is also said to lean more heavily on loans from multilaterals.