## cr1823-uruguayartiv ## Source details **Canonical URL:** [cr1823-uruguayartiv](https://www.imf.org/-/media/files/publications/cr/2018/cr1823-uruguayartiv.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1823-uruguayartiv.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1823-uruguayartiv.pdf.json) --- ### The Impact of Exchange Rate Movements on Consumption - Key empirical findings: - A 10 percent depreciation is accompanied by approximately a 1 percentage point fall in private consumption growth in the short run (VAR and VECM results). - Depreciations lead to a contractionary effect on GDP in the short run. - Transmission channels: - Negative impact on real incomes: - Nominal wages are fixed in the short-run. - Immediate exchange rate pass-through of around 15 percent causes temporary falls in real wages. - High share of households liquidity constrained and adjust consumption to temporary income shocks. - Heterogeneous pass-through across goods: - Pass-through close to 100 percent for durables; durable consumption reacts very strongly in the short run. - Little evidence for wealth effects or changes in expected permanent income driving consumption changes. - Empirical indicators: - Car sales (seasonally adjusted) move inversely with the peso over the period shown. - Exchange rate pass-through estimates: - Immediate pass-through to wages and prices: around 15 percent. - Pass-through to durables: close to 100 percent. - Policy implications: - Exchange rate depreciations can be contractionary via disposable income and durable goods price channels; short-run demand effects should be accounted for in policy frameworks. - Hedging options limited, increasing the cost of exchange rate volatility for households and firms. - Recommendations include strengthening macroeconomic buffers, maintaining flexible exchange rate, and improving availability of hedging and financial instruments. ### Macro context and recent developments (selected indicators) - 2017 summary and near-term performance: - Inflation developments: - Inflation declined to 6¼ percent. - Inflation fell to 5½ percent in July before edging up as appreciation effects waned. - Projected to pick up to 6½ percent by end-2017 and subsequently edge down to about 6 percent. - Nominal peso appreciation: 12 percent vis-à-vis the U.S. dollar from April through October 2016. - Multilateral real exchange rate appreciation: 9 percent between April 2016–September 2017. - GDP growth: - Real GDP growth: 1.5 percent in 2016; projected 3.1 percent in 2017. - Fiscal: - 2016 fiscal deficit: 4.0 percent of GDP (0.3 percent of GDP smaller than budgeted). - Projected overall deficit for 2017: 3.3 percent of GDP. - Credit and banking: - Bank credit to firms (U.S. dollar-denominated) declined by about 4¾ percent (y/y) by October. - Credit to households edged up by more than 2 percent (y/y) in real terms. - Domestic bank credit remains below 30 percent of GDP. - Non-performing loans: less than 4 percent. - External and financial flows: - Current account: surplus of more than 1.5 percent of GDP in 2017. - Central bank added US$3 billion to net reserves in the first three quarters of 2017. - Tax amnesty in Argentina led to withdrawal of about US$1.3 billion in nonresident foreign-currency bank deposits since August 2016. - Revised FDI data: inflows slowed in 2015 and turned to net outflows in 2016; excluding merchanting firms, slowdown amounted to 2.1 percent of GDP in 2015 and 2.6 percent of GDP in 2016. - Financial market developments: - Mid-2017: Uruguay issued nominal-peso bonds in the global market, raising over US$ 2billion at yields of 10 percent or below for five- and ten-year paper. - Share of public debt denominated in foreign currency expected to remain at about 50 percent by end 2017. - Potential UPM investment: about US$3 billion (5 percent of GDP) under discussion. ### Outlook and risks (selected projections and scenarios) - Growth and output gap: - Growth projected to remain somewhat above its 3-percent potential rate in 2018 and 2019. - Output gap projected to turn slightly positive in 2018–2019. - Current account and external outlook: - Expected to worsen gradually to a deficit of ¾ percent of GDP over the medium term as investment and imports increase. - Net FDI outflows expected to turn to inflows again in 2017 and beyond. - Inflation and credit: - Inflation projected to pick up to 6½ percent by end-2017 and subsequently edge down to about 6 percent. - Real domestic credit projected to rebound modestly to a growth rate of 2–3 percent as investment picks up. - Buffers and resilience: - Gross reserves of the central bank well above the upper bound of the IMF reserve adequacy metric range. - Liquid financial assets sufficient to cover debt service for 12 months. - Contingent credit lines at international financial institutions of 4 percent of GDP. - Authorities plan to reverse more than half of the net reserve increase of 2017 over the next three years by selling foreign exchange to public companies on a fixed schedule. - Key risks (likelihood, impact, policy responses): - Tighter global financial conditions: Likelihood: High; Impact: Medium (↓); Policy: Maintain flexible exchange rate; maintain solid fundamentals; use liquidity buffers. - Weak growth in neighboring economies: Likelihood: Medium; Impact: Medium (↓); Policy: Flexible exchange rate; adjust fiscal/monetary policy where space allows. - Significant slowdown in China: Likelihood: Medium; Impact: Low/Medium (↓); Policy: Use exchange rate as shock absorber; pass-through oil price declines to households; adjust fiscal/monetary policies. - Insufficient investment during fiscal consolidation: Likelihood: Medium; Impact: Medium; Policy: Create fiscal space by rationalizing current expenditure. - Fragmentation/security dislocations: Likelihood: High; Impact: Low (↓); Policy: Use oil price hedges; pass through oil price changes to households over the medium term. ### Authorities' assessment and policy discussions - Authorities' view: - 2017 combined rebound in growth and lower inflation within target range; decline in nontradables inflation important. - Emphasized risks from neighboring countries and the potential end of search-for-yield in international markets. - Uruguay well positioned to manage shocks with flexible exchange rate and ample buffers; potential third paper pulp mill investment would be major impulse. - Concern about eroding competitiveness in parts of the export sector. - Staff recommendations and policy stance: - Keep fiscal and monetary policy tight with positive near-term growth to secure public debt path and lower inflation. - Steps recommended: - (i) Reinforce de-indexation of wages. - (ii) Increase investment in infrastructure and strengthen predictability of fiscal policy over the medium term. - (iii) Facilitate the de-dollarization process. - (iv) Explore structural reforms to raise growth potential. - Monetary guidance: - Some monetary tightening appropriate as demand pressure materializes. - Baseline projection assumes short-term real interest rates staying above 2½ percent. - Support de-dollarization: maintain macro stability, higher reserve requirements on foreign currency deposits restored in August, promote pricing in local currency, consider standing facilities to reduce short-term interest rate volatility. - Eliminate remaining backward-looking wage indexation provisions; move to nominal wage increases and moderation of annual nominal wage growth in 2018 (multi-year) agreements. - Exchange rate policy: - Maintain flexible exchange rate as stabilizer; interventions limited to countering disorderly market conditions. - Clear communications to ensure interventions do not undermine inflation reduction commitment. - Fiscal policy: - 2015–17 cumulative structural fiscal effort: 1.4 percent of GDP. - 2018 budget: higher pension and education outlays amounting to 0.4 percent of GDP, offset by higher revenues and temporary 3 percentage points increase in import fees for consumer goods and higher taxes on gambling. - Budget envisages decline in overall deficit from 4.0 percent of GDP in 2016 to 2.9 percent in 2018. - Government commitment to reduce deficit to 2.5 percent of GDP by 2019. - Staff encourages reaching 2.5-percent-of-GDP target earlier and saving revenue windfalls if GDP growth exceeds expectations. - Restore pension sustainability via parametric reforms. - Public investment and PPPs: - Public investment reduced by close to 1 percent of GDP starting in 2015. - Staff advises reorienting spending from public wage bill to investment and accelerating PPP preparation without relaxing safeguards. ### Banking sector stability and financial sector priorities - Banking sector indicators and risks: - Banks’ operating costs are high; non-performing loans rose and bank profitability declined after the 2016 peso appreciation. - Stability risks limited per authorities’ stress tests; regulatory capital to risk-weighted assets ratio increased since December 2015. - Recent Basel III steps: - Phased introduction of the 2.5-percent capital conservation buffer. - Capital surcharges for larger banks. - Liquidity ratio regulations. - Supervision should continue to monitor exposures; implementation of IFRS slated for 2018. - Funding and market structure: - Self-financing and FDI key sources of funding for private investment; bank credit played a relatively less important role. - Large public bank BROU dominates peso market; foreign banks have dollarized deposit bases and mostly dollar lending. - Ongoing Financial Inclusion Law (2014) expected to increase peso funding supply and access to credit via electronic transactions and payroll deposit accounts. - Initiatives: blueprint for domestic securities market reform, fintech working group, six-month “e-peso” pilot for digital central bank currency. - Structural recommendations: - Improve education quality and vocational training. - Upgrade transport and logistics infrastructure. - Enhance labor market flexibility so wage increases reflect productivity gains. - Reorient budget toward investment and accelerate PPP preparation. ### Key macroeconomic and financial statistics (selected exact figures) - Real GDP (percent change): 3.1 percent (2017). - GDP (US$ billions): 63.6 (2017). - Unemployment (end of period): 7.1 percent (2017). - CPI inflation (average): 6.2 percent (2017). - Current account (percent of GDP): 1.9 percent (2017). - Gross international reserves (US$ millions): 15,473 (2016) and 15,813 (2017). - Reserves in months of imports: 14.5 months (2016), 13.5 months (2017). - Exports, f.o.b. (US$ millions): 11,574 (2016); 12,317 (2017). - Imports, f.o.b. (US$ millions): 9,196 (2016); 10,061 (2017). - Financial soundness indicators (2017 exact values): - Dollar loans in percent of total loans: 55.4. - Loan dollarization (constant exchange rate, January 2013): 42.0. - Dollar deposits in percent of total deposits: 74.4. - Deposit dollarization (constant exchange rate, January 2013): 65.6. - Private sector credit in percent of GDP: 27.9. - Private sector credit growth in percent: -0.7. - Regulatory capital in percent of risk-weighted assets: 13.9. - Non-performing loans in percent of total loans: 4.2. - Specific loan-loss provisions in percent of non-performing loans: 58.4. - Implicit exchange rate risk: 27.0. - Return on assets: 1.2. - Return on equity: 14.4. - Operating costs in percent of gross income: 66.5. - Liquidity ratio: 52.2. - Non-resident deposits in percent of total deposits: 10.2. - Deposits/Loans ratio in national currency: 0.9. - Deposits/Loans ratio in foreign currency: 2.5. ### Annex I — External Sector Assessment (selected findings) - Staff assessment: - External position appears stronger than justified by fundamentals based primarily on a sizeable current account gap indicated by the standardized EBA current account model. - EBA lite REER model indicates the REER is overvalued. - External stability risks judged contained given sufficient reserves and projected current account surplus in 2017. - Current account balances: - 2016: surplus of 1.7 percent of GDP. - 2017: expected surplus of 1.9 percent of GDP. - Merchandise trade balance (percent of GDP, annual): - Trade balance: 2013: 2.0; 2014: 3.5; 2015: 2.5; 2016: 4.4; 2017: 4.5. - Exports: 2013: 23.1; 2014: 24.1; 2015: 20.9; 2016: 20.5; 2017: 19.2. - Imports: 2013: 21.1; 2014: 20.6; 2015: 18.4; 2016: 16.0; 2017: 14.7. - REER and model divergences: - Standardized EBA current account model indicates a sizeable current account gap and suggests REER is 14 percent undervalued (based on a 5.6 percent of GDP excess of the current account balance over the model’s norm). - After adjustments for merchanting and bilateral trade with Argentina, staff estimate current account gap of 2.2–3.0 percent of GDP and corresponding REER undervaluation of 5.3–7.2 percent (using CA elasticity 0.415). - EBA lite REER model assesses REER to be 11 percent overvalued. - EBA External Sustainability (ES) model assesses REER broadly neutral. - Reserves and adequacy (October 27, 2017): - Gross reserves: US$15.3 billion. - BCU’s own reserves (net of BCU liabilities): US$7.4 billion. - In percent of GDP (2016): 29.2. - IMF reserve adequacy metric range (2017 Q2): US$5.8 to 8.8. ### Annex II — Public Sector Debt Sustainability Analysis (DSA) (selected) - Coverage and composition (end-2016): - Central government debt: 47 percent of GDP; average maturity just under 14 years; share local currency close to one half. - Central bank debt: declined from 12 to 10 percent of GDP in 2016; about 2/3 short-term and 2/3 local currency-denominated. - Public enterprises’ debt: 3 percent of GDP. - Financial assets and liquidity buffers: - Total public sector financial assets (including reserves): 32 percent of GDP at end-2016. - Contingent credit lines: 4½ percent of GDP in 2016. - Central bank financial assets (including reserves): close to 27 percent of GDP; reserves at 25 percent of GDP. - Liquid financial assets of public sector: 19 percent of GDP at end-2016. - Net public sector debt (gross minus liquid assets): 43 percent of GDP at end-2016. - Baseline projections: - Gross debt projected to stabilize at around 63 percent of GDP in 2022. - 2017 projected gross debt increase by almost 3 percent of GDP; net debt projected to rise by only 1 percent of GDP. - Debt-stabilizing primary balance: close to 0.5 percent of GDP. - Stress test (combined downside shock): - Permanent 20 percent exchange rate depreciation, temporary drop in growth and primary balances, permanent increase in real interest rates. - Impact over five years: gross debt ratio rises by about 15 percentage points; net debt rises by 13 percentage points. - Probabilistic fan-chart: gross public debt would remain below 73 percent of GDP in 90 percent of cases; net public debt remain below 56 percent under combined shock. ### Annex III — External Debt Sustainability Analysis (selected) - Data revisions: - Upward revision in external debt of some 20 percent of GDP in 2016 due to wider survey coverage (~490 firms). - Gross external debt peaked at 90 percent of GDP in 2015; fell to 75 percent in 2016; projected 69 percent in 2017. - Some 45 percent of external debt is owed by the public sector. - Projections and financing needs: - Gross external financing needs (US$, selected series) and percent of GDP series shown in source tables (series preserved in source). - Main risk: exchange rate depreciation. - Counterfactual one-off devaluation of 30 percent could increase gross external debt-to-GDP ratio by a similar number of percentage points but not lead to unstable subsequent debt dynamics holding other factors equal. ### Annex IV — Revised Balance of Payments (selected effects) - BCU released new BOP and IIP data back to 2012 (BPM6) on 29 September 2017; survey sample expanded from ~200 to ~490 corporate groups. - Two main revisions: - Upward shift in current account balance of approximately US$0.8 billion (on average). - Increase in gross external debt of the non-financial private sector of approximately US$14 billion. - Merchanting (compraventas): - Merchant firms accounted for much of additional measured exports; many are foreign-owned subsidiaries. - Authorities’ calculations show net current account impact of some 0.8 percent of GDP in 2016 from merchanting/compraventas. - Selected BOP series (percent of GDP, 2012–2016) provided in source tables (Trade Balance, Trade Balance excl compraventas, Services Balance, Factor income, Current account, FDI, and their excl compraventas counterparts). ### Data, surveillance, and statistical issues - Data adequacy: broadly adequate for surveillance but shortcomings in national accounts. - National accounts: - 2009 revision updated benchmark years. - Shortcomings: limited enterprise survey coverage, partial business register updates, poor quality source data for some GDP components, inadequate information on informal economy, incomplete quarterly accounts. - Need adoption of 2008 SNA and base year updates. - Prices: - CPI base December 2010 = 100; CPI does not cover implicit rent or owner-occupied dwellings. - PPI and CPI could benefit from more frequent weight updates and broader coverage. - Government finance statistics: - Central administration, state enterprises, social security data complete; timeliness problems for local governments. - Monthly and quarterly financing and debt data disseminated on BCU website but not published in IFS. - Monetary and financial statistics: - Prepared per IMF manuals; SRFs used for central bank and other depository corporations; OFC coverage limited to off-shore financial institutions. - Mission could expand OFC coverage. - Reporting and timeliness: - Uruguay subscribed to SDDS in February 2004 and is in observance. - Various data reporting frequencies and latest observation dates listed in source tables (exchange rates, reserves, monetary aggregates, CPI, GFS, external accounts, GDP). - Statement highlights (Adrian Armas and David Vogel, January 22, 2018): - 15 years of positive growth; 2017 growth about 3 percent; poverty reduced from 32.5 percent in 2006 to 9.4 percent in 2016; Gini declined from 0.45 to 0.38. - Fiscal consolidation: target overall deficit 2.5 percent of GDP by 2019. - Monetary policy: inflation peaked at 11 percent in May 2016; ended year at 6.55 percent. - Exchange rate flexibility and de-dollarization progress: 51 percent of central government debt denominated in local currency (compared with 12 percent in 2005 and 26 percent a decade ago). - Financial sector stability: NPLs stable after moderate increases; monitoring of low and declining bank credit. - Priorities: improve education quality, increase investment and PPPs, address productivity and employment creation, continue fiscal consolidation. _International Monetary Fund. Uruguay — Selected Issues (excerpt): "1. The Impact of Exchange Rate Movements on Consumption."_ ### 1. The Impact of Exchange Rate Movements on Consumption ____________________________________ 5 ### 1. The Impact of Exchange Rate Movements on Consumption ### Key findings on exchange rate impacts - A 10 percent depreciation is accompanied by approximately a 1 percentage point fall in private consumption growth in the short run (VAR and VECM results). - Depreciations lead to a contractionary effect on GDP in the short run, deviating from the standard view that depreciations are typically expansionary through higher net exports. - Two main channels explain the negative impact on private consumption: - Negative impact on real incomes: nominal wages are fixed in the short-run and there is an immediate exchange rate pass-through of around 15 percent, causing temporary falls in real wages. A high share of households is liquidity constrained and adjusts consumption to temporary income shocks. - Heterogeneous pass-through across goods: pass-through is close to 100 percent for durables, so depreciations cause a price hike for durable goods and durable consumption reacts very strongly in the short run (consistent with inter-temporal substitution by households). - Little evidence is found for consumption changes arising from wealth effects or changes in expected permanent income. ### Empirical evidence and indicators - Exchange rate movements have strong short-run effects on consumption patterns, notably car sales (seasonally adjusted) moving inversely with the peso in the period shown. - Exchange rate pass-through estimates: - Immediate pass-through to wages and prices: around 15 percent. - Pass-through to durables: close to 100 percent. ### Implications for monetary and exchange rate policy - Exchange rate depreciations can be contractionary via demand channels in Uruguay; policies that affect exchange rate volatility have direct short-run implications for consumption and GDP. - Hedging options are limited, increasing the cost of exchange rate volatility for households and firms. ### Source attribution *Based on Toscani, F., “The Impact of Exchange Rate Movements on Consumption in Uruguay,” Selected Issues Paper, forthcoming.* --- ### Macro context and recent developments (selected indicators) - 2017 summary: stronger GDP growth, unemployment increase halted, inflation brought within the central bank’s target range (3 to 7 percent) for the first time in seven years, current account in surplus, fiscal deficit reduced. - Nominal peso appreciation: 12 percent vis-à-vis the U.S. dollar from April through October 2016. - Multilateral real exchange rate appreciation: 9 percent between April 2016–September 2017. - Inflation developments: - Inflation declined to 6¼ percent. - Inflation fell to 5½ percent in July before edging up as appreciation effects waned. - Projected to pick up to 6½ percent by end-2017 and subsequently edge down to about 6 percent. - GDP growth: - Real GDP growth: 1.5 percent in 2016; projected 3.1 percent in 2017 (driven largely by private consumption, net exports, and a good harvest). - Fiscal: - 2016 fiscal deficit: 4.0 percent of GDP (0.3 percent of GDP smaller than budgeted). - Projected overall deficit for 2017: 3.3 percent of GDP. - Credit and banking: - Bank credit to firms (U.S. dollar-denominated) declined by about 4¾ percent (y/y) by October. - Credit to households edged up by more than 2 percent (y/y) in real terms. - Domestic bank credit remains below 30 percent of GDP. - Non-performing loans: less than 4 percent. - External and financial flows: - Current account: surplus of more than 1.5 percent of GDP in 2017. - Central bank added US$3 billion to net reserves in the first three quarters of 2017. - Tax amnesty in Argentina led to withdrawal of about US$1.3 billion in nonresident foreign-currency bank deposits since August 2016. - Revised FDI data show inflows slowed in 2015 and turned to net outflows in 2016; excluding merchanting firms, slowdown amounted to 2.1 percent of GDP in 2015 and 2.6 percent of GDP in 2016. ### Financial market developments - Mid-2017: Uruguay issued nominal-peso bonds in the global market, raising over US$ 2billion at yields of 10 percent or below for five- and ten-year paper. - Share of public debt denominated in foreign currency expected to remain at about 50 percent by end 2017. - Potential large FDI project: UPM investment at about US$3 billion (5 percent of GDP) under discussion (would be the largest FDI project in the country). --- ### Outlook and risks (selected projections and scenarios) - Growth outlook: - Growth projected to remain somewhat above its 3-percent potential rate in 2018 and 2019. - Output gap projected to turn slightly positive in 2018–2019. - Current account: - Expected to worsen gradually to a deficit of ¾ percent of GDP over the medium term as investment and imports increase. - Net FDI outflows expected to turn to inflows again in 2017 and beyond. - Inflation: - Projected to pick up to 6½ percent by end-2017 and subsequently edge down to about 6 percent. - Real domestic credit: - Projected to rebound modestly to a growth rate of 2–3 percent as investment picks up, but remain subdued given structural impediments. - Buffers and resilience: - Gross reserves of the central bank well above the upper bound of the IMF reserve adequacy metric range. - Liquid financial assets sufficient to cover debt service for 12 months. - Contingent credit lines at international financial institutions of 4 percent of GDP. - Authorities plan to reverse more than half of the net reserve increase of 2017 over the next three years by selling foreign exchange to public companies on a fixed schedule. ### Key risks (likelihood, impact, and policy responses summarized) - Tighter global financial conditions - Likelihood: High; Impact if realized: Medium (↓) - Policy response: Maintain flexible exchange rate; maintain solid macroeconomic fundamentals; use liquidity buffers if necessary. - Structurally weak growth in neighboring economies (Argentina, Brazil) - Likelihood: Medium; Impact if realized: Medium (↓) - Policy response: Maintain flexible exchange rate; adjust fiscal and monetary policies to stabilize demand where space allows. - Significant slowdown in China - Likelihood: Medium; Impact if realized: Low/Medium (↓) - Policy response: Use exchange rate as shock absorber; pass-through declines in oil import prices to households; adjust fiscal and monetary policies as needed. - Insufficient investment while completing fiscal consolidation and boosting capital spending - Likelihood: Medium; Impact if realized: Medium - Policy response: Create fiscal space by rationalizing current expenditure. - Fragmentation/security dislocations (Middle East, Africa, Asia, Europe) - Likelihood: High; Impact if realized: Low (↓) - Policy response: Use oil price hedges; pass through oil price changes to households over the medium term. --- ### Policy implications and recommendations (relevant to exchange rate–consumption link) - Recognize that exchange rate depreciations can be contractionary through disposable income and durable goods price channels; policy frameworks should account for these short-run demand effects. - Maintain a flexible exchange rate to act as an automatic stabilizer and allow for adjustments in response to shifts in economic fundamentals. - Strengthen macroeconomic buffers and liquidity positions to smooth the transmission of exchange rate shocks to consumption. - Improve hedging and financial instruments availability to reduce the cost of exchange rate volatility for households and firms. - Pursue structural reforms to boost productivity and competitiveness to mitigate risks from real exchange rate appreciation and sustain export performance. *International Monetary Fund. Uruguay — Selected Issues (excerpt): "1. The Impact of Exchange Rate Movements on Consumption."* ### 13. The authorities underscored the combination in 2017 of a rebound in growth and ### 13. The authorities underscored the combination in 2017 of a rebound in growth and ### Authorities' assessment - Combination in 2017 of a rebound in growth and lower inflation, within the target range. - Decline in nontradables inflation viewed as particularly important. - Risks emphasized: - Developments in neighboring countries. - Risk that the search for yield in international markets might come to an end. - Authorities’ view of resilience: - Uruguay well positioned to manage shocks with a flexible exchange rate and ample financial buffers. - Expected investments in a third paper pulp mill would offer a major impulse to investment and growth. - Concern that eroding competitiveness for parts of the export sector warranted attention. ### Policy discussions — overview and staff recommendations - Authorities are positioned to consolidate macroeconomic gains of 2017 and address medium-term growth bottlenecks. - With a positive near-term growth outlook, both fiscal and monetary policy should be kept tight to secure a stable and sustainable path for public debt and lower inflation within the target range. - Staff warned that a persistent decline in public and private investment would reduce potential growth (currently estimated at 3 percent). - Staff recommends steps to: - (i) reinforce the de-indexation of wages; - (ii) increase investment in infrastructure and strengthen the predictability of fiscal policy over the medium term; - (iii) facilitate the de-dollarization process; - (iv) explore structural reforms aimed at raising Uruguay’s growth potential. ### A. Keeping inflation low - Recent moderation of nontradables inflation and inflation expectations confirm favorable prospects for enhancing price stability. - Inflation history and expectations: - Peak inflation at 11 percent in May 2016; decline since then partly from currency appreciation. - Inflation expectations in surveys and in the yields on nominal versus inflation-linked government bonds foresee inflation declining after 2017 to 5–7 percent. - Central bank’s target range: 3-to-7 percent. - Monetary policy guidance: - Some monetary tightening appropriate as expected demand pressure materializes to bring inflation close to the middle of the target range. - Baseline projection of gradually falling inflation predicated on prudent monetary policies, with short-term real interest rates staying above 2½ percent. - Constraints on monetary transmission: - High degree of dollarization, low level of peso credit, volatility of short-term interest rates, and wage indexation. - Staff suggestions to support de-dollarization and policy effectiveness: - Maintain macroeconomic stability to support de-dollarization. - Restoration in August of higher reserve requirements on foreign currency deposits welcomed. - Promote pricing of domestic transactions in local currency. - Strengthen the policy signal: - Continue to closely monitor and accommodate changes in money demand. - Explore options to reduce volatility of short-term interest rates, e.g., use standing facilities to create an interest rate corridor. - Eliminate remaining backward-looking wage indexation provisions: - Move to nominal wage increases seen as positive; continued moderation of annual nominal wage growth in 2018 (multi-year) wage agreements important. - Removing indexation provisions would reduce inflation inertia and improve monetary policy effectiveness. ### Box: Options for supporting de-dollarization (summary) - De-dollarization historically requires macroeconomic stabilization (lower inflation) and can be aided by nominal appreciation. - Peruvian experience: prudential, supervisory, and pricing policies, plus inflation targeting and domestic capital market development, contributed to gradual de-dollarization. - Additional measures for Uruguay: - Maintain higher reserve requirements on foreign currency deposits relative to local currency deposits at the central bank, together with higher provisioning and capital requirements on foreign currency loans. - Consider mandating listing of prices of goods and services in local currency. - Government communications to consistently refer to prices and amounts in domestic currency. ### B. A flexible exchange rate - Large portfolio shifts by financial institutions and domestic pension funds posed risks of large, sudden, disruptive exchange rate movements, justifying recent interventions. - Portfolio shifts by domestic pension funds accounted for US$3 billion (5 percent of GDP), equivalent to the increase in net reserves during this period, with sharp peaks in May and August. - Without interventions, Uruguay’s small exchange market (average daily turnover about US$25 million) would likely have experienced disruptive volatility. - Authorities stressed necessity to absorb large capital flows and portfolio shifts given residents’ freedom to switch between foreign and domestic currency assets. - Authorities confirmed the importance of maintaining a flexible exchange rate for stabilizing the economy. ### C. Reconciling fiscal consolidation and investment support - Fiscal stance and 2018 budget: - Staff estimates cumulative structural fiscal effort during 2015–17 amounted to 1.4 percent of GDP—split between years 2015 and 2017 (with minimal adjustment in 2016). - 2018 budget includes higher pension and education outlays amounting to 0.4 percent of GDP, offset by higher revenues from better-than-expected macro outcomes and a temporary 3 percentage points increase in import fees for consumer goods and higher taxes on gambling. - 2018 outturn expected to benefit from full impact of the 2017 tax reform. - Budget envisages decline in overall deficit from 4.0 percent of GDP in 2016 to 2.9 percent in 2018. - Government commitment to reduce deficit to 2.5 percent of GDP by 2019. - Staff advice and concerns: - Staff encouraged reaching the 2.5-percent-of-GDP deficit target earlier, noting election years (such as 2019) historically see higher spending and deficits. - Staff argued steadfast implementation of budget spending combined with stronger-than-expected recovery could achieve the 2.5-percent-of-GDP objective already in 2018 with limited additional effort and lower interest costs. - Staff advised saving revenue windfalls if GDP growth exceeds expectations. - Implicit fiscal liability from defined benefits pillar of mixed pension system increased; authorities should restore sustainability via parametric reforms. - Public investment and PPPs: - Public investment reduced by close to 1 percent of GDP starting in 2015, with expectation PPPs would pick up the slack; rapid rise in PPPs has not materialized despite infrastructure gaps. - Staff estimates fiscal multipliers support that higher public investment could invigorate private investment and growth. - Staff advised reorienting budget spending from public wage bill to investment and accelerating PPP preparation (without relaxing safeguards). - Importance of carefully assessing costs and benefits, including potential synergies, of each project and incentives to attract private investment. - Fiscal rule and fiscal credibility: - Amending the existing fiscal rule could strengthen confidence in sustainability of public finances as government term ends in 2019. - Suggested enhancements: (i) further safeguards to limit use of escape clauses, (ii) constrain annual deficits (or debt increases) in structural terms to allow automatic stabilizers, (iii) anchor rule on medium-term objective for level of debt. - State-owned enterprises: - SOEs require strong governance to avoid quasi-fiscal costs. - Recent recapitalization of ANCAP involved forgiveness of its $0.6-billion (1 percent of GDP) debt to the government and restructuring of some $0.7 billion of the company’s debt to commercial banks. - Staff reiterated advice to pass through changes in international oil prices to domestic fuel prices charged by ANCAP, based on a transparent formula, to promote efficiency and remove fiscal risks. ### D. A more functional financial sector - Banking sector and credit: - Banking sector well capitalized; regulatory capital to risk-weighted assets ratio increased since December 2015. - Extensive dollarization and market segmentation render bank credit expensive and limited, especially in the peso market. - Large public bank BROU dominates peso market; foreign banks have highly dollarized deposit bases and mostly engage in dollar lending to commercial and higher-income segments. - Financial inclusion and market development: - Ongoing implementation of the 2014 Financial Inclusion Law expected to increase peso funding supply and access to credit by consumers (including low-income and rural segments) and small businesses via electronic transactions and generalized payroll deposit accounts and by encouraging competition. - Use of new capital market instruments to finance public infrastructure, including PPPs, and regulatory changes to facilitate bond issuance by medium-sized private enterprises can help develop domestic financial markets and promote competition. *International Monetary Fund — Uruguay section (content unit).* ### 29. Maintaining the stability of the banking sector is a priority. Banks’ operating costs ### cr1823-uruguayartiv - 29. Maintaining the stability of the banking sector is a priority. Banks’ operating costs ### Banking sector stability and risks - Banks’ operating costs are high; non-performing loans have risen; and bank profitability declined in the wake of the peso appreciation in 2016 (since most banks were long in U.S. dollars). - Stability risks to the banking system remain limited, as evidenced by the authorities’ stress tests, and supported by rising capital-asset ratios (Table 1). - Supervision should continue to closely monitor banks’ exposures, assisted by the implementation of the International Financial Reporting Standards (slated for 2018). - Recent steps to implement Basel III include: - phased introduction of the 2.5-percent capital conservation buffer, - capital surcharges for larger banks, - liquidity ratio regulations. - The authorities considered that the financial system was stable and well-supervised. - Funding composition noted by the authorities: - self-financing and foreign direct investment have been key sources of funding for private investment, - bank credit has played a relatively less important role. - Authorities’ initiatives: - joint public-private working group to prepare a blueprint for reform of the domestic securities market, - fintech working group to analyze Uruguay’s noticeable position in this sector, - six-month “e-peso” pilot project for digital currency issued by the central bank. ### Structural issues, growth drivers, and vulnerabilities - Uruguay’s business climate is backed by strong institutions and stability and increasing integration in world markets, benefiting from large inward FDI in most years, often for companies operating within free zones. - Transition to knowledge-intensive services, including fintech, is ongoing. - Energy transition: shift to renewable sources for power supply, in particular hydropower and, to a lesser degree, wind energy; developed connections for exporting excess supply to Argentina and Brazil. - Social policy: implementing a comprehensive care system that supports women’s participation in the broader economy. - Ease of doing business: Uruguay is ranked relatively low—94th worldwide according to the World Bank. - Sources of growth: - Growth over the past two decades has been largely driven by total factor productivity (TFP). - A standard (Cobb-Douglas) decomposition shows TFP has been the main contributor, unlike in other Latin American countries. - External demand/terms-of-trade improvements can explain about ½ of a percentage point of increased yearly growth since the crisis. - Labor allocation inefficiencies: labor productivities are almost twice as spread out across Uruguayan sectors as they are across sectors in the United States, suggesting possible lack of labor market flexibility. ### Structural reform priorities recommended by staff - Staff urged the authorities to: - (i) undertake reforms to improve both educational attainment and the quality of education—for instance, via enhancing teacher qualifications and expanding vocational training; - (ii) facilitate further economic integration with the countries in the region and elsewhere by upgrading the country’s transport and logistic infrastructure; - (iii) enhance the flexibility of labor markets, to facilitate shifts to relatively productive sectors and firms and to ensure that wage increases reflect productivity improvements. - Authorities’ investment-related initiatives: - forthcoming public investment in railroads associated with expected FDI in a third paper pulp mill, - reviewing investment promotion regime to enhance prioritization and management, - confirmation that education reform remains a crucial policy priority, - support for renewed momentum in Mercosur and negotiations on a free trade agreement with the European Union. ### Staff appraisal, macro policy guidance, and medium-term recommendations - 2017 macro performance: - Through prudent policies, authorities capitalized on favorable external conditions to achieve good macroeconomic outcomes in 2017. - Combination of tight monetary policy stance and earlier exchange rate appreciation brought inflation within the central bank’s target range. - Fiscal adjustment proceeding broadly as planned, with the authorities’ 2.5-percent of GDP deficit target being within reach. - Upside risk: envisaged paper pulp-processing plant could significantly boost growth beyond current projections. - Policy recommendations to reinforce resilience and sustain inclusive growth: - Continue ongoing fiscal and monetary prudence combined with structural reforms. - Boost credibility of monetary and fiscal anchors over the medium term. - Address weaknesses in transportation infrastructure, skills formation, labor market flexibility, and access to foreign markets. - Competitiveness and structural challenges: - Loss of competitiveness in manufacturing and agriculture poses a longer-term policy challenge. - Staff assesses the external position to be stronger than consistent with fundamentals and desirable policy settings; expected foreign investments in a new paper pulp plant could create further appreciation pressures. - Policy priorities include reforms to enhance the business climate, enhancing firms’ access to credit and hedging instruments, and assessing scope to adjust administered fuel prices as the public petroleum company regains financial health. - Monetary policy guidance: - Some monetary tightening would be appropriate as expected demand pressure materializes, to keep inflation on a downward path and to set the stage for broader efforts towards de-dollarization. - Keeping nominal wage growth on a declining path is important for anchoring inflation. - Explore options to reduce the volatility of short-term interest rates. - Exchange rate policy: - Exchange rate flexibility should remain an important stabilizer. - Interventions should be limited to countering disorderly market conditions and should not substitute for structural reforms. - Clear communications are important so interventions do not undermine the central bank’s commitment to reducing inflation. - Fiscal policy guidance: - Short term: save expected revenue windfalls and aim at achieving the 2.5-percent of GDP fiscal deficit target before the 2019 election year. - Medium term: consider an enhanced fiscal rule to keep net debt on a sustainable and declining path. - Pension system viability will require further reforms. - Reversing the reduction in public investment is becoming key given infrastructure gaps, with careful assessment of costs and benefits of each public and public-private project and of incentives to attract private investment. - Strong governance of SOEs will be important for limiting fiscal risks. *Source: International Monetary Fund.* ### 41. Staff proposes that Uruguay remains on the 12-month Article IV consultation cycle. ### 41. Staff proposes that Uruguay remains on the 12-month Article IV consultation cycle. ### Proposed IMF surveillance cycle - Staff proposes that Uruguay remains on the 12-month Article IV consultation cycle. ### Real activity and inflation - Real GDP growth: charted series showing recovery; text: "Growth has picked up, supported by consumption..." - Real private consumption and real salary index contributed to private consumption: "Private consumption is buoyed by rising real wages..." - CPI inflation developments: "Inflation has come down sharply..." and moved "...to inside the BCU's target range for the first time since 2010." - Inflation measures noted: - Core Inflation: BCU definition excludes administered prices, fruits and vegetables, and tobacco. - BCU survey: median of expected inflation for the 12 months ahead. - Labor market: "the unemployment rate has declined." ### External accounts - Current account: "The current account turned to surplus in 2016..." - Real exchange rate: "However, Uruguay's real exchange rate depreciated vis-a-vis Argentina's." - Financial and current account balance: "Portfolio flows have been volatile..." - Reserves: "reserves remained well above prudential norms." - Nominal exchange rates: "The peso exchange rate against the U.S. dollar mimicked that of most regional currencies." - Terms of trade and commodities: "supported by favorable terms of trade." ### Fiscal developments and projections - Public sector debt: "Gross debt has stabilized..." - Currency composition indicated (chart): "47% Pesos / 53% Foreign Currency" - Debt maturity composition (chart): "13% 1 Year / 11% 1-5 Years / 76% 5 Years+" - Residence composition (chart): "51% Residents / 49% Non-residents" - Fiscal effort: "A sizeable fiscal effort in 2017 is expected to bring the primary balance to zero..." - Composition of central government expenditures: "Capital expenditures bore the bulk of the adjustment in 2015 and remained low in 2016-17..." - Public enterprises: "...with surpluses of public enterprises supporting the primary balance." Key fiscal figures (from tables and charts; percent of GDP unless otherwise indicated): - Revenues: 29.6 percent (2017, Table 9 row "Revenue 2/ 29.6" and Table 4) - Primary balance (Total public sector, projections): 0.2 percent (2018, Table 9 "Primary balance 1/ 0.2") and projected path to 0.8 percent by 2022. - Overall balance (public sector): -3.3 percent (2016); projected -2.7 percent (2018) and steady around -2.5 percent (2019-2022). - Gross public sector debt: 64.9 percent of GDP (2017); projected 65.0 percent (2018) and 63.8 percent (2019). - Net public sector debt (gross minus liquid assets): 44.1 percent of GDP (2017); projected 44.3 percent (2018). ### Monetary policy - Short-term interest rate policy: "The 1-month interest rate has recently been roughly in line with the one implied by a calibrated Taylor rule." - Monetary conditions: "Monetary conditions have remained relatively tight." - M1+ reference range: "BCU M1+ reference range was raised in line with increasing money demand." - Yield curve: "The yield curve is close to historic lows." - Peso credit and deposit spreads: "Peso credit to households remains very expensive..." and "the large spread between deposit and lending rates in the peso market persists." - Monetary policy metrics: - MCI (Index, 2012=0): shown; relative weights noted (real interest rate vs REER). - Average peso interest rates and interest rates by currency charted through Oct-2017. ### Credit and banking sector - Non-performing loans (NPLs): increased to 4.2 percent of total loans in 2017 (Table 1). - Specific loan-loss provisions: 58.4 percent of NPLs in 2017 (Table 1). - Regulatory capital: 13.9 percent of risk-weighted assets in 2017 (Table 1). - Private sector credit in percent of GDP: 27.9 percent in 2017 (Table 1). - Credit growth: private sector credit growth: -0.7 percent (2017, Table 1). - Dollarization: - Dollar loans in percent of total loans: 55.4 percent (2017, Table 1). - Dollar deposits in percent of total deposits: 74.4 percent (2017, Table 1). - Bank profitability: Return on assets 1.2 percent (2017, Table 1); Return on equity 14.4 percent (2017, Table 1). - Liquidity ratios: - Liquidity ratio: 52.2 percent (2017, Table 1). - Deposits/Loans ratio in national currency: 0.9 (2017, Table 1). - Deposits/Loans ratio in foreign currency: 2.5 (2017, Table 1). - FX lending to the nontradable sectors: "stands at around one-third of total loans." ### Yield differentials and market pricing - Real and nominal peso yields have declined in the short and medium term: "Real and nominal peso yields have come down in the short term... and in the medium term." - Markets price in a stable real depreciation: "markets continue to price in a stable real depreciation." - Breakeven curves show markets pricing "slightly declining future rates of inflation and nominal depreciation." ### Key macroeconomic and external indicators (selected exact figures from tables) - Real GDP (percent change): 3.1 percent (2017, Table 9 and Table 2 "Real GDP ... 3.1") - GDP (US$ billions): 63.6 (2017, Table 2) - Unemployment (end of period): 7.1 percent (2017, Table 2) - CPI inflation (average): 6.2 percent (2017, Table 9 and Table 2) - Current account (percent of GDP): 1.9 percent (2017, Table 9 and Table 3) - Gross international reserves (US$ millions): 15,473 (2016) and 15,813 (2017, Table 3); in months of imports: 14.5 months (2016), 13.5 months (2017, Table 3) - Exports, f.o.b. (US$ millions): 11,574 (2016); 12,317 (2017, Table 3) - Imports, f.o.b. (US$ millions): 9,196 (2016); 10,061 (2017, Table 3) ### Financial soundness indicators (Table 1 exact values) - Dollar loans in percent of total loans: 55.4 (2017) - Loan dollarization (constant exchange rate, January 2013): 42.0 (2017) - Dollar deposits in percent of total deposits: 74.4 (2017) - Deposit dollarization (constant exchange rate, January 2013): 65.6 (2017) - Private sector credit in percent of GDP: 27.9 (2017) - Private sector credit growth in percent: -0.7 (2017) - Regulatory capital in percent of risk-weighted assets: 13.9 (2017) - Non-performing loans in percent of total loans: 4.2 (2017) - Specific loan-loss provisions in percent of non-performing loans: 58.4 (2017) - Implicit exchange rate risk: 27.0 (2017) - Return on assets: 1.2 (2017) - Return on equity: 14.4 (2017) - Operating costs in percent of gross income: 66.5 (2017) - Liquidity ratio: 52.2 (2017) - Non-resident deposits in percent of total deposits: 10.2 (2017) - Deposits/Loans ratio in national currency: 0.9 (2017) - Deposits/Loans ratio in foreign currency: 2.5 (2017) ### Medium-term projections (selected) - Real GDP growth projected: 3.4 percent (2018), 3.1 percent (2019), 3.0 percent (2020), 2.9 percent (2021), 3.0 percent (2022) (Table 9). - CPI inflation projected (average): 6.4 percent (2018), 6.7 percent (2019), 6.6 percent (2020), 5.6 percent (2021), 5.1 percent (2022) (Table 9). - Current account balance (percent of GDP): 1.3 (2017), 0.6 (2018), 0.3 (2019), -0.1 (2020), -0.7 (2021) (Table 9 / Table 3). - Gross public sector debt (percent of GDP): 64.9 (2017), 65.0 (2018), 63.8 (2019), 63.7 (2020), 63.9 (2021), 63.8 (2022) (Table 9 / Table 5). *Source: IMF staff report excerpt (figures, tables, and text as provided).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overview - Staff assesses that the external position appears stronger than justified by fundamentals, based primarily on a sizeable current account gap indicated by the standardized External Balance Assessment (EBA) current account model. - The EBA lite real effective exchange rate (REER) model indicates Uruguay is overvalued. - External stability risks are judged to remain contained given the sufficient level of reserves and the projected current account surplus in 2017. ### Current account and trade dynamics - The current account recorded historic surpluses in 2016–17, driven by strong demand from Argentina, weak FDI, and low import price valuation effects. - Current account balances: - 2016: surplus of 1.7 percent of GDP. - 2017: expected surplus of 1.9 percent of GDP. - Drivers of the current account improvement: - Price and volume effects, and weak investment spending. - Sharp fall in oil prices reduced the value of imports between 2014 and 2016. - The value of fuel imports fell by 1.5 percent of GDP over this period. - Record net tourism inflows from Argentina in early 2016 and 2017 due to a strongly appreciated Argentinean real exchange rate. - Weak foreign investment inflows and weak government investment contributed to weakness in import volumes. - Medium-term projection: - As temporary foreign investment and bilateral trade imbalances unwind, the current account balance is expected to worsen gradually to a deficit of ¾ percent of GDP. - Uruguay: Merchandise Trade Balance (in percent of GDP) — annual figures (2013–2017 1/): - Trade balance: 2013: 2.0; 2014: 3.5; 2015: 2.5; 2016: 4.4; 2017: 4.5 - Exports: 2013: 23.1; 2014: 24.1; 2015: 20.9; 2016: 20.5; 2017: 19.2 - Imports: 2013: 21.1; 2014: 20.6; 2015: 18.4; 2016: 16.0; 2017: 14.7 - Fuel: 2013: 4.5; 2014: 3.5; 2015: 2.5; 2016: 2.0; 2017: 1.9 - Non-fuel: 2013: 16.7; 2014: 17.1; 2015: 15.9; 2016: 14.1; 2017: 12.8 - Capital: 2013: 3.4; 2014: 3.7; 2015: 3.4; 2016: 3.0; 2017: 2.2 - Consumption: 2013: 4.9; 2014: 5.1; 2015: 5.0; 2016: 4.8; 2017: 4.6 - Intermediary: 2013: 8.4; 2014: 8.2; 2015: 7.4; 2016: 6.4; 2017: 6.0 - Sources: Banco Central del Uruguay and Fund staff calculations. - 1/ 4 quarters through 2017Q2 ### Capital flows, market behavior, and exchange rate evolution - Net FDI flows: - Net FDI inflows (excluding merchanting firms) completely dried up in 2016; net FDI flows were negative in 2016. - Contributing factors: diminished export competitiveness, recessions in Argentina and Brazil. - Portfolio and other investment flows: - 2016 saw net capital outflows from nonresident sales in H1, reversed from Q3 with strong portfolio inflows. - 2017 Q1: sizeable outflows from nonresident sales of government securities; reversed in Q2–Q3 with strong nonresident interest in global bond issuances (June and September). - Other investment inflows remained positive through end-2016 despite over US$1 billion in nonresident deposit outflows after August 2016 (Argentina’s tax amnesty); in H1 2017 Argentine nonresident deposits reduced by a further US$1 billion, leading to net other investment outflows. - Peso and portfolio shifts: - Peso appreciation: about 1 percent in the year through September 2017 relative to the U.S. dollar. - Domestic pension funds shifted into peso assets, reducing foreign currency exposure by an estimated US$3 billion in favor of peso assets (to a large degree by shifting out of dollar deposits held at the central bank). - The central bank facilitated large portfolio shifts by directly purchasing U.S. dollars from pension funds and other large investors in exchange for central bank peso-denominated paper. ### Exchange rate assessment and valuation gaps - Multilateral and bilateral REER movements: - The multilateral real effective exchange rate appreciated by some 10 percent since the beginning of 2012, worsening competitiveness relative to countries outside the region. - Bilateral real exchange rate depreciated by some 10 percent against Argentina over the same period, reflecting Argentina’s real effective appreciation. - Multilateral REER with trading partners excluding Argentina appreciated by some 12 percent. - EBA and related model results (as presented): - Staff notes divergence across models: - The standardized EBA current account model indicates a sizeable current account gap and suggests the REER is 14 percent undervalued, based on a 5.6 percent of GDP excess of the current account balance over the model’s current account norm. The model indicates a minimal 0.2 percent of GDP contribution of policy gaps to this current account gap. - Staff judges the EBA current account gap could be overly high for two reasons: - Reported merchanting activities may not reflect domestic value added and have raised the most recent reported annual current account surplus by 0.8 percent of GDP for 2016; corresponding national accounts revisions are planned for 2019. - The model exaggerates the strength of the external position due to rapid improvements in the trade balance vis-à-vis Argentina; the estimated bilateral trade balance with Argentina in 2017 is 2.6 percent of GDP above its historical average, which is almost half the model’s current account gap. - Adjusting for these factors yields a staff estimate of the current account gap of 2.2–3.0 percent of GDP, and a corresponding REER undervaluation of 5.3–7.2 percent (using a CA elasticity of 0.415). - The EBA lite REER model assesses the REER to be 11 percent overvalued, driven mostly by its actual appreciation; the model’s REER norm is lowered by a weak level of private sector credit. - The EBA External Sustainability (ES) model assesses the REER to be broadly neutral because the projected medium-term current account balance (a 0.7 percent of GDP deficit) is close to the balance (a 0.9 percent of GDP deficit) that would stabilize the long-term value of net foreign assets relative to GDP. - Table excerpt (as presented): - I. EBA - Current Account model 2/ 4/: CA norm -13.5; CA projection -3.5 5/; Difference 2.1 6/; 5.6 - II. External Sustainability (ES) approach 3/ 4/: CA norm -0.3; CA projection -0.9 7/; Difference -0.7 8/; 0.13 - III. EBA-lite REER model: 10.7 - Source: Fund staff calculations. - Footnotes in original text describe data adjustments, elasticities, and projection vintages. ### External stability and reserves - Gross international reserves and central bank (BCU) position (October 27, 2017): - Gross reserves: US$15.3 billion. - BCU’s own reserves (net of the BCU’s foreign currency liabilities): US$7.4 billion. - In months of imports (2016): 15.6. - In percent of GDP (2016) 1/: 29.2. - In percent of short-term external (STE) debt (2016): 192.3. - In percent of STE debt and foreign currency deposits (2016): 63.7. - In percent of STE debt and nonresident deposits (2016): 136.4. - In percent of M2 (latest): 176.7. - In percent of M3 (latest): 55.2. - Memo items: - IMF's new reserve adequacy metric range in US$, billions (2017 Q2): 5.8 to 8.8. - Banks' gross foreign assets (US$, billions, 2016): 12.3. - Ratio of gross reserves plus banks' foreign assets to STE debt and foreign currency deposits (percent): 114.9. - Notes: - Reserves remain well above the upper bound of the IMF reserve adequacy metric range, and various other prudential benchmarks. - The sum of foreign assets of the central bank and commercial banks far exceeds the sum of non-resident deposits and short-term external debt, amounting to 115 percent of the sum of foreign currency denominated bank deposits (resident and non-resident) and short-term external debt. - Given the ample level of reserves, and the projected current account surplus in 2017, staff judges external stability risks remain contained. *Source: Annex I. External Sector Assessment (cr1823-uruguayartiv - Annex I. External Sector Assessment).* ### Annex II. Public Sector Debt Sustainability Analysis (DSA) ### Annex II. Public Sector Debt Sustainability Analysis (DSA) ### Coverage and composition of public sector debt - Uruguay reports debt figures on a consolidated basis for the whole public sector, excluding public commercial banks, but including the central bank. - Classification: Uruguay is classified as higher scrutiny country, with gross financing needs and debt ratios exceeding the relevant benchmarks. - Components of public sector gross debt (end-2016): - Central government debt: 47 percent of GDP. Average maturity: just under 14 years. Share of local currency-denominated debt: close to one half. - Central bank debt: declined from 12 to 10 percent of GDP in 2016. Composition: 2/3 short-term and 2/3 local currency-denominated. Primary purpose: manage liquidity. - Public enterprises’ debt: 3 percent of GDP. - Debt of local governments and other public sector entities: less than one percent of GDP. - Currency composition (end-2016): 47 percent of public sector debt was in local currency, almost 2/3 of which was in CPI-indexed units. ### Financial assets and liquidity buffers - Total public sector financial assets (including international reserves): 32 percent of GDP at end-2016. - Contingent credit lines from multilateral institutions: represented 4½ percent of GDP in 2016. - Central bank financial assets (including foreign reserve assets): close to 27 percent of GDP at end-2016; reserves at 25 percent of GDP. - About 13 percent of GDP in reserves were the counterpart to reserve requirements on foreign currency bank deposits. - Financial assets of the non-financial public sector: 5 percent of GDP at end-2016, mostly held in liquid instruments (e.g., securities and deposits). - Liquid financial assets of the public sector (computed as total gross public sector assets minus the reserves held by banks at the BCU against foreign currency deposits): 19 percent of GDP at end-2016. - Net public sector debt (gross debt minus liquid assets): 43 percent of GDP at end-2016. ### Baseline scenario and medium-term projections - Under the baseline scenario, gross debt of the public sector is projected to stabilize at around 63 percent of GDP in 2022. - 2017 dynamics: - Gross debt projected to increase by almost 3 percent of GDP. - Net debt projected to rise by only 1 percent of GDP. - Outer years: both gross and net debt projected to remain broadly stable as a share of GDP. - Debt-stabilizing primary balance: estimated at close to 0.5 percent of GDP, assuming real GDP growth, real interest rates, and other identified debt-creating flows remain at the level projected for 2022. - Baseline assumptions judged broadly plausible: - Staff’s forecast track record not systematically biased; projection errors over 2008–16 broadly in line with other countries. - Inflation forecasts tended to underestimate actual inflation through 2016; growth forecasts largely on target. - Fan charts: - Width of symmetric fan chart estimated at around 15 percent of GDP, indicating limited uncertainty around the baseline. ### Alternative scenarios - Historical scenario (key macro variables behave as in the last decade): yields a downward-sloping debt path due to high growth rates and exchange rate appreciation during recovery from the 2002 financial crisis. - Constant Primary Balance scenario (underlying assumptions listed): - Real GDP growth: 3.1, 3.4, 3.1, 3.0, 2.9, 3.0 (2017–2022). - Inflation: 5.0, 6.4, 6.4, 6.5, 6.4, 6.4. - Primary Balance: -0.1 each year. - Effective interest rate: 6.4, 6.4, 6.9, 7.1, 7.4, 7.4. ### Vulnerabilities and financing profile assessment - Vulnerability analysis used non-financial public sector data (excluded central bank debt) to compare against standardized benchmarks. - Indicators: - Share of public sector debt held by nonresidents is above its benchmark. - Other indicators are within their respective benchmarks. - Short-term debt of the non-financial public sector: negligible. - Mitigating factors: long average maturity, favorable currency composition, high level of liquid financial assets, and access to contingent credit lines. - Public gross financing needs and other market indicators (selected values shown as of December 06, 2017 table): - Nominal gross public debt: 62.6 (2015), 64.6 (2016), 61.9 (2017), 64.6 (2018), 64.6 (2019), 63.3 (2020), 63.1 (2021), 63.3 (2022), 63.0 (projection labels repeated). - Public gross financing needs: 11.5 (2015), 20.5 (2016), 14.3 (2017), 14.3 (2018), 12.6 (2019), 14.5 (2020), 15.0 (2021), 14.1 (2022), 15.5 (projection labels repeated). - Net public debt: 36.4 (2015), 39.7 (2016), 42.7 (2017), 43.7 (2018), 43.9 (2019), 44.1 (2020), 44.1 (2021), 44.2 (2022), 44.1 (projection labels repeated). - Real GDP growth (in percent): 5.2 (2015), 0.4 (2016), 1.5 (2017), 3.1 (2018), 3.4 (2019), 3.1 (2020), 3.0 (2021), 2.9 (2022), 3.0 (projection labels repeated). - Inflation (GDP deflator, in percent): 8.0 (2015), 9.0 (2016), 7.0 (2017), 5.0 (2018), 6.4 (2019), 6.4 (2020), 6.5 (2021), 6.4 (2022), 6.4 (projection labels repeated). - Effective interest rate (in percent): 4.9 (2015), 4.6 (2016), 5.5 (2017), 6.4 (2018), 6.4 (2019), 6.9 (2020), 7.1 (2021), 7.3 (2022), 7.4 (projection labels repeated). - EMBIG (bp): 146 (as noted in table). - 5Y CDS (bp): 104 (as noted in table). - Ratings: Moody's Baa2/Baa2 (Foreign/Local); S&P: BBB/BB; Fitch: BBB-/BBB (formatting preserved as in source). ### Stress tests and sensitivity analysis - Stylized downside combined shock: - Permanent 20 percent exchange rate depreciation (relative to baseline). - Temporary drop in growth and primary balances. - Permanent increase in real interest rates. - Impact over five-year forecast horizon: - Gross debt ratio rises by about 15 percentage points. - Net debt rises by 13 percentage points. - Sensitivity notes: - Net debt less sensitive to exchange rate shocks than gross debt because valuation effects on assets partly offset valuation effects on foreign-currency denominated debt. - Probabilistic results from fan charts under combined shocks: - Gross public debt would remain below 73 percent of GDP in 90 percent of the cases. - Net public debt would remain below 56 percent of GDP under the combined shock scenario. - Macro-fiscal shock scenarios and example parameter paths (2017–2022 under various shocks): - Combined Shock (selected years): Real GDP growth: 3.1, 1.0, 0.7, 3.0, 2.9, 3.0; Inflation: 5.0, 5.8, 5.8, 6.5, 6.4, 6.4; Primary balance: -0.1, -1.1, -1.6, 0.5, 0.6, 0.8; Effective interest rate: 6.4, 6.8, 7.1, 7.8, 8.2, 8.3. - Real Interest Rate Shock example: Effective interest rate path includes spikes to 7.2, 7.7, 8.1, 8.3 in later years. - Stress-test outputs illustrated (select metrics shown in charts): - Gross Nominal Public Debt (in percent of GDP) under baseline and shocks. - Gross Nominal Public Debt (in percent of Revenue). - Public Gross Financing Needs (in percent of GDP). ### Key fiscal dynamics and debt-creating flows (selected historical and projected contributions) - Change in gross public sector debt (cumulative, selected years shown): -2.5 (2006-2014 actual), 3.2 (2015), -2.7 (2016), 2.7 (2017), 0.1 (2018), -1.3 (2019), -0.2 (2020), 0.2 (2021), -0.2 (2022), 1.2 (projection labels). - Identified debt-creating flows (cumulative): -3.9 (2006-2014 actual), 0.6 (2015), -5.3 (2016), 2.5 (2017), -1.4 (2018), -2.5 (2019), -1.4 (2020), -1.1 (2021), -1.5 (2022), -5.4 (projection labels). - Primary deficit/contribution (selected): - Primary deficit: -1.2 (2006-2014 actual), 1.0 (2015), 0.8 (2016), 0.1 (2017), -0.2 (2018), -0.5 (2019), -0.5 (2020), -0.6 (2021), -0.8 (2022), -2.4 (cumulative). - Primary (noninterest) revenue and grants: 28.3 (2015), 29.0 (2016), 29.4 (2017), 29.6 (2018), 29.8 (2019), 30.0 (2020), 30.1 (2021), 30.2 (2022), cumulative 180.1. - Primary (noninterest) expenditure: 27.1 (2015), 30.0 (2016), 30.2 (2017), 29.8 (2018), 29.6 (2019), 29.5 (2020), 29.5 (2021), 29.7 (2022), cumulative 177.7. - Automatic debt dynamics (cumulative): -5.1 (2006-2014 actual), 3.0 (2015), -2.6 (2016), -1.0 (2017), -2.2 (2018), -1.7 (2019), -1.6 (2020), -1.3 (2021), -1.3 (2022), cumulative -9.2. - Interest rate/growth differential contribution: -4.9 (2006-2014), -2.9 (2015), -2.0 (2016), -1.0 (2017), -2.2 (2018), -1.7 (2019), -1.6 (2020), -1.3 (2021), -1.3 (2022), cumulative -9.2. - Of which: real interest rate: -1.9, -2.6, -1.1, 0.7, -0.2, 0.1, 0.2, 0.4, 0.4, cumulative 1.6. - Of which: real GDP growth: -3.0, -0.2, -0.9, -1.8, -2.0, -1.8, -1.7, -1.7, -1.7, cumulative -10.7. - Exchange rate depreciation contribution examples: -0.2, 5.9, -0.7 (selected early years). - Other identified debt-creating flows (cumulative): 2.4 (2006-2014), -3.4 (2015), -3.4 (2016), 3.4 (2017), 1.0 (2018), -0.3 (2019), 0.7 (2020), 0.8 (2021), 0.6 (2022), cumulative 6.2. - Residual (including valuation changes and interest revenues): 1.4, 2.6, 2.5, 0.2, 1.5, 1.2, 1.2, 1.2, 1.2, cumulative 6.5. _Italic: Source: IMF staff calculations as presented in Annex II. Public Sector Debt Sustainability Analysis (DSA)._ ### Annex III. External Debt Sustainability Analysis ### Annex III. External Debt Sustainability Analysis ### Data revisions and methodology - Improvements in the authorities’ data collection methods led to an upward revision in Uruguay’s external debt relative to what was shown in last year’s Staff Report. - These upward revisions amounted to some 20 percent of GDP in 2016, almost entirely due to wider survey coverage of firms in the non-financial private sector. - Revisions back to 2012 create a structural break in the statistics on gross external debt between 2011 and 2012. - The new debt is predominantly owed to foreign parent firms within a larger corporate structure. - Gross external assets have been revised up commensurately, calling into question whether external risk has risen with the data revisions. - A detailed description of the change in methodology and its resulting data revisions appears in Annex IV. ### Recent developments and levels - Gross external debt peaked in 2015 at 90 percent of GDP and then fell to 75 percent of GDP in 2016. - Some 45 percent of the external debt is owed by the public sector. - Gross external debt is projected to have declined in 2017 to 69 percent of GDP, attributable primarily to a current account surplus and exchange rate appreciation. - Reserve accumulation is occurring as part of de-dollarization transactions that are expected to be accommodated by the BCU. ### Projections and debt dynamics - Staff expects a stable ratio of external debt to GDP in subsequent years, where current account surpluses and favorable automatic debt dynamics are offset by reserve accumulation. - Gross external financing needs are expected to increase gradually over the medium term with an amortization of longer-term debt and the normalization of the non-interest current account. - Favorable debt dynamics from (non-debt creating) capital inflows and real GDP growth are expected to support a stable long-term ratio of gross external debt to GDP even in the event of current account deficits as high as 4.4 percent of GDP. - Automatic debt dynamics and contributors (table highlights): - Contribution from nominal interest rate examples: 1.1, 1.7, 1.8, 2.3, 2.4, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 (percent series as shown). - Contribution from real GDP growth examples: -1.5, -2.7, -1.9, -0.3, -1.3, -2.1, -2.2, -2.1, -2.0, -1.9, -2.0 (percent series as shown). - Gross external financing need (in billions of US dollars): 6.0, 7.2, 6.6, 9.7, 7.4, 5.7, 5.6, 5.8, 6.4, 7.2, 9.0 (series shown in the table). - Gross external financing need (in percent of GDP): 11.2, 13.1, 12.2, 19.9, 13.6, 9.6, 9.0, 8.9, 9.1, 9.8, 11.7 (series shown in the table). ### Risks and stress tests - The main risk to the outlook is an exchange rate depreciation. - A counterfactual one-off devaluation of 30 percent could increase the gross external debt-to-GDP ratio by a similar number of percentage points of GDP, but would not lead to unstable subsequent debt dynamics, holding other things equal. - Bound tests and scenario analysis presented include: - Interest rate shocks (permanent one-half standard deviation shocks) and combined shocks. - One-time real depreciation of 30 percent occurs in 2017 in the real depreciation shock. - Historical scenarios use ten-year historical averages to project debt dynamics five years ahead. - Scenario indicators (examples from figure captions and annotations): - Baseline external debt level shown as 71 (percent of GDP) in plots for scenario comparisons. - Combined shock and CA shock lines illustrate higher debt paths (e.g., scenario value 77 in some panels). - Growth shock panels reference baseline and scenario growth assumptions (e.g., Baseline: 3.1, Scenario: 1.9, Historical: 4.4; and Baseline: 2.3, Scenario: 1.1, Historical: -0.6 in different panels). ### Annex IV: The Revised BOP (selected effects and merchanting/compraventas) - On 29 September 2017, the Banco Central de Uruguay (BCU) released a new version of Balance of Payments (BOP) and International Investment Position (IIP) data going back to 2012, conforming to BPM6. - The BCU widened the sample of firms surveyed from some 200 corporate groups to approximately 490. - The national accounts currently published by the BCU do not yet reflect these data revisions. Effects on the BOP and IIP - Two main data revisions: - An upward shift in the current account balance of approximately US$0.8 billion (on average). - An increase in gross external debt of the non-financial private sector of approximately US$14 billion. - Many of the new survey firms responsible for the increase in measured exports are merchant firms (compraventas), and many of these exporters are owned by non-residents; the balance of the primary income account was revised downward to reflect profits accruing to these non-residents. - Much of the additional gross external debt is held by parent companies within larger corporate ownership structures; these newly surveyed firms hold significant external assets that limit the upward revision in net external debt. - Difference between revisions: - Small upward revision in the net external debt of direct investment enterprises: US$2 billion in 2016. - Large upward revision in the gross external debt of the non-financial private sector: US$14 billion in 2016. - Overall the net IIP is revised down by some US$2.5 billion. Compraventas / merchanting - Merchant firms purchase goods from non-residents and resell them to non-residents without the goods entering Uruguay’s economic territory. - Approximately four-fifths of Uruguayan merchant firms operate in grains; the remainder sell industrial components for manufacturing processes. - Merchant firms typically operate as subsidiaries of foreign-owned parent companies; merchanting activity may be episodic and often secondary to other activities. - Authorities’ calculations of balance of payments data including and excluding compraventas show a sizable net current account impact of some 0.8 percent of GDP in 2016. Uruguay: impact of merchanting/compraventas on the BOP (percent of GDP), selected series shown in table: - Trade Balance (2012–2016): 0.7%, 2.0%, 3.5%, 2.5%, 4.4% - Trade Balance excl compraventas (2012–2016): -3.0%, -1.0%, -0.2%, 0.8%, 2.1% - Services Balance (2012–2016): 2.3%, -0.4%, -0.6%, 0.8%, 1.6% - Services Balance excl compraventas (2012–2016): 3.0%, 0.5%, 0.3%, 1.5%, 2.1% - Factor income (2012–2016): -7.3%, -5.2%, -6.0%, -4.4%, -4.7% - Income excl compraventas (2012–2016): -4.5%, -3.3%, -3.9%, -3.7%, -3.8% - Current account (2012–2016): -4.0%, -3.3%, -2.8%, -0.7%, 1.7% - CA excl compraventas (2012–2016): -4.2%, -3.5%, -3.5%, -1.1%, 0.9% - FDI (2012–2016): -4.2%, -4.8%, -4.1%, -1.6%, 1.5% - FDI excl compraventas (2012–2016): -4.1%, -3.8%, -4.5%, -2.6%, 0.2% *Prepared by IMF staff; Annex III and Annex IV as in the source document.* ### 7. Accessible Tourism for UY ### 7. Accessible Tourism for UY ### Relations with the Inter-American Development Bank (IDB) - IDB Board approved the Country Strategy with Uruguay (2016–20) in December 2015. - Sovereign-guaranteed lending under the 2016–20 program is expected to reach approximately US$1.8 billion. - The program includes additional non reimbursable financing for technical assistance and analytical work. - Approved lending under the previous Country Strategy (2010–15) reached approximately US$1.9 billion in sovereign guaranteed loans and US$1 billion in non-sovereign guaranteed loans. - As of October 31st 2017, the Bank’s portfolio in execution in Uruguay includes 41 sovereign guaranteed loans for US$2.2 billion: - 37 investment loan operations totaling US$1.4 billion. - 4 policy-based loans for US$800.8 million with a deferred drawdown option. - Active public sector portfolio composition: - productive infrastructure (36%) - international positioning (26%) - habitat improvement (13%) - urban and departmental management (7%) - public sector management (7%) - human capital and employability (6%) - innovation (3%) - early childhood and youth (2%) - Active private sector portfolio (as of September 30th, 2017): 24 loans totaling US$744.1 million, primarily in: - energy (59%) - agribusiness (36%) ### Financial Relations with the Inter-American Development Bank — Key Figures - Total outstanding loans: US$1,801 (As of October 31, 2017) - Loan transactions (In millions of U.S. dollars) - Disbursement by year: - 2005: 242.3 - 2006: 114.8 - 2007: 112.9 - 2008: 337.2 - 2009: 477.3 - 2010: 54.3 - 2011: 138.2 - 2012: 121.6 - 2013: 195.9 - 2014: 166.3 - 2015: 182.5 - 2016: 174.4 - Amortization by year: - 2005: 220.0 - 2006: 519.6 - 2007: 133.8 - 2008: 140.0 - 2009: 162.0 - 2010: 465.1 - 2011: 115.4 - 2012: 120.7 - 2013: 591.7 - 2014: 99.2 - 2015: 110.1 - 2016: 118.9 - Net Loan Flows by year: - 2005: 22.3 - 2006: -404.8 - 2007: -21.0 - 2008: 197.2 - 2009: 315.2 - 2010: -410.8 - 2011: 22.8 - 2012: 0.8 - 2013: -395.8 - 2014: 67.1 - 2015: 72.4 - 2016: 55.5 ### Statistical Issues — Assessment of Data Adequacy for Surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected area is national accounts. - National accounts: - 2009 revision updated benchmark year (from 1983 to 1997 and 2005) and adopted SNA 1993. - Shortcomings: limited coverage of the enterprise survey, partial update of business register, poor quality source data for some GDP components, inadequate information on the informal economy, incomplete quarterly accounts. - Long-time series are not available on the BCU website. - No regular schedule for updating the base year of the national accounts. - Causes of current revisions to quarterly national accounts are not explained to users. - Need to plan adoption of the 2008 SNA and update the base year. - Prices: - CPI base period: December 2010 = 100; national coverage; includes more than forty thousand price quotations. - CPI does not cover implicit rent or net acquisitions of owner-occupied dwellings. - Reselection of the sample of detailed products for the CPI has not been done for an extended period. - Wholesale price index base updated to 2001. - Producer price indices (March 2010 =100) for national products recently disseminated; PPI does not cover utilities, construction, business and other services, and exported output. - CPI and PPI: statistical outputs/intermediate results are not validated with alternative sources; would benefit from more regular and frequent weight updates. - Government finance statistics: - Official data for central administration, state enterprises, and social security system are complete and current. - Timeliness problems for local governments. - Monthly and quarterly financing and debt data disseminated on the BCU website from 1999 onwards for central government and total public sector, but not reported for publication in the International Financial Statistics. - Data for the Government Finance Statistics Yearbook cover consolidated central government revenue and expense; local government revenue and expense not reported since 1994. - Monetary and financial statistics: - Prepared in accordance with the IMF's Monetary and Financial Statistics Manual (2000). - Authorities report monetary data using the standardized reporting forms (SRFs) for the central bank, other depository corporations, and other financial corporations (OFCs). - Data for OFCs are limited to off-shore financial institutions. - A mission could be fielded to expand institutional coverage of OFCs and compile SRF for OFCs with full institutional coverage. - Financial sector surveillance: - Authorities participate in CDIS, CPIS, and FSI databases. - Only annual FSIs data from 2009 through 2013 have been reported; authorities have not responded to requests for more current data. - FSIs on nonfinancial corporations, households, market liquidity, and real estate markets are not available. - BCU disseminates FSIs for individual banks monthly and generates system FSIs weighted by asset share. - External sector statistics: - Balance of payments and IIP compiled and published quarterly, following BPM6 recommendations. - Uruguay disseminates the international reserves and foreign currency liquidity data template, submits quarterly external debt statistics to QEDS, and participates in CPIS and CDIS. ### Data Standards, Reporting, and Timeliness - Uruguay subscribed to the SDDS in February 2004 and is in observance. - Data ROSC published on October 1, 2001. - A data reassessment ROSC on CPI, PPI and NA published in February 2014. - Reporting to STA: - Consumer and wholesale price indices reported regularly and timely for IFS publication. - Authorities do not provide trade price and volume indices for IFS. - Annual GFS are regularly reported to STA for Government Finance Statistics Yearbook. - No high frequency GFS reported for IFS publication. - Uruguay reports to STA balance of payments and IIP data for publication in IFS and the Balance of Payments Statistics Yearbook. ### Uruguay: Common Indicators Required For Surveillance (selected entries) - Exchange Rates: - Date of latest observation: 12/12/17 - Date received: 12/12/17 - Frequency of Data/Reporting/Publication: D / D / D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: - Date of latest observation: 12/12/17 - Date received: 12/12/17 - Frequency: D / D / D - Reserve/Base Money: - Date of latest observation: 09/17 - Date received: 11/19/17 - Frequency: M / M / M - Broad Money: - Date of latest observation: 08/17 - Date received: 11/19/17 - Frequency: M / M / M - Central Bank Balance Sheet: - Date of latest observation: 08/17 - Date received: 11/19/17 - Frequency: M / M / M - Consolidated Balance Sheet of the Banking System: - Date of latest observation: 08/17 - Date received: 11/19/17 - Frequency: M / M / M - Interest Rates: - Date of latest observation: 11/27/17 - Date received: 11/27/17 - Frequency: D / D / D - Consumer Price Index: - Date of latest observation: 11/17 - Date received: 12/05/17 - Frequency: M / M / M - Data Quality – Methodological Soundness: O, LO, O, O - Data Quality – Accuracy and Reliability: LO, O, O, LNO, NO - Revenue, Expenditure, Balance and Composition of Financing – Central Government: - Date of latest observation: 10/17 - Date received: 11/30/17 - Frequency: M / M / M - Stocks of Central Government and Central Government-Guaranteed Debt: - Date of latest observation: Q2/17 - Date received: 10/1/17 - Frequency: Q / Q / Q - External Current Account Balance: - Date of latest observation: Q2/17 - Date received: 9/30/17 - Frequency: Q / Q / Q - GDP/GNP: - Date of latest observation: Q2/17 - Date received: 09/15/17 - Frequency: Q / Q / Q - Data Quality – Methodological Soundness: LO, LO, LO, LO - Data Quality – Accuracy and Reliability: LNO, LNO, LO, O, LO ### Statement by Adrian Armas and David Vogel — Key Messages (January 22, 2018) - Growth and macro performance: - 15 years of positive growth. - In 2017, at a rate of about 3 percent, Uruguay recorded its fifteenth consecutive year of economic expansion. - Growth rate in 2017 was below the period average (somewhat above 5 percent), but better than the previous two years; a sound reacceleration is ongoing. - Uruguay has decoupled from main regional trade partners; export market diversification and product expansion (including software exports) highlighted. - Social progress: - Poverty rates reduced from 32.5 percent in 2006 to 9.4 percent in 2016. - Inequality (Gini Index measured by Instituto Nacional de Estadística) declined from 0.45 to 0.38 in the same period. - Education remains a critical area for further improvement. - Fiscal policy and public finances: - Fiscal consolidation underway; authorities’ target for 2019 is an overall deficit of 2.5 percent of GDP. - Public enterprises made an important contribution to fiscal performance in 2017; state oil company Ancap returned to financial soundness. - Uruguay’s VAT evasion about 13 percent in 2015 (noted as the lowest level in Latin America). - Monetary policy and inflation: - Inflation climbed to 11 percent in May 2016; a tighter monetary stance contributed to a steep fall in inflation. - Since March 2017, inflation systematically within the central bank’s target range, ending the year at 6.55 percent. - Inflation expectations are well anchored and within the target range; non-tradable inflation has declined. - Central Bank of Uruguay announced continuation of a tight monetary stance. - Exchange rate and de-dollarization: - Authorities view exchange rate flexibility as key to cushion shocks; interventions used to soften disproportionate temporary movements. - Authorities agree with staff on need to continue promoting de-dollarization, while noting substantial progress: 51 percent of central government debt denominated in local currency (compared with 12 percent in 2005 and 26 percent a decade ago). - Debt profile and buffers: - Average time to maturity of Central Government Debt is about 14 years. - 94 percent of debt is at a fixed rate. - In June and September (year not specified in the statement), two issuances of 5-year and 10-year nominal fixed-rate local currency bonds were launched in international markets (both included in the JP Morgan GBI-EM benchmark), increasing nominal peso composition of public debt. - International reserves remained well above the Fund’s reserve adequacy metric. - Considerable contingent lines from multilateral and regional institutions are available. - Financial sector and credit: - Authorities monitoring bank credit due to its relatively low level and declining trend in 2017. - Financial soundness indicators point to stability: capital adequacy, non-performing loans at stable low levels after a moderate increase in 2015 and 2016, liquidity, and implicit exchange rate risk. - Structural reforms over more than a decade in regulation, supervision, and public banks governance have supported financial stability. - Institutions and governance: - Uruguay classified as a full democracy by Economist Intelligence Unit. - Ranked 21st (out of 176) by Transparency International’s Corruption Perception Index. - Ranked 20th (out of 135) by World Justice Project’s Rule of Law. - Ranked 36th (out of 180) by Heritage Foundation’s Index of Economic Freedom. - In the World Bank’s Governance Indicators, Uruguay occupies second place in the Americas (after Canada) in Voice and Accountability, and Political Stability and Absence of Violence. - Challenges and priorities going forward: - Enhance potential growth by significantly improving education quality and increasing investment rates. - Deploy policies to boost investments and greater use of public-private partnerships (PPPs) to address infrastructure gaps. - Employment creation has lagged behind economic activity; need to enhance workers’ training programs. - Address productivity issues while continuing fiscal consolidation. - Innovations and initiatives noted: an “e-peso” pilot project (a digital bill with same functioning as a physical one), technology readiness, shift to renewable energy, progress in financial inclusion, and efforts to attract investments. *Source: cr1823-uruguayartiv - 7. Accessible Tourism for UY (PDF chapter/section).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1823-uruguayartiv.pdf_