## _cr1048

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---

### Determinants of cross-country differences in the output impact of the global crisis
- Economies with higher credit growth and more leverage were hit more strongly.
- More flexible exchange-rate regimes allowed economies to absorb the shock more easily.
- For emerging markets, the financial channel trumps the trade impact.
- Among emerging markets, Uruguay’s growth revision between August 2008 and August 2009 was -3.8 percentage points, compared to a median revision among emerging markets of -6.4 percentage points.
- A simple model fits the Uruguayan case well, explaining 3.3 percentage points of the revision.
- Contributing factors to Uruguay’s milder impact included:
  - Low degree of leverage (credit over deposits).
  - A flexible exchange rate regime.
  - Lack of developed capital markets and banks’ low exposure to toxic assets.

### Macroeconomic and financial outcomes through 2009
- GDP and activity:
  - Real GDP contracted in Q1 2009 by 2.3 percent (q/q SA) and expanded in Q2 2009 by 0.5 percent (q/q SA).
  - Real GDP projected to grow by at least 0.6 percent in 2009.
  - Private consumption growth decelerated from 7.5 percent in Q4 2007 to 0.8 percent in Q2 2009 (y/y).
  - Unemployment rose temporarily but fell back to 7.2 percent in August 2009.
- External sector and financing:
  - FDI contracted by 42 percent y/y in the first semester of 2009 but remained an important external financing source.
  - The peso depreciated by almost 30 percent against the US dollar between August and December 2008; subsequently the currency recovered and capital inflows resumed.
  - Gross international reserves continued to increase; net reserves (excluding private banks’ holdings) are above September 2008 levels.
- Banking sector and credit:
  - Deposit growth remained steady at about 15 percent.
  - Non-resident deposits rose by 36 percent y/y and account for about 19 percent of total deposits.
  - Some re-dollarization of deposits occurred during financial turbulence.
  - Banks remain very liquid and well-capitalized.
  - Non-performing loans are 1 percent of total loans.
  - Credit growth slowed from a peak of 45 percent in May 2008 to around 6 percent (y/y).
  - Private sector credit is 26 percent of GDP.
  - Loan loss provisions are about seven times loan delinquencies; statistical provisions are currently 2½ times non-performing loans.

### Policy assessment and short-term guidance
- Monetary policy:
  - Staff assessment: in the short term, there is no room for loosening monetary policy.
  - Policy rates were raised by 225 basis points to 10 percent in January 2009.
  - The BCU cut rates by 100 basis points in March 2009 and by 100 basis points in June 2009.
  - Headline CPI inflation fell from close to 10 percent in January 2009 to 6.3 percent in June 2009.
  - September 12-month CPI inflation was 6.9 percent (compared to a target range of 3–7 percent).
  - Current staff view: the real exchange rate is broadly in equilibrium.
- Fiscal policy:
  - Authorities allowed automatic stabilizers of about 1 percent of GDP to operate; fiscal outlays grew at close to 18 percent, concentrated largely in permanent rises in wages, transfers and pensions (these three components totaling ¾ of the increase).
  - Staff recommendation for near-term fiscal policy: be cautious; contain expenditure growth in non-priority areas while fully executing programs with higher multipliers (planned public investment and social programs).
  - Staff advocacy for next year: limit the deficit to around 1 percent of GDP to keep fiscal policy broadly neutral.
  - Medium-term fiscal target proposed: in the five-year budget to be adopted next year, the new authorities should target on average an overall deficit of at most 0.4 percent of GDP (equivalent to a primary surplus of around 2.3 percent of GDP) starting in 2011, to bring down gross debt to below 40 percent of GDP by 2014.
- Other policy recommendations:
  - Plan for energy-related contingencies (recurrent droughts) by considering insurance mechanisms or establishing a countercyclical energy fund.
  - Aim for lower inflation rates to reap growth benefits, protect the poor, promote de-dollarization, and avoid costly emergency measures if inflation threatens to exceed 10 percent.
  - Strengthen the monetary policy framework:
    - Stronger commitment to the inflation target range, possibly with enhanced accountability and consideration of strengthening central bank autonomy.
    - Ensure exchange-rate intervention is consistent with and clearly subordinated to the inflation objective.
    - Communicate monetary policy within an explicit, forward-looking framework (based on forecasts) to enhance credibility and support de-dollarization.
  - Advance energy sector and public sector reforms to raise potential growth:
    - Promote private investment to expand power generation capacity and improve infrastructure.
    - Continue promoting public sector efficiency, reduce red tape, and improve governance of public enterprises.
  - Continue prioritizing budget resources to sustain and improve well-targeted social programs to reduce poverty further.

### Macroeconomic outlook and key projections (selected)
- Growth outlook:
  - The economy is well positioned to benefit from the global recovery; for 2010 growth is expected to reach 3.5 percent.
  - Near-term developments will significantly depend on external developments, with regional developments (notably Argentina) of particular importance.
  - Medium-term prospects are good, supported by considerable FDI in recent years.
- Key macro figures (2008–2010):
  - Real GDP growth: 8.9 (2008), 0.6 (2009), 3.5 (2010)
  - Inflation (CPI, eop): 9.2 (2008), 7.0 (2009), 6.5 (2010)
  - Overall fiscal balance (percent of GDP): -1.4 (2008), -2.6 (2009), -2.1 (2010)
  - Primary fiscal balance (percent of GDP): 1.4 (2008), 0.4 (2009), 0.8 (2010)
  - Current account balance (percent of GDP): -4.6 (2008), -1.6 (2009), -2.5 (2010)
  - FDI (percent of GDP): 5.7 (2008), 3.0 (2009), 3.1 (2010)
  - Gross International Reserves (1/): 150.6 (2008), 194.3 (2009), 203.7 (2010)
    - 1/ In percent of short term debt plus bank non-resident deposits
- External accounts and terms of trade:
  - Current account deficit is expected to narrow from 4.6 percent of GDP to 1.6 percent in 2009 and 2.5 percent in 2010, partly reflecting a terms-of-trade improvement estimated at around 9 percent in 2009.

### Inflation, monetary conditions and recommendations
- Inflationary pressures are likely to persist: output around potential, inflation expectations in the upper half of the target range, most core measures above it.
- Risks to inflation: resurgence of commodity prices, the ongoing recovery, a (moderate) positive fiscal impulse, and persistently high real wage growth above productivity growth in the last few quarters.
- Real short-term-interest rates are around one percent; staff view current monetary stance as not particularly tight and see no room for further monetary policy easing at this point.
- Policy recommendations on monetary framework:
  - Transparency of foreign-exchange interventions: interventions should be consistent with and clearly subordinated to the inflation target.
  - Improve communication using a forward-looking framework; BCU working on forecasting models and stronger communication.
  - Consider enhancing central bank autonomy and establishing a more formal accountability mechanism regarding the inflation objective.

### Fiscal position, financing and medium-term strategy
- Fiscal developments:
  - The primary fiscal surplus declined in 2008 and is worsening further in 2009 as revenue growth slows, public energy companies face higher drought-related costs of about 1.6 percent of GDP for the second consecutive year, and public spending continues to rise.
  - The overall deficit is projected to nearly double, from 1.4 percent of GDP in 2008 to around 2.6 percent of GDP in 2009.
- Financing:
  - Authorities secured credits of about 4 percent of GDP from multilateral organizations and placed a US$500 million bond on the international market to secure financing through 2010.
- Debt metrics:
  - Gross public debt ratio had fallen to 59.7 percent by end-December 2008 and is projected to increase slightly in 2009.
  - Net public debt (excluding central bank’s net reserves) stands at around 50 percent of GDP.
- Short-term guidance:
  - No clear-cut case for further stimulus given activity around potential.
  - Near-term fiscal policy should be cautious; contain expenditure growth in non-priority areas and contain the budget deficit at no more than currently envisaged.
  - For next year, staff advocated limiting the deficit to around 1 percent of GDP (roughly equivalent to a structural balance of -1.7 percent of GDP).
  - Proposed measures: combination of expenditure and revenue measures totaling 1.1 percent of GDP relative to a passive scenario.
- Medium-term target:
  - Target an overall deficit of at most 0.4 percent of GDP starting 2011 (equivalent to a primary surplus of around 2.3 percent of GDP) to bring down gross debt to below 40 percent of GDP by 2014.

### Banking system soundness, regulation and buffers
- Prudential reforms since the 2002–03 crisis include explicit liquidity requirements; capital charges for market and operational risks; limits to risk exposures; forward-looking loan classification and provisioning rules.
- Dynamic Loan Loss Provisions (Box 5):
  - Introduced September 2001: banks required to provision each year an average of one percent of their total loans to the non-financial private sector less specific loan losses, until provisions reach 3 percent of loans.
  - The contribution rule yields larger provisions when credit grows fast and delinquencies are low; during downturns banks can tap funds of dynamic provisions.
  - Scenario results (monetary values in millions of US dollars):
    - BCU adverse scenario: ∆ GDP: -3.64%; ∆ Exchange Rate: 13.02%; Bond Spread: 733; Dynamic Provisions: 158.8; Expected Loan Losses: 100; Coverage of Losses: 100.00%
    - BCU crisis scenario: ∆ GDP: -8.00%; ∆ Exchange Rate: 31.70%; Bond Spread: 1000; Dynamic Provisions: 158.8; Expected Loan Losses: 383.64; Coverage of Losses: 41.40%
    - 2002-03 Crisis: ∆ GDP: -11.00%; ∆ Exchange Rate: 50.00%; Bond Spread: 2000; Dynamic Provisions: 158.8; Expected Loan Losses: 1,246.6; Coverage of Losses: 12.70%
  - Assessment: dynamic provisions would fully cover losses in a sizeable shock but only cushion part of losses in a full-blown crisis; overall provisions appear sufficient for current uncertainty, but it is too early to conclude the system is overprovisioned.
- Banking indicators:
  - Non-performing loans: 1 percent of total loans.
  - Banks’ return on average assets fell slightly to 0.9 percent in June 2009; when excluding the single state-owned bank (Banco República del Uruguay), return on assets is -0.1 percent.
  - Reserve requirement adjustments: BCU reduced reserve requirements on peso deposits from 25 to 20 percent, and on dollar deposits from 35 to 30 percent.

### Energy, infrastructure and public sector reform priorities
- Energy sector:
  - Planned projects: generation capacity expansions (traditional and alternative), improved connection with Brazilian electricity network, exploring gas and mineral deposits.
  - Staff argued for promoting private investment through public-private partnerships and developing a competitive spot market for electricity.
  - Contingency planning: consider creating an “energy fund” to be drawn upon during drought years; cost of such insurance would need translation into tariffs.
- Public sector and investment climate:
  - Need to streamline regulations, reduce administrative burden, strengthen corporate governance in public enterprises.
  - Authorities plan to simplify procedures for opening and closing businesses.

### Social inclusion and human development indicators
- Central government social expenditures rose from 57 percent in 2003 to 75 percent in 2008.
- Poverty levels fell from around 32 percent after the 2002 crisis to 20 percent (authorities’ figure).
- Key social and demographic statistics (selected):
  - Population (estimate): 3.5
  - Physicians per 1,000: 3.7
  - Hospital beds per 1,000: 4.4
  - Life expectancy at birth (years): 75.7
  - Access to safe water (percent of population): 98.0
  - Infant mortality rate (per thousand live births): 12.0
  - Adult literacy rate: 98.0
  - Gross enrollment rate — Primary: 113.1; Secondary: 106.9; Tertiary: 42.0
  - Unemployment rate: 6.8
  - Poverty rate: 25.3
  - GDP per capita in 2008 (in US$): 9,654
  - Human Development Index Rank: 43 (out of 177)
- Policy priority: continue improving carefully targeted social programs through budget re-prioritization.

### External accounts, reserves and balance of payments trends
- Merchandise exports, f.o.b. (US$ millions): 2,281; 3,145; 3,758; 4,389; 5,043; 7,083; 6,301; 6,942; 7,773; 8,544; 9,291; 9,984 (series across years).
- Merchandise imports, f.o.b. (US$ millions): 2,098; 2,992; 3,730; 4,863; 5,598; 8,799; 7,261; 8,385; 9,157; 9,834; 10,494; 11,123.
- Gross official reserves (US$ millions): 2,087; 2,512; 3,438; 3,091; 4,096; 6,328; 8,211; 8,811; 9,218; 9,710; 10,203; 10,745.
- Reserves in months of next year's imports of goods and services: 6.6; 6.5; 7.1; 5.5; 4.9; 8.9; 10.0; 9.8; 9.6; 9.4; 9.3; 9.3.
- External debt (percent of GDP): 77.8; 91.4; 84.7; 65.8; 52.7; 50.4; 37.4; 41.1; 38.1; 35.3; 32.4; 29.9; 28.6.
- Current account balance (percent of GDP): -0.5; 0.3; 0.0; -2.3; -0.3; -4.6; -1.6; -2.5; -1.6; -0.9; -0.5; -0.2.

### Debt sustainability assessments and stress-test scenarios (highlights)
- Public sector debt (percent of GDP, baseline): 90.1 (2004), 77.6 (2005), 69.6 (2006), 62.2 (2007), 59.7 (2008), 60.1 (2009), 56.3 (2010), 51.8 (2011), 47.6 (2012), 43.9 (2013), 40.8 (2014).
- Debt-stabilizing analyses consider shocks: growth shock, primary balance shock, interest rate shock, combined shock, contingent liabilities shock, and a one-time real depreciation of 30 percent plus a 10 percent of GDP shock to contingent liabilities in 2009.
- External debt stress tests include interest rate shock, CA shock (non-interest current account shock), combined shock, real depreciation shock (one-time real depreciation of 30 percent in 2009), and growth shock.

### Fund relations, safeguards, TA and statistical issues
- Membership: Joined March 11, 1946; Article VIII.
- Quota: 306.50 (SDR Million).
- Stand-By arrangements: Jun 08, 2005 – Dec 27, 2006 (Amount Approved 766.25 SDR Million; Amount Drawn 263.59 SDR Million) and earlier arrangements noted.
- Safeguards: Authorities addressing concerns from September 2005 safeguards assessment; selection criteria for external audit amended per safeguards recommendation.
- Exchange rate arrangement: Uruguayan peso (Ur$); independently floating exchange rate regime since July 29, 2002; reclassified to a floating exchange rate regime in 2008; official market exchange rate Ur$ 21.173 per US dollar on October 5, 2009.
- Statistical issues:
  - National accounts revised with benchmark year updates and SNA93 adoption; shortcomings remain in enterprise survey coverage, informal economy measurement, and quarterly accounts.
  - CPI base period: March 1997 = 100; CPI coverage limited to the capital city.
  - Uruguay subscribed to the SDDS in February 2004 and is in observance.
- Public Information Notice (PIN) No. 09/127, November 11, 2009: IMF Executive Board concluded the 2009 Article IV consultation; summary observations noted Uruguay’s resilience, buffers, robust banking system, substantial international reserves, flexible exchange rate regime, external current account deficits financed by FDI, reduced debt vulnerabilities, and low private sector leverage.

### Relations with multilateral partners (summaries)
- World Bank:
  - First Programmatic Reform Implementation Development Policy Loan (PRIDPL 1): US$100 million, approved May 30, 2007; disbursed in local currency in May 2008.
  - Second PRIDPL: $400 million, approved on 3 February 2009 and fully disbursed.
  - Current investment portfolio (as of September 7, 2009): eight investment projects totaling US$261.9 million in commitments, undisbursed amount US$123.9 million.
- Inter-American Development Bank (IDB):
  - IDB Country Strategy approved March 15, 2006.
  - Current estimate of total approvals for 2005–09: US$920.5 million (77% of planned resources).
  - IDB portfolio as of September 15, 2009: 35 projects, total lending portfolio US$1,379.9 million, pending disbursement US$510.4 million.

### Executive Board and authorities’ views (summarized)
- Directors commended achievements in reducing vulnerabilities and enabling Uruguay to withstand the global recession.
- Endorsed policy mix: tighter monetary stance given inflation concerns; fiscal policy to broadly maintain planned nominal expenditure increases and allow automatic stabilizers to work.
- Emphasized continued fiscal consolidation aiming at debt reduction and preserving room for priority infrastructure and social spending.
- Authorities highlighted substantial progress since the 2002–03 crisis: average economic growth of approximately 7 percent over the last five years, unemployment just above 7 percent, inflation under control (twelve-month inflation 6.5 percent in October), lengthened public debt maturities (from 7.4 years in 2004 to 12.8 years in 2009), and partial de-dollarization of debt (from 89 percent in foreign currency to 71 percent).

*Source: Excerpts from the provided IMF staff report content.*

### 1. Determinants of Cross-Country Differences in the Output Impact of the

### 1. Determinants of Cross-Country Differences in the Output Impact of the Global Crisis

### Cross-country empirical findings (Box 1)
- Economies with higher credit growth and more leverage were hit more strongly.
- More flexible exchange-rate regimes allowed economies to absorb the shock more easily.
- For emerging markets, the financial channel trumps the trade impact.
- Among emerging markets, Uruguay’s growth revision between August 2008 and August 2009 was -3.8 percentage points, compared to a median revision among emerging markets of -6.4 percentage points.
- A simple model fits the Uruguayan case well, explaining 3.3 percentage points of the revision.
- Contributing factors to Uruguay’s milder impact included:
  - Low degree of leverage (credit over deposits).
  - A flexible exchange rate regime.
  - Lack of developed capital markets and banks’ low exposure to toxic assets.

### Uruguay: macroeconomic and financial outcomes through 2009
- GDP and activity:
  - Real GDP contracted in Q1 2009 by 2.3 percent (q/q SA) and expanded in Q2 2009 by 0.5 percent (q/q SA).
  - Real GDP projected to grow by at least 0.6 percent in 2009.
  - Private consumption growth decelerated from 7.5 percent in Q4 2007 to 0.8 percent in Q2 2009 (y/y).
  - Unemployment rose temporarily but fell back to 7.2 percent in August 2009.
- External sector and financing:
  - FDI contracted by 42 percent y/y in the first semester of 2009 but remained an important external financing source.
  - The peso depreciated by almost 30 percent against the US dollar between August and December 2008; subsequently the currency recovered and capital inflows resumed.
  - Gross international reserves continued to increase; net reserves (excluding private banks’ holdings) are above September 2008 levels.
- Banking sector and credit:
  - Deposit growth remained steady at about 15 percent.
  - Non-resident deposits rose by 36 percent y/y and account for about 19 percent of total deposits.
  - Some re-dollarization of deposits occurred during financial turbulence.
  - Banks remain very liquid and well-capitalized.
  - Non-performing loans are 1 percent of total loans.
  - Credit growth slowed from a peak of 45 percent in May 2008 to around 6 percent (y/y).
  - Private sector credit is 26 percent of GDP.
  - Loan loss provisions are about seven times loan delinquencies; statistical provisions are currently 2½ times non-performing loans (see Box 5 reference in source).

### Policy assessment and short-term guidance
- Monetary policy:
  - Staff assessment: in the short term, there is no room for loosening monetary policy.
  - Inflation dynamics and policy-rate actions:
    - Policy rates were raised by 225 basis points to 10 percent in January 2009 amid inflation concerns.
    - The BCU cut rates by 100 basis points in March 2009 and by 100 basis points in June 2009 as inflationary pressures diminished and activity deteriorated.
    - Headline CPI inflation fell from close to 10 percent in January 2009 to 6.3 percent in June 2009.
    - September 12-month CPI inflation was 6.9 percent (compared to a target range of 3–7 percent).
  - Current staff view: the real exchange rate is broadly in equilibrium.
- Fiscal policy:
  - Authorities allowed automatic stabilizers of about 1 percent of GDP to operate; fiscal outlays grew at close to 18 percent, concentrated largely in permanent rises in wages, transfers and pensions (these three components totaling ¾ of the increase).
  - Staff recommendation for near-term fiscal policy: be cautious; contain expenditure growth in non-priority areas while fully executing programs with higher multipliers (planned public investment and social programs).
  - Staff advocacy for next year: limit the deficit to around 1 percent of GDP to keep fiscal policy broadly neutral, given still relatively high debt levels.
  - Medium-term fiscal target proposed: in the five-year budget to be adopted next year, the new authorities should target on average an overall deficit of at most 0.4 percent of GDP (equivalent to a primary surplus of around 2.3 percent of GDP) starting in 2011, to bring down gross debt to below 40 percent of GDP by 2014.
- Other policy recommendations:
  - Plan for energy-related contingencies (recurrent droughts) by considering insurance mechanisms or establishing a countercyclical energy fund to incorporate this risk into budgeting.
  - Aim for lower inflation rates to reap growth benefits, protect the poor, promote de-dollarization, and avoid costly emergency measures if inflation threatens to exceed 10 percent.
  - Strengthen the monetary policy framework:
    - Stronger commitment to the inflation target range, possibly with enhanced accountability and consideration of strengthening central bank autonomy.
    - Ensure exchange-rate intervention is consistent with and clearly subordinated to the inflation objective.
    - Communicate monetary policy within an explicit, forward-looking framework (based on forecasts) to enhance credibility and support de-dollarization.
  - Advance energy sector and public sector reforms to raise potential growth:
    - Promote private investment to expand power generation capacity and improve infrastructure.
    - Continue promoting public sector efficiency, reduce red tape, and improve governance of public enterprises.
  - Continue prioritizing budget resources to sustain and improve well-targeted social programs to reduce poverty further.

*Source: IMF Staff Appraisal and Executive Summary (selected content from the provided chapter).*

### 21.      The economy is well positioned to benefit from the global recovery. For 2010 growth

### _cr1048 - 21.      The economy is well positioned to benefit from the global recovery. For 2010 growth

### Macroeconomic outlook and growth projections
- The economy is well positioned to benefit from the global recovery; for 2010 growth is expected to reach 3.5 percent, slightly below trend growth.
- Near-term developments will significantly depend on external developments, with regional developments (notably Argentina) of particular importance.
- Medium-term prospects are good, supported by considerable FDI in recent years that has contributed to substantial productivity improvements in the tradable sectors.

### Key macroeconomic figures (2008–2010, as presented)
- Real GDP growth: 8.9 (2008), 0.6 (2009), 3.5 (2010)
- Inflation (CPI, eop): 9.2 (2008), 7.0 (2009), 6.5 (2010)
- Overall fiscal balance (percent of GDP): -1.4 (2008), -2.6 (2009), -2.1 (2010)
- Primary fiscal balance (percent of GDP): 1.4 (2008), 0.4 (2009), 0.8 (2010)
- Current account balance (percent of GDP): -4.6 (2008), -1.6 (2009), -2.5 (2010)
- FDI (percent of GDP): 5.7 (2008), 3.0 (2009), 3.1 (2010)
- Gross International Reserves (1/): 150.6 (2008), 194.3 (2009), 203.7 (2010)
  - 1/ In percent of short term debt plus bank non-resident deposits
- Sources: Uruguayan authorities; and Fund staff estimates.

### External accounts and terms of trade
- Lower international oil prices and domestic demand adjustment are reducing the current account deficit.
- Despite the decline in export values, the current account deficit is expected to narrow from 4.6 percent of GDP to 1.6 percent this year and 2.5 percent in 2010, partly reflecting a terms-of-trade improvement estimated at around 9 percent this year.

### Inflation and monetary conditions
- Inflationary pressures are likely to persist: with output around potential, inflation expectations remain clearly in the upper half of the target range, and most core inflation measures are above it.
- Risks to inflation: resurgence of commodity prices, the ongoing recovery, a (moderate) positive fiscal impulse, and persistently high real wage growth above productivity growth in the last few quarters.
- Real short-term-interest rates are around one percent; staff view the current monetary stance as not particularly tight and see no room for further monetary policy easing at this point.
- Staff expect a further normalization of real interest rates looking forward, with the pace depending partly on the fiscal stance.
- Policy recommendations on monetary framework:
  - Transparency of foreign-exchange interventions: interventions should be consistent with and clearly subordinated to the inflation target.
  - Improve communication using a forward-looking framework; BCU working on forecasting models and stronger communication.
  - Consider enhancing central bank autonomy and establishing a more formal accountability mechanism regarding the inflation objective.

### Fiscal position, shocks, and projections
- The primary fiscal surplus declined in 2008 and is worsening further in 2009 as revenue growth slows, public energy companies face higher drought-related costs of about 1.6 percent of GDP for the second consecutive year, and public spending continues to rise.
- The overall deficit is projected to nearly double, from 1.4 percent of GDP last year to around 2.6 percent of GDP in 2009, the largest deficit since the 2002–03 crisis.
- To help cover this deficit, the authorities secured credits of about 4 percent of GDP from multilateral organizations and placed a US$500 million bond on the international market, which secures financing through 2010.
- The gross public debt ratio, which had fallen steadily since 2003 to 59.7 percent by end-December 2008, is projected to increase slightly this year.
- Net public debt (excluding central bank’s net reserves) stands at around 50 percent of GDP.
- Downside risks to the fiscal outlook stem mainly from uncertainty in the global growth outlook.

### Short-term fiscal policy guidance
- There is currently no clear-cut case for further stimulus given activity around potential and ongoing recovery.
- Near-term fiscal policy should be cautious: staff and authorities agreed that public debt levels were still somewhat too high for comfort, particularly given the large share denominated in dollars (70 percent).
- Staff suggested containing expenditure growth in non-priority areas and containing the budget deficit at no more than currently envisaged for the year.
- For next year, staff advocated limiting the deficit to around 1 percent of GDP, roughly equivalent to a structural balance of -1.7 percent of GDP, keeping fiscal policy broadly neutral.
- Staff proposed achieving this via a combination of expenditure and revenue measures in roughly equal proportions, totaling 1.1 percent of GDP compared to a passive scenario.
- Authorities indicated that substantially reducing expenditure growth without adversely affecting investment outlays would be difficult, though they saw scope for revenue outperformance from efficiency gains.

### Medium-term fiscal strategy and recommendations
- Staff proposed that for the five-year budget plan to be adopted next year, the new authorities should target an overall deficit of at most 0.4 percent of GDP starting 2011 (equivalent to a primary surplus of around 2.3 percent of GDP) to bring down gross debt to below 40 percent of GDP by 2014.
- Implication: barring revenue measures, this would require restraining nominal expenditure growth; staff argued this should be feasible given recent sharp wage and pension growth is unlikely to be sustained.
- Staff cautioned against further buildup in budget rigidities and noted Uruguay’s expenditure structure is relatively inflexible.
- Authorities and opposition/private analysts agreed with the impetus to reduce debt further.

### Contingency planning for energy/drought shocks
- Staff and authorities agreed fiscal planning should better integrate recurring drought-related fiscal costs; at least until the structural energy problem is solved, staff suggested considering creating an “energy fund” to be drawn upon during drought years.
- The cost of such an insurance mechanism would need to be translated into tariffs. Authorities are exploring possibilities of insuring against extreme weather shocks.

### Inflation target and de-dollarization goals
- Staff argued Uruguay should aim for lower steady-state inflation levels, aligned with the center of the target range; twelve-month inflation has averaged 7.5 percent since 2006.
- A balanced policy mix—with more neutral fiscal policy—would aid in reaching lower inflation levels.
- Authorities noted structural changes and the economy’s openness and dollarization justify a wide target range and that there is no strong public demand for substantially lower inflation rates at present.
- Staff emphasized the need to achieve further de-dollarization:
  - Improvements seen in peso lending to households, but corporate credit remains firmly dollarized.
  - Regulatory steps already taken: limits on net open foreign currency positions for banks; higher capital requirements for foreign currency loans; higher reserve and liquidity requirements on foreign currency deposits; tighter loan classifications for consumer foreign currency loans and large corporate borrowers failing stress tests.
  - Planned measures include extending the yield curve in pesos and developing a local market for exchange rate hedges.

### Banking system soundness and policy measures
- Banking system vulnerability is low, and stress tests as of May 2009 indicate resilience to sizeable macroeconomic shocks; however, bank profitability is declining substantially.
- Banks’ return on average assets fell slightly to 0.9 percent in June 2009.
- Factors behind low profitability: low international interest rates (large part of assets placed abroad), high reserve requirements with low remuneration, fiercer competition for high-quality borrowers, and rising wage costs.
- Recent regulatory adjustment: BCU reduced reserve requirements on peso deposits from 25 to 20 percent, and on dollar deposits from 35 to 30 percent, partially reversing the hikes from May 2008.

*Source: IMF staff report content as provided.*

### 34.      The regulatory framework is being refined further. Since the 2002–03 banking

### _cr1048 - 34.      The regulatory framework is being refined further. Since the 2002–03 banking

### Prudential regulation and supervisory reforms
- Since the 2002–03 banking crisis, Uruguay has persistently updated its prudential regulation, introducing, inter alia:
  - explicit liquidity requirements;
  - capital charges for market and operational risks;
  - limits to risk exposures;
  - forward-looking loan classification and provisioning rules.
- Earlier this year, the authorities published a set of regulations specifying the preconditions for selling investment instruments issued by third parties, and bolstering the rights of bank clients (particularly credit card holders).
- Authorities are moving towards consolidated supervision of financial groups, which they hoped to begin applying next year.

### Other financial sector progress
- Financial sector reform law adopted last year includes a substantially improved bank resolution framework.
- The new deposit insurance agency foreseen in the law was formally established in September.
- A law on capital market reform aimed at improving the legal framework in the areas of securities registration and settlement, and providing for the supervision of brokerage houses was passed in the Lower House.
- The restructuring of state-owned housing bank BHU has progressed; with a much leaner structure, and its recapitalization about to be completed, the institution has cautiously begun to lend again.
- Note: Overall return on assets figure is biased upward by the performance of the single state-owned bank (Banco República del Uruguay). When excluding this bank, the return on assets turns negative (-0.1 percent).

### Box 5 — Dynamic Loan Loss Provisions in Uruguay
- Design and mechanics:
  - Uruguay introduced dynamic (countercyclical) provisions in September 2001.
  - Banks are required to provision each year an average of one percent of their total loans to the non-financial private sector less specific loan losses incurred, until these provisions reach 3 percent of loans.
  - The contribution rule yields larger provisions when credit grows fast and loan delinquencies are low; during downturns banks can cover rising loan losses by tapping into their funds of dynamic provisions.
- Assessment of buffer provided by dynamic provisions:
  - Loan losses predicted by the credit risk model of the BCU under certain macroeconomic shocks are set to equal the overall stock of dynamic provisions; backward solving yields the magnitude of shocks required to deplete the stock of provisions.
  - Results show that banks’ dynamic provisions would fully cover the loan losses expected to be caused by a sizeable shock, while only cushioning part of the losses in a full-blown crisis.
  - While overall provisions appear sufficient, it seems too early to conclude that the system is overprovisioned given uncertainties about the magnitude of credit cycles looking forward.
- Scenario results (all monetary values in millions of US dollars unless otherwise indicated):
  - BCU adverse scenario
    - ∆ GDP: -3.64%
    - ∆ Exchange Rate: 13.02%
    - Bond Spread (Uruguayan Bond Index): 733
    - Dynamic Provisions: 158.8
    - Expected Loan Losses: 100
    - Coverage of Losses: 100.00%
  - BCU crisis scenario
    - ∆ GDP: -8.00%
    - ∆ Exchange Rate: 31.70%
    - Bond Spread (Uruguayan Bond Index): 1000
    - Dynamic Provisions: 158.8
    - Expected Loan Losses: 383.64
    - Coverage of Losses: 41.40%
  - 2002-03 Crisis
    - ∆ GDP: -11.00%
    - ∆ Exchange Rate: 50.00%
    - Bond Spread (Uruguayan Bond Index): 2000
    - Dynamic Provisions: 158.8
    - Expected Loan Losses: 1,246.6
    - Coverage of Losses: 12.70%
  - Footnotes:
    - 2/ Increase = depreciation of the local currency
    - 3/ Uruguayan Bond Index
    - 4/ millions of US dollars

### Energy sector and infrastructure
- Authorities recognize improvements in the energy sector are crucial to avoid bottlenecks and enhance growth potential.
- Planned and ongoing projects highlighted by authorities include:
  - generation capacity expansions through traditional and alternative energy sources;
  - improvements in the connection with the Brazilian electricity network;
  - exploring possible gas and mineral deposits.
- Staff argued private investment could be promoted through public-private partnerships (with adequate risk sharing) and the development of a competitive spot market for electricity.

### Public sector reform and the investment climate
- Reforming the public sector remains a key element of the agenda to enhance the investment climate.
- Staff highlighted the need to:
  - streamline regulations and reduce the administrative burden on the private sector;
  - strengthen corporate governance in public enterprises.
- Authorities indicated scope for a thorough review of these issues and explained efforts at reducing administrative procedures for private companies, including a plan to drastically simplify the opening and closing of businesses.
- Staff inquired about effects of labor market regulations passed in recent years, including implementation of tripartite negotiations; authorities argued that so far there was no evidence of any adverse impact, citing that unemployment had barely risen with the downturn.

*IMF staff report excerpt.*

### 38.      Improving social inclusion will be important for sustainable growth. A

### _cr1048 - 38.      Improving social inclusion will be important for sustainable growth. A

### Social inclusion and public spending
- Central government social expenditures (comprising mainly outlays in health, housing, and education as well as social security benefits and transfers) rose from 57 percent in 2003 to 75 percent in 2008.
- Authorities highlighted that poverty levels had fallen from around 32 percent in the aftermath of the 2002 crisis to currently 20 percent.
- Policy recommendation: continuing to improve carefully targeted social programs through budget re-prioritization remained an important policy objective.

### Economic activity and recovery
- After decelerating sharply to its lowest growth rate since 2004, activity "has begun" rising.
- Contributions to Growth (quarter on quarter, percent, s.a): commerce, construction, manufacturing, primary sector contributed to recovery; Real GDP growth shown on RHS scale.
- Contributions to Growth (year on year, percent) components: Imports, Exports, Investment, Consumption; Real GDP growth (RHS).
- Domestic demand: After falling off sharply, there are some signs of a recovery in domestic demand.
- Leading indicators: a key leading indicator of economic activity (CERES Leading Indicator, Aug 1995=100, s.a.) has begun rising.
- Sectoral rebound: Exports were initially hit the hardest, but have recently rebounded, led by the manufacturing, construction and commerce sectors.

### Inflation, wages, and output gap
- Headline and core inflation remain close to the upper end or above the central bank's target range.
- Inflationary pressures persist in a context of administrative price increases, rising wages and a still positive output gap.
- Non-core inflation is driven by recent increases in administered prices.
- Real wage growth (12-month, in percent) and diffusion index (share of CPI items experiencing m/m price increases) indicate real wages have grown steadily.
- Non tradables inflation and tradables inflation: non tradables inflation recently rising.
- Output Gap (percentage of Potential Output) chart indicates the output gap is slowly closing but the economy has yet to develop significant slack.

### Monetary and exchange rate policy
- Exchange rate: The exchange rate adjusted to the external shock, with the central bank intervening to smooth volatility (Intervention in FX Market measured in US$ mns, exchange rate in pesos per US$).
- Monetary policy: While allowing the exchange rate to adjust amid intervention, monetary policy has been guided mainly by inflation concerns.
- Policy rates: After tightening policy amid inflation concerns, the central bank has recently cut rates as inflation has declined.
- Money growth: Money growth has slowed significantly (M1, M2 series shown).

### Fiscal position and public finances
- Fiscal stance: Although there has been no explicit fiscal stimulus package, the fiscal position is projected to deteriorate in light of still strong expenditure growth and lower revenues.
- Revenues levelled off with the slowdown in activity, while expenditures remained strong, which will deteriorate the fiscal position and interrupt the downward trend in public debt.
- Structural Fiscal Balances (percent of GDP) and Fiscal Impulse: Structural primary balance and output gap series presented.
- Public Sector Balances and Debt (percent of GDP): Overall Balance (LHS), Primary Balance (LHS), Gross Debt (RHS).

### External developments and capital flows
- Current account: The current account balance has improved on the back of a declining oil import bill.
- Exports and imports: A less pronounced deterioration of exports than of non-oil imports.
- External financing: Loans to the public sector and FDI have become important sources of external financing.
- FDI: Although FDI is expected to decline, it is still significant even by regional standards.
- Other private capital flows have decreased, but the country risk premium has diminished (EMBI, UBI country risk premium).
- Gross international reserves continue to increase (GIR and GIR excluding financial and public sector claims in US$ millions).

### Banking system and financial indicators
- The banking system is stronger than it was ahead of the 2002-03 Uruguayan financial crisis.
- Liquidity and leverage:
  - Liquid Assets (in percent of total liabilities): BROU and Private banks shown (Dec-01 vs Sep-09).
  - Banks have ample liquidity and leverage is lower.
- Asset quality:
  - Non-Performing Loans (in percent of total loans): BROU and Private banks (Dec-01 vs Sep-09) show significantly lower delinquency rates.
- Dollarization and exposure:
  - Financial Dollarization (in percent): Credit and Deposit dollarization levels have slightly declined (Dec-01 vs Sep-09).
  - Non-resident Deposits (in percent of total deposits) declined (Dec-01 vs Sep-09), indicating lower exposure to non-resident deposits.
- Implicit Exchange Rate Risk Index (in percent) declined (Jan-03 to Jun-09).

### Key statistics, projections, and selected indicators (as reported)
- Population (estimate) 3.5
- Physicians per 1,000 3.7
- Hospital beds per 1,000 4.4
- Life expectancy at birth (years) 75.7
- Crude birth rate (per thousand) 14.9
- Access to safe water (percent of population) 98.0
- Infant mortality rate (per thousand live births) 12.0
- Adult literacy rate 98.0
- Gross enrollment rate — Primary education 113.1; Secondary education 106.9; Tertiary education 42.0
- Unemployment rate 6.8
- Poverty rate 25.3
- GDP per capita in 2008 (in US$) 9,654
- Human Development Index Rank 43 (out of 177)

Selected macro projections and historical figures (exact figures preserved):
- Real GDP: 2.3, 4.6, 6.8, 4.6, 7.6, 8.9, 0.6, 3.5, 3.6, 3.8, 3.9, 3.9 (series labeled "Real GDP")
- Real consumption: -3.1, 2.9, 5.2, 7.1, 7.3, 8.8, 3.9, 2.9, 2.2, 4.3, 4.2, 4.3
- Real investment: 14.4, 15.8, 4.2, 13.3, 6.3, 25.0, -0.6, 2.4, 1.5, 3.0, 1.5, 1.5
- GDP (Ur$ billions): 339.8, 392.8, 425.0, 482.0, 569.3, 674.3, 736.3, 815.8, 900.2, 989.1, 1,083, 1,173
- GDP (US$ billions): 12.0, 13.7, 17.4, 20.0, 24.3, 32.2, 31.6, 35.5, 39.1, 43.5, 48.1, 52.1
- GDP deflator: 14.8, 10.5, 1.3, 8.4, 9.8, 8.8, 8.5, 7.0, 6.5, 5.8, 5.4, 4.3
- CPI inflation (average): 20.0, 9.2, 4.7, 6.4, 8.1, 7.9, 7.3, 7.0, 6.0, 5.2, 5.0, 4.6
- CPI inflation (eop): 10.2, 7.6, 4.9, 6.4, 8.5, 9.2, 7.0, 6.5, 5.5, 5.0, 5.0, 4.3
- Exchange rate change (Ur$/US$) (average): 32.7, 1.8, -14.7, -1.7, -2.5, -10.7, 11.2...
- Unemployment (in percent): 15.4, 12.1, 12.1, 9.1, 7.7, 6.8...
- Base Money (eop): 20.0, 10.6, 5.4, 12.5, 16.4, 29.3, 9.2...
- Credit to the private sector (constant exch. rate): -31.8, -31.4, 6.3, 11.0, 22.1, 28.0, 0.6...
- Revenue (Non-financial public sector) 1/: 27.9, 28.0, 28.0, 27.7, 27.6, 25.4, 26.3, 27.3, 27.9, 27.9, 27.9, 27.9
- Non-interest expenditure 1/: 24.6, 24.2, 24.3, 24.3, 24.4, 24.3, 26.2, 26.8, 26.1, 25.8, 25.8, 25.7
- Primary balance 2/: 2.7, 3.5, 3.8, 3.5, 3.4, 1.4, 0.4, 0.8, 2.0, 2.4, 2.5, 2.5
- Interest 2/: 5.4, 5.5, 4.4, 4.0, 3.4, 2.8, 2.9, 2.9, 2.8, 2.9, 2.9, 2.8
- Overall balance 2/: -2.6, -2.0, -0.6, -0.5, 0.0, -1.4, -2.6, -2.1, -0.7, -0.5, -0.4, -0.3
- Gross public sector debt: 104.6, 90.1, 77.6, 69.6, 62.2, 59.7, 60.1, 56.3, 51.8, 47.6, 43.9, 40.8
- Net public sector debt 3/: 98.6, 86.7, 72.6, 65.0, 55.1, 50.2, 47.4...
- Gross domestic investment: 15.2, 17.5, 17.7, 20.3, 21.0, 23.0, 21.8, 22.0, 21.2, 21.3, 20.8, 20.5
- Gross national savings: 14.7, 17.8, 17.7, 18.0, 20.6, 18.4, 20.2, 19.6, 19.6, 20.4, 20.3, 20.3
- Foreign savings: 0.5, -0.3, 0.0, -2.3, -0.3, -4.6, -1.6, -2.5, -1.6, -0.9, -0.5, -0.2
- Merchandise exports, fob (US$ millions): 2,281; 3,145; 3,758; 4,389; 5,043; 7,083; 6,301; 6,942; 7,773; 8,544; 9,291; 9,984
- Merchandise imports, fob (US$ millions): 2,098; 2,992; 3,730; 4,863; 5,598; 8,799; 7,261; 8,385; 9,157; 9,834; 10,494; 11,123
- Current account balance (percent of GDP): -0.5; 0.3; 0.0; -2.3; -0.3; -4.6; -1.6; -2.5; -1.6; -0.9; -0.5; -0.2
- Foreign direct investment (percent of GDP): 3.3; 2.3; 2.3; 4.1; 6.9; 4.7; 5.7; 3.0; 3.1; 2.9; 2.7; 2.5
- Gross official reserves (US$ millions) 5/: 2,087; 2,512; 3,438; 3,091; 4,096; 6,328; 8,211; 8,811; 9,218; 9,710; 10,203; 10,745
- In months of imports of goods and services: 6.6; 6.5; 7.1; 5.5; 4.9; 8.9; 10.0; 9.8; 9.6; 9.4; 9.3; 9.3

### Consolidated public sector operations (high-level findings)
- Revenues (Non financial public sector) (in percent of GDP) declined from 28.0 in 2004/2005 to 25.4 in 2008, then 26.3 in 2009, projected 27.3 in 2010 and stabilize around 27.9.
- Expenditure (Non financial public sector) rose from 24.2 in 2004 to 26.2 in 2009 and projected 26.8 in 2011 before gradually stabilizing around 25.7.
- Current Expenditure (percent of GDP) increased to 22.6 in 2009 and projected 23.4 in 2010.
- Social security benefits (percent of GDP): 9.3 (2004), 9.2 (2005), 8.8 (2006), 8.2 (2007), 7.8 (2008), 8.4 (2009), 8.7 (2010).
- Capital Expenditure (percent of GDP): 2.5 (2004), 2.3 (2005), 2.5 (2006), 2.8 (2007), 3.1 (2008), 3.6 (2009), projected 3.4 (2010).
- Primary Balance (Total Public Sector) (percent of GDP): 3.5 (2004), 3.8 (2005), 3.5 (2006), 3.4 (2007), 1.4 (2008), 0.4 (2009), 0.8 (2010), 2.0 (2011), 2.4 (2012), 2.5 (2013), 2.5 (2014).
- Overall Balance (Total Public Sector) (percent of GDP): -2.0 (2004), -0.6 (2005), -0.5 (2006), 0.0 (2007), -1.4 (2008), -2.6 (2009), -2.1 (2010), -0.7 (2011), -0.5 (2012), -0.4 (2013), -0.3 (2014).

Italicized source attribution:
*Source: Excerpts from the provided IMF staff report content.*

### 1. Banco Central del Uruguay

### 1. Banco Central del Uruguay

### Balance of Payments: key items and trends
- Current account (in millions of U.S. dollars, selected series shown in table): 382, -564, 32, -457, -80, -1,484, -507, -874, -632, -389, -223, -121 (series across years shown in table).
- Trade balance (in millions of U.S. dollars, series): 481, 831, 532, 8, -474, -555, -1,716, -960, -1,442, -1,384, -1,290, -1,203, -1,139.
- Exports, f.o.b. (millions): 1,922, 2,281, 3,145, 3,758, 4,389, 5,043, 7,083, 6,301, 6,942, 7,773, 8,544, 9,291, 9,984.
- Imports, f.o.b. (millions): 1,874, 2,098, 2,992, 3,730, 4,863, 5,598, 8,799, 7,261, 8,385, 9,157, 9,834, 10,494, 11,123.
- Services exports/imports (millions): exports 771, 803, 1,151, 1,335, 1,284, 1,807, 2,222, 2,312, 2,561, 2,863, 3,156, 3,429, 3,677; imports 618, 636, 786, 926, 923, 1,124, 1,413, 1,309, 1,444, 1,581, 1,724, 1,866, 2,009.
- Income (net, millions): 109, -489, -588, -585, -470, -345, -727, -670, -709, -651, -611, -642, -701.
- Transfers (net, millions): 728, 311, 314, 912, 613, 615, 1,201, 1,201, 1,208, 605, 0, 50 (selected entries).
- Financial and capital account (millions): -2,234, 1,039, 671, 1,016, 202, 1,685, 2,820, 2,390, 1,475, 1,038, 881, 715, 664.
- Foreign direct investment (millions): 180, 401, 315, 715, 151, 1,377, 1,139, 1,840, 950, 1,100, 1,122, 1,144, 1,167, 1,191 (series).
- Portfolio investment (millions): 415, -541, -422, 766, 1,810, 1,113, -571, -101, -109, 112, 614, 717, 1 (series).

- Balance of payments ratios (selected):
  - Current account (percent of GDP): 2.8, -0.5, 0.3, 0.0, -2.3, -0.3, -4.6, -1.6, -2.5, -1.6, -0.9, -0.5, -0.2.
  - Financial and capital account (percent of GDP): -16.4, 8.6, 0.5, 5.9, 1.0, 6.9, 8.8, 7.6, 4.2, 2.7, 2.1, 1.5, 1.3.
  - Foreign direct investment (net, percent of GDP): 1.3, 3.3, 2.3, 4.1, 6.9, 4.7, 5.7, 3.0, 3.1, 2.9, 2.7, 2.5, 2.3.
  - Overall balance (percent of GDP): -17.1, 11.5, 3.3, 5.5, -1.7, 4.1, 6.9, 6.0, 1.7, 1.0, 1.1, 1.0, 1.1.

### Reserve adequacy and external indicators
- Gross official reserves (stock, millions of U.S. dollars): 772, 2,087, 2,512, 3,438, 3,091, 4,096, 6,328, 8,211, 8,811, 9,218, 9,710, 10,203, 10,745.
- Net international reserves (stock, millions): -1,088, -763, -2,218, -1,166, 3,085, 4,121, 6,356, 7,116, 8,071, 8,718, 9,412, 10,286, 11,241.
- Reserves in months of next year's imports of goods and services: 3.4, 6.6, 6.5, 7.1, 5.5, 4.8, 8.9, 10.0, 9.8, 9.6, 9.4, 9.3, 9.3.
- Reserves as percent of short-term debt: 32.3, 131.3, 112.4, 153.8, 49.2, 64.9, 78.9, 86.5, 99.4, 95.1, 90.6, 48.4, 82.4 (series shown).
- External debt (selected ratios, percent of GDP or other bases):
  - External debt (percent of GDP): 77.8, 91.4, 84.7, 65.8, 52.7, 50.4, 37.4, 41.1, 38.1, 35.3, 32.4, 29.9, 28.6 (from Table 1).
  - Short-term debt (residual maturity, percent): 22.7, 19.9, 11.6, 12.9, 3.1, 3.6, 2.5, 2.6, 2.6, 2.6, 2.6, 2.6, 2.6.
  - External public debt (percent): 61.2, 79.3, 74.6, 58.4, 65.5, 46.5, 45.6, 33.4, 37.1, 34.1, 31.3, 28.4, 25.9.
- Exports and imports (percent of GDP) shown in table: Exports 14.1, 18.9, 23.0, 21.6, 21.9, 20.8, 22.0, 19.9, 19.6, 20.0, 19.9, 19.6, 19.4; Imports 13.8, 17.4, 21.9, 21.5, 24.3, 23.1, 27.3, 23.0, 23.6, 23.5, 22.9, 22.2, 21.6.

### Prices and volumes (selected year-on-year percent changes)
- Export prices in US$ (year-on-year percent change): -7.7, 7.4, 6.4, 5.1, 6.5, 8.5, 17.1, -8.7, 2.6, 3.1, 2.8, 2.7, 2.1.
- Import prices in US$ (year-on-year percent change): -10.8, 5.1, 9.1, 12.2, 8.2, 7.9, 18.4, -16.3, 7.0, 2.7, 1.7, 1.8, 1.7.
- Terms of trade (percent): 3.5, 2.2, -2.4, -6.3, -1.6, 0.5, -1.1, 9.2, -4.1, 0.4, 1.1, 0.9, 0.5.
- Export volume (percent): -2.1, 9.4, 28.7, 16.2, 9.2, 4.7, 11.5, 2.0, 7.5, 8.5, 7.0, 6.0, 5.5.
- Import volume (percent): -26.9, 6.2, 29.1, 9.4, 13.6, 20.0, 31.0, 1.6, 7.1, 6.3, 5.8, 5.0, 4.5.

---

### Debt Sustainability: public sector (Table 1 highlights)
- Public sector debt (percent of GDP, baseline): 90.1 (2004), 77.6 (2005), 69.6 (2006), 62.2 (2007), 59.7 (2008), 60.1 (2009), 56.3 (2010), 51.8 (2011), 47.6 (2012), 43.9 (2013), 40.8 (2014).
- Foreign-currency denominated share (percent of GDP): 81.3, 67.7, 56.7, 43.1, 40.9, 41.2, 37.8, 34.2, 30.0, 25.9, 23.7.
- Change in public sector debt (percent of GDP): -14.5, -12.5, -8.0, -7.4, -2.5, 0.4, -3.8, -4.5, -4.1, -3.8, -3.1.
- Identified debt-creating flows (percent of GDP): -20.4, -15.0, -6.5, -16.4, -3.5, -2.5, -2.8, -4.5, -4.1, -3.8, -3.1.
- Primary deficit (percent of GDP): -3.7, -3.8, -3.5, -3.4, -1.3, -0.4, -0.8, -2.0, -2.4, -2.5, -2.5.
- Revenue and grants (percent of GDP): 30.0, 30.8, 30.7, 30.4, 28.0, 28.8, 29.9, 30.6, 30.7, 30.7, 30.7.
- Primary (noninterest) expenditure (percent of GDP): 26.3, 26.9, 27.2, 27.0, 26.7, 28.5, 29.1, 28.6, 28.3, 28.2, 28.2.
- Automatic debt dynamics (percent of GDP): -16.7, -11.1, -3.0, -13.0, -2.2, -2.1, -2.0, -2.5, -1.7, -1.2, -0.6.
  - Contribution from interest rate/growth differential (percent): -8.7, -2.4, -5.2, -7.3, -6.9, -2.1, -2.0, -2.5, -1.7, -1.2, -0.6.
    - Of which contribution from real interest rate: -4.5, 3.2, -2.0, -2.8, -2.2, -1.8, -1.0, -0.7, 0.1, 0.5, 1.0.
    - Of which contribution from real GDP growth: -4.2, -5.7, -3.2, -4.5, -4.7, -0.4, -1.0, -1.8, -1.8, -1.7, -1.6.
  - Contribution from exchange rate depreciation (percent): -8.0, -8.7, 2.2, -5.7, 4.7, ... (table continues).
- Residual, including asset changes (percent of GDP): 5.9, 2.4, -1.5, 9.0, 1.0, 2.9, -1.0, 0.0, 0.0, 0.0, 0.0.
- Public sector debt-to-revenue ratio (percent): 300.4, 252.3, 226.7, 204.8, 212.9, 208.5, 188.2, 169.3, 155.3, 142.9, 132.8.
- Gross financing need (percent of GDP): 9.5, 10.0, 24.2, 4.5, 7.1, 4.2, 3.2, 2.5, 1.3, 1.1, 0.9.
  - In billions of U.S. dollars: 1.3, 1.7, 4.8, 1.1, 2.3, 1.3, 1.2, 1.0, 0.6, 0.5, 0.5.

- Scenario notes:
  - Scenario with key variables at their historical averages: public sector debt 60.1, 55.4, 51.9, 48.5, 45.2, 42.1, -1.6 (table entries).
  - Scenario with no policy change (constant primary balance) in 2009-2014: 60.1, 62.6, 59.4, 57.3, 55.1, 54.0, -0.7 (series).

### Debt Sustainability: external sector (Table 2 highlights)
- Debt-stabilizing non-interest current account (percent of GDP): Baseline external debt 84.7, 65.8, 52.7, 50.4, 37.4, 41.1, 38.1, 35.3, 32.4, 29.9, 28.6.
- Change in external debt (percent of GDP): -6.7, -19.0, -13.0, -2.4, -13.0, 3.8, -3.1, -2.8, -2.9, -2.5, -1.2.
- Identified external debt-creating flows (percent of GDP): -13.6, -21.6, -13.3, -13.5, -12.8, -1.6, -1.9, -2.5, -3.0, -3.1, -3.2.
  - Current account deficit, excluding interest payments (percent of GDP): -5.2, -4.5, -1.7, -2.8, 2.5, -0.7, 0.7, -0.1, -0.7, -0.9, -1.0.
  - Net non-debt creating capital inflows (negative, percent of GDP): -2.3, -4.1, -6.9, -4.7, -5.7, -3.0, -3.1, -2.9, -2.7, -2.5, -2.3.
- Automatic debt dynamics (percent of GDP): -6.1, -13.0, -4.7, -6.0, -9.6, 2.1, 0.5, 0.5, 0.4, 0.2, 0.2.
  - Contribution from nominal interest rate (percent): 4.9, 4.5, 4.0, 3.1, 2.1, 2.3, 1.8, 1.7, 1.6, 1.4, 1.3.
  - Contribution from real GDP growth (percent): -3.7, -4.5, -2.7, -3.3, -3.4, -0.2, -1.3, -1.2, -1.2, -1.1, -1.1.
- External debt-to-exports ratio (percent): 269.9, 224.2, 186.1, 178.4, 129.3, 150.9, 142.0, 129.1, 119.0, 111.1, 107.8.
- Gross external financing need (in billions of US dollars): 1.9, 2.5, 5.3, 1.5, 4.1, 2.1, 2.4, 2.2, 2.0, 1.9, 1.9.
  - As percent of GDP: 14.0, 14.4, 26.5, 6.3, 12.8, 6.8, 6.8, 5.7, 4.7, 4.1, 3.7.

- Scenario with key variables at their historical averages (external debt, percent of GDP): 41.1, 38.9, 36.6, 34.7, 33.3, 33.1, -2.6.

### Key macroeconomic and fiscal assumptions underlying the baseline
- Real GDP growth (percent): 4.6, 6.8, 4.6, 7.6, 8.9, 0.6, 3.5, 3.6, 3.8, 3.9, 3.9 (2004–2014 series in table).
- Average nominal interest rate on public debt (percent): 6.0, 5.3, 5.9, 5.8, 5.3, 5.3, 5.4, 5.4, 6.2, 6.7, 6.9.
- Average real interest rate (percent, nominal rate minus change in GDP deflator): -4.4, 4.0, -2.5, -4.0, -3.5, -3.2, -1.7, -1.1, 0.4, 1.3, 2.6.
- Inflation rate (GDP deflator, percent): 10.5, 1.3, 8.4, 9.8, 8.8, 8.5, 7.0, 6.5, 5.8, 5.4, 4.3.
- Growth of real primary spending (deflated by GDP deflator, percent): -0.3, 9.1, 5.8, 6.6, 7.8, 7.3, 5.9, 1.7, 2.7, 3.5, 4.0.
- GDP deflator in US dollars (change in percent, external table): 8.6, 18.8, 10.2, 12.6, 21.9, -2.4, 8.3, 6.0, 6.4, 6.0, 4.6.
- Nominal external interest rate (percent): 6.1, 6.7, 7.0, 7.2, 5.6, 6.1, 4.9, 4.9, 4.9, 4.7, 4.6.
- Growth of exports (US dollar terms, percent): 39.3, 18.6, 11.4, 20.7, 35.8, -7.4, 10.3, 11.9, 10.0, 8.7, 7.4.
- Growth of imports (US dollar terms, percent): 38.2, 23.2, 24.3, 16.2, 51.9, -16.1, 14.7, 9.3, 7.6, 6.9, 6.2.
- Current account balance, excluding interest payments (percent of GDP): 5.2, 4.5, 1.7, 2.8, -2.5, 0.7, -0.7, 0.1, 0.7, 0.9, 1.0.

---

### Debt sustainability stress tests (figures and scenario notes)
- Public and external debt sustainability frameworks include bound tests:
  - Public debt projections and shocks shown in Figure 1: scenarios include growth shock, primary balance shock, interest rate shock, combined shock, contingent liabilities shock, real depreciation and contingent liabilities shocks (one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009).
  - External debt projections and shocks shown in Figure 2: scenarios include interest rate shock, CA shock (non-interest current account shock), combined shock, real depreciation shock (one-time real depreciation of 30 percent occurs in 2009), growth shock.
- Figures and notes indicate individual shocks are permanent one-half standard deviation shocks; combined and other scenarios use permanent 1/4 standard deviation shocks for some variables.

---

### Fund relations, safeguards, and technical assistance (Annex 1 highlights)
- Membership status: Joined March 11, 1946; Article VIII.
- Quota and holdings: Quota 306.50 (SDR Million) 100.00 percent; Fund holdings of currency 306.51 100.00 percent.
- SDR Department: Net cumulative allocation 277.19 (SDR Million) 100.00 percent; Holdings 229.63 82.84 percent.
- Outstanding purchases and loans: None.
- Latest financial arrangements (selected):
  - Stand-By Jun 08, 2005 – Dec 27, 2006: Amount Approved 766.25 (SDR Million); Amount Drawn 263.59 (SDR Million).
  - Stand-By Apr 01, 2002 – Mar 31, 2005: Amount Approved 1,988.50; Amount Drawn 1,988.50 (including SRF Jun 25, 2002 – Aug 08, 2002: 128.70 approved and drawn).
  - Stand-By May 31, 2000 – Mar 31, 2002: 150.00 approved and drawn.
- Projected payments to Fund (SDR Million): Charges/Interest 0.03 (2009); 0.15 (2010); 0.15 (2011); 0.15 (2012); 0.15 (2012 entry repeated in table).
- Safeguards assessment: Authorities addressing concerns from September 2005 safeguards assessment. Uruguay's total obligations to the Fund are included in the BCU's financial statements; selection criteria for external audit amended per safeguards recommendation.
- Exchange rate arrangement: Uruguayan peso (Ur$); independently floating exchange rate regime since July 29, 2002. In 2008 reclassified to a floating exchange rate regime. On October 5, 2009, official market exchange rate Ur$ 21.173 per US dollar. System free of restrictions on payments and transfers for current international transactions.
- Article IV consultation: 2008 Article IV concluded October 24, 2008 (Country Report No. 09/104); Uruguay on standard consultation cycle.
- FSAP participation and ROSCs: Financial Sector Stability Assessment (FSSA) considered June 28, 2006 (Country Report No. 06/187). ROSC on fiscal transparency March 5, 2001. ROSC on data dissemination October 18, 2001. ROSC on AML/CFT December 2006 (Country Report No. 06/435).
- Technical assistance (TA) and missions (selected):
  - FAD: Tax, customs, and social security administration TA in 2008; February 2007; March 2006; June 2005 and July 2006. Tax policy TA October 2005 and May 2003. Public financial management March 2005 and July 2006. Resident advisor on social security administration July 2006 to June 2007.
  - LEG: TA to develop AML/CFT national strategy February 2007; TA to conduct money laundering/terrorist financing country risk assessment January, April, and July 2009.
  - MCM: Substantial and continuous TA in resolution of intervened banks, restructuring of BROU, and BHU since 2002. Debt Management (jointly with ICM) July 2005. Strengthening monetary and exchange rate policy formulation July 2006; May 2007.
  - STA: TA to develop adequate recording of loans funded by the FSBS April 2003. Monetary and financial statistics November 2007. Government Finance Statistics February 2008.
- Resident Representative: Mr. Gaston Gelos (covers Uruguay from Buenos Aires office).

---

### Relations with the World Bank Group (Annex 2 highlights)
- Last Country Assistance Strategy (CAS) approved June 9, 2005.
- CAS envisaged a base case scenario of up to US$800 million in new lending over FY05–10, with focus on infrastructure, social programs and innovation.
- Strategy anchored around programmatic development loans (DPLs). The first DPL (SPDPL) for US$75 million was approved by the Board together with the CAS on June 9, 2005.

*Prepared by IMF staff representatives for the 2009 Article IV Consultation with Uruguay; informational annex content from the Staff Report for the 2009 Article IV Consultation.*

### 2005. It supported reforms in social policies as well as important measures taken by the

### _cr1048 - 2005. It supported reforms in social policies as well as important measures taken by the

### World Bank lending and programmatic support
- First Programmatic Reform Implementation Development Policy Loan (PRIDPL 1): US$100 million, approved May 30, 2007; disbursed in local currency in May 2008.  
- PRIDPL1 objectives: supported Government’s reform program in taxation, business climate and capital markets development, and aimed at improving the social protection system.  
- Second PRIDPL: $400 million, approved on 3 February 2009 and fully disbursed; continued support for key reforms in taxation, business climate and capital markets, and the social protections system, building on SPDPL achievements.  
- The World Bank issued an inflation indexed Uruguayan peso bond as the first foreign issuer to do so for the purpose of a back-to-back disbursement of a specific loan.

### Current investment portfolio (as of September 7, 2009)
- Portfolio comprises eight investment projects totaling US$261.9 million in commitments, with an undisbursed amount of US$123.9 million.  
- Seven investment operations approved since beginning of new CAS period, including projects approved June 9, 2005 and later.  
- Specific IBRD operations (Commitments / Disbursed / Undisbursed):
  - Foot & Mouth Disease (AF): 6.5 / 4.7 / 1.8
  - Basic Education III: 42.0 / 40.6 / 1.4
  - Transport Infrastr. Maint. & Rural Access: 70.0 / 48.1 / 21.9
  - Integrated Nat. Resources & Biodiv. Mgnt.: 30.0 / 16.8 / 13.2
  - Innovation to Enhance Competitiveness: 26.0 / 1.1 / 24.9
  - Institutions Building TAL: 12.1 / 2.0 / 10.1
  - OSE Modernization & Systems Rehab. APL2: 50.0 / 24.4 / 25.6
  - Non Communicable Diseases Prevention: 25.3 / 0.4 / 24.9
  - Total: 261.9 / 138.0 / 123.9

### Additional IBRD/IDA/World Bank activity and approvals
- Two investment operations for Integrated Natural Resources (US$30 million) and Transport Infrastructure and Rural Access (US$70 million) were approved by the Board on June 9, 2005 together with the CAS.
- Supplemental Financing for the Foot and Mouth Disease Project: US$6.5 million, approved December 2006.
- Institution Building Technical Assistance Project: US$15 million, approved May 30, 2007 (together with PRIDPL1).
- Second phase of an Adaptable Program Loan (APL) for OSE Modernization and Rehabilitation Systems: US$50 million, approved July 28, 2007.
- Investment loan for Promoting Innovation to Enhance Competitiveness Project: US$26 million, approved May 1, 2007.
- Non Communicable Disease Prevention Project: US$25.30 million, approved August 28, 2008.

### Analytical and advisory activities (AAA) and technical assistance
- FY08 AAA included: Programmatic DPR in Infrastructure, a PSIA on Tax Reform, an Investment Climate Assessment, and a Non-Lending Technical Assistance (NLTA) on Strengthening Participatory Monitoring and Evaluation in Social Policies.  
- FY09 completions: second phase NLTA on Strengthening Participatory Monitoring and Evaluation in Social Policies; Study on the Payments System.  
- Under preparation for FY10 delivery: Railways Sector Study, Country Economic Memorandum (CEM) focusing on trade, Study on Family Farm Development, Study on Opportunity and Informality.  
- Policy Notes to inform next Country Partnership Strategy (CPS) to be finalized in the third quarter of FY10; new CPS expected to be presented in the fourth quarter of FY10.

### IFC operations (as of August, 2009)
- Committed: Loans 108.6 / Equity 0.0 / Quasi 5.0 / Guarantees 14.7 / Participation 87.5
- Outstanding: Loans 98.6 / Equity 0.0 / Quasi 5.0 / Guarantees 14.2 / Participation 87.5

### IBRD loan transactions (calendar year figures)
- Disbursements by year: 2002: 234; 2003: 97; 2004: 144; 2005: 134; 2006: 42; 2007: 74; 2008: 147; 2009*: 430
- Repayments by year: 2002: 75; 2003: 78; 2004: 80; 2005: 104; 2006: 205; 2007: 85; 2008: 86; 2009*: 47
- Net Disbursements by year: 2002: 158; 2003: 19; 2004: 64; 2005: 30; 2006: -163; 2007: -11; 2008: 62; 2009*: 382
- Debt service payments by year: 2002: 104; 2003: 107; 2004: 102; 2005: 138; 2006: 246; 2007: 116; 2008: 117; 2009*: 67
- Net Transfers by year: 2002: 129; 2003: -9; 2004: 41; 2005: -4; 2006: -204; 2007: -42; 2008: 30; 2009*: 363
- *As of September 7, 2009

### Relations with the Inter-American Development Bank (IDB)
- IDB Country Strategy approved March 15, 2006; focuses on: (i) improving public sector management, (ii) enhancing competitiveness, and (iii) reducing poverty and increasing social inclusion.  
- Original proposed lending scenario for 2005–09: about US$1.2 million for the five-year period (as stated in document). Current estimate of total approvals for the period: US$920.5 million (77% of planned resources).  
- Selected IDB approvals and amounts:
  - Program to support productivity and development of new livestock products: US$15.8 million, approved July 2005.
  - Investment project to improve cluster competitiveness: US$9 million, approved July 2006.
  - Two-year programmatic loan to improve competitiveness: total US$150 million (US$75 million each), first loan approved January 2007; second loan expected approval March 2009.
  - Strengthen institutional capacity for international insertion: US$5.4 million, approved April 2008.
  - Sector loan to support Government social policy: US$250 million, approved August 2005.
  - Sanitation loan: US$118.6 million, approved January 2006.
  - Sanitation program for Ciudad de la Costa: US$43 million.
  - Modernization of the harbor (Montevideo): $40 million.
  - Two loans to improve transportation: US$80 million and US$100 million.
  - Neighborhood improvement program: US$70 million, approved October 2008.
  - Public debt management unit support: US$2.45 million, approved November 2005.
  - Three-year programmatic loan to support tax administration and public sector management: first loan US$50 million approved October 2006; second loan US$285 million approved early-2009; amount for third loan still to be determined.
  - E-government program: US$5 million, approved March 2008.
  - Social security system support: US$3.2 millions, approved December 2008.
  - Support to entities in charge of public oversight: US$2.2 million, approved December 2008.
- IDB portfolio as of September 15, 2009: 35 projects, total lending portfolio US$1,379.9 million, pending disbursement US$510.4 million.
- IDB disbursements and loan flows (selected figures, as of September 15, 2009):
  - Disbursements (by year row in table): 214.2 / 558.6 / 367.2 / 53.1 / 242.3 / 114.8 / 112.9 / 337.2 / 495.0 (sequence corresponds to years listed in table heading).
  - Amortization (by year row in table): 60.7 / 73.1 / 103.7 / 113.3 / 220.0 / 519.6 / 133.8 / 138.7 / 166.2
  - Net Loan Flows (by year row in table): 153.5 / 485.5 / 263.6 / -60.2 / 22.3 / -404.8 / -20.9 / 198.5 / 328.8
  - Total outstanding loans: US$1,828.01 (as of September 15, 2009).
  - IDB staff projection note present for 2009 figures.

### Statistical issues and data adequacy (as of October 14, 2009)
- General: Data provision has some shortcomings, but 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 System of National Accounts 1993 (SNA93).
  - Remaining shortcomings: limited coverage of the enterprise survey, long publication lags, inadequate information on the informal economy, and incomplete quarterly accounts.
  - The central bank (BCU) compiles and disseminates annual GDP estimates in current and at previous year prices by the production and expenditure approaches, as well as quarterly constant price GDP estimates by the production and expenditure approaches. Gross national income, gross disposable income and gross savings available annually.
- Prices:
  - Consumer price index base period: March 1997 = 100.
  - Wholesale price index base updated to 2001.
  - CPI coverage limited to the capital city.
  - Authorities do not provide trade price and volume indices for publication in the IFS.
- Government finance statistics:
  - Official data on central administration, state enterprises and social security system are complete and current; timeliness problems for local governments.
  - Data on revenue and expense for local governments have not been reported since 1994.
  - Monthly and quarterly financing and debt data disseminated on BCU website from 1999 onwards for central government and total public sector.
- Monetary and financial statistics:
  - Prepared in accordance with the IMF's Monetary and Financial Statistics Manual (2000).
  - Authorities have yet to report monetary data using standardized reporting forms (SRF).
  - April 2003 STA mission assisted in recording loans from the Fund for the Stabilization of the Banking System in the Central Bank’s balance sheet; recommendations implemented and reflected in IFS June 2003 issue.
- External sector statistics:
  - Balance of payments compiled and published quarterly; compiled following the fifth edition of the Balance of Payments Manual.
  - Uruguay reports quarterly balance of payments and annual international investment position (IIP) data for publication in the IFS and the Balance of Payments Statistics Yearbook.
  - Uruguay started disseminating the international reserves and foreign currency liquidity data template on the Fund’s external website in 2005.
  - BCU disseminates quarterly external debt statistics on its website, although not in SDDS format.
- Data standards and quality:
  - Uruguay subscribed to the SDDS in February 2004 and is in observance.
  - Data ROSC published on October 1, 2001.
- Reporting to STA:
  - No data are currently reported to STA for publication in the Government Finance Statistics or in the International Financial Statistics.

### IMF staff updates and public information (November 2009)
- Statement by IMF Staff Representative on Uruguay: November 9, 2009 — provided additional information since circulation of the staff report; did not alter thrust of staff appraisal.
- Presidential elections (October 25): José Mujica received 48.0 percent of votes; Luis Alberto Lacalle 29.1 percent; Pedro Bordaberry 17.0 percent. Run-off scheduled November 29; Mr. Bordaberry announced support for Mr. Lacalle. Frente Amplio obtained majority of seats in both chambers of Congress.
- Central bank measures to dampen exchange-rate volatility and limit appreciation pressures included:
  - Fostering creation of a market for foreign-exchange forwards with central bank participation.
  - Reducing reserve requirements on US dollar deposits by 5 percentage points (to 25 percent) over the next 5 months.
  - Refunding deposits for export prefinancing operations at the central bank in pesos instead of US dollars.
  - Signing a letter of intent with the Brazilian central bank to implement a bilateral payment system to conduct trade transactions in local currency.
- Recent outcomes: in the past two weeks appreciation pressures lessened somewhat and intervention levels in the foreign-exchange market were substantially lower.
- Public Information Notice (PIN) No. 09/127, November 11, 2009: IMF Executive Board concluded the 2009 Article IV consultation with Uruguay. Summary observations noted Uruguay’s resilience in the global recession, build-up of buffers, robust banking system, substantial international reserves, flexible exchange rate regime, external current account deficits more than financed by FDI, reduced debt vulnerabilities, and low private sector leverage.

*Source: IMF staff report and annexes (content as provided).*

### 2.3 percent (quarter-over-quarter, seasonally adjusted) during the first quarter of 2009, as the

### _cr1048 - 2.3 percent (quarter-over-quarter, seasonally adjusted) during the first quarter of 2009, as the

### Economic performance and outlook (2009–2010)
- Real GDP contracted by 2.3 percent (quarter-over-quarter, seasonally adjusted) during the first quarter of 2009.
- In the second quarter of 2009, real GDP expanded by 0.5 percent (quarter-over-quarter, seasonally adjusted), led by a recovery in manufacturing and commerce.
- Overall, the economy is now expected to grow by at least 0.6 percent in 2009.
- In 2010, growth is projected to reach 3.5 percent.
- Medium-term prospects are described as good, supported by considerable FDI in recent years that has contributed to substantial productivity improvements in the tradable sectors.

### Shocks and drivers of 2009 performance
- Decline in external demand affected key export-oriented sectors.
- A severe drought affected activity in the agriculture, livestock and energy sectors.
- Private consumption and investment decelerated.
- Unemployment rate rose only little, and temporarily.
- Drought-related costs are estimated at 1.6 percent of GDP.

### Policy response and stance
- Exchange rate: Forceful but temporary intervention was undertaken to address concerns about an overshooting of the exchange rate during the period of financial turbulence.
- Monetary policy: Persistent inflationary pressures resulted in a more restrictive monetary stance than in other emerging markets.
  - Core inflation remains in the upper half of the target range in an economy operating around potential.
  - Directors did not see room for monetary easing in the near term and encouraged aiming for lower inflation rates over the medium term.
  - Staff assessment: the real effective exchange rate is broadly in line with fundamentals.
  - Recommended monetary-framework improvements: stronger commitment to the inflation target range; limit exchange-rate intervention to addressing volatility consistent with the inflation objective; consider strengthening central bank autonomy, enhancing accountability, and improving communication to strengthen credibility and promote de-dollarization.
- Fiscal policy:
  - Fiscal policy maintained nominal expenditure growth as planned; no discretionary stimulus plans were implemented besides specific, limited measures to support particularly affected sectors.
  - With strong expenditure growth, lower-than-expected revenues, and drought-related costs (1.6 percent of GDP), the overall fiscal deficit is projected to deteriorate further in 2009 to 2.6 percent of GDP.
  - Directors recommended that fiscal policy continue to aim at debt reduction and welcomed the authorities’ intention to contain growth in non-priority areas while preserving room for infrastructure and social outlays, and encouraged returning to more ambitious fiscal targets over the medium term.
  - Directors noted that the recent increase in the fiscal deficit reflected largely temporary factors but that still high levels of public debt call for a cautious approach.

### Financial sector and external position
- Uruguay’s banking system described as robust and well-regulated; low private sector leverage and minimal bank exposure to foreign toxic assets limited transmission of the global crisis.
- After pressure late last year, the peso has been appreciating again and capital inflows have resumed; yields and country risk stabilized near pre-crisis levels.
- Gross official reserves (US$ millions): 2,512 (2004); 3,438 (2005); 3,091 (2006); 4,096 (2007); 6,328 (2008); 8,211 (2009); 8,811 (2010 projected).
- In percent of short-term debt: 112.4 (2004); 153.8 (2005); 492.6 (2006); 469.9 (2007); 786.5 (2008); 994.4 (2009); 951.2 (2010 projected).
- Directors welcomed progress toward consolidated supervision of financial groups starting next year and encouraged continuing to strengthen the prudential framework.

### Key macroeconomic indicators (selected figures)
- Real GDP (percent change): 2004: 4.6; 2005: 6.8; 2006: 4.6; 2007: 7.6; 2008: 8.9; 2009: 0.6; 2010: 3.5.
- Real consumption (percent change): 2004: 2.9; 2005: 5.2; 2006: 7.1; 2007: 7.3; 2008: 8.8; 2009: 3.9; 2010: 2.9.
- Real investment (percent change): 2004: 15.8; 2005: 4.2; 2006: 13.3; 2007: 6.3; 2008: 25.0; 2009: -0.6; 2010: 2.4.
- CPI inflation (average): 2004: 9.2; 2005: 4.7; 2006: 6.4; 2007: 8.1; 2008: 7.9; 2009: 7.3; 2010: 7.0.
- CPI inflation (eop): 2004: 7.6; 2005: 4.9; 2006: 6.4; 2007: 8.5; 2008: 9.2; 2009: 7.0; 2010: 6.5.
- Credit to the private sector (constant exch. rate): -31.4 (2004); 6.3 (2005); 11.0 (2006); 22.1 (2007); 28.0 (2008); 0.6 (2009).
- Revenue (percent of GDP, non-financial public sector): 2004: 28.0; 2005: 28.0; 2006: 27.7; 2007: 27.6; 2008: 25.4; 2009: 26.3; 2010: 27.3.
- Non-interest expenditure (percent of GDP): 2004: 24.2; 2005: 24.3; 2006: 24.3; 2007: 24.4; 2008: 24.3; 2009: 26.2; 2010: 26.8.
- Primary balance (percent of GDP, total public sector): 2004: 3.5; 2005: 3.8; 2006: 3.5; 2007: 3.4; 2008: 1.4; 2009: 0.4; 2010: 0.8.
- Interest (percent of GDP): 2004: 5.5; 2005: 4.4; 2006: 4.0; 2007: 3.4; 2008: 2.8; 2009: 2.9; 2010: 2.9.
- Overall balance (percent of GDP, total public sector): 2004: -2.0; 2005: -0.6; 2006: -0.5; 2007: 0.0; 2008: -1.4; 2009: -2.6; 2010: -2.1.
- Gross public sector debt (percent of GDP): 2004: 90.1; 2005: 77.6; 2006: 69.6; 2007: 62.2; 2008: 59.7; 2009: 60.1; 2010: 56.3.
- Net public sector debt (percent of GDP): 2004: 86.7; 2005: 72.6; 2006: 65.0; 2007: 55.1; 2008: 50.2; 2009: 47.4.
- External debt (percent of GDP): 2004: 84.7; 2005: 65.8; 2006: 52.7; 2007: 50.4; 2008: 37.4; 2009: 41.1; 2010: 38.1.
- Current account balance (percent of GDP): 2004: 0.3; 2005: 0.0; 2006: -2.3; 2007: -0.3; 2008: -4.6; 2009: -1.6; 2010: -2.5.
- Merchandise exports, f.o.b. (percent of GDP): 2004: 23.0; 2005: 21.6; 2006: 21.9; 2007: 20.8; 2008: 22.0; 2009: 19.9; 2010: 19.6.
- Merchandise imports, f.o.b. (percent of GDP): 2004: 21.9; 2005: 21.5; 2006: 24.3; 2007: 23.1; 2008: 27.3; 2009: 23.0; 2010: 23.6.
- Capital and financial account (percent of GDP): 2004: 0.5; 2005: 5.9; 2006: 1.0; 2007: 6.9; 2008: 8.8; 2009: 7.6; 2010: 4.2.
- Foreign direct investment (percent of GDP): 2004: 2.3; 2005: 4.1; 2006: 6.9; 2007: 4.7; 2008: 5.7; 2009: 3.0; 2010: 3.1.
- Overall balance of payments (US$ millions): 2004: 454; 2005: 951; 2006: -337; 2007: 1,005; 2008: 2,232; 2009: 1,883; 2010: 600.
- External debt service (percent of exports of goods and services): 2004: 44.8; 2005: 53.1; 2006: 92.5; 2007: 26.1; 2008: 29.8; 2009: 21.0; 2010: 15.1.

### Executive Board assessment (summarized)
- Directors commended achievements in reducing vulnerabilities, enabling Uruguay to withstand the global recession.
- Praised: sound macroeconomic policies; skilful public debt management; robust and well-regulated banking system; solid external position under a flexible exchange rate regime; advances in poverty alleviation.
- Noted the quick turnaround in the economy and welcomed resumption of growth in Q2 2009.
- Endorsed policy mix: tighter monetary stance given inflation concerns; fiscal policy to broadly maintain planned nominal expenditure increases and allow automatic stabilizers to work.
- Emphasized continued fiscal consolidation aiming at debt reduction and preserving room for priority infrastructure and social spending.
- Urged further efforts to lower inflation over the medium term to support growth, protect the poor, promote de-dollarization, and avoid costly measures should inflation threaten to reach the 10 percent threshold.

### Structural and social policy priorities
- Continue improving productivity and the business climate: promote public sector efficiency, reduce red tape, improve governance of public enterprises.
- Promote private investment in the electricity sector and improve planning for energy-related contingencies to avoid bottlenecks and enhance growth potential.
- Strengthen social inclusion and improve targeting of social programs through budget reprioritization.
- Move towards consolidated supervision of financial groups and continue strengthening the prudential regulatory and supervisory framework.

### Statement highlights by Mr. David Vogel (Alternate Executive Director for Uruguay, November 9, 2009)
- Uruguay endured its deepest crisis seven years earlier, with severe deposit losses, exchange-rate depreciation of more than 80 percent (end-2002 relative to end-2001), unemployment near 20 percent, and gross public sector debt above 100 percent of GDP.
- By 2009: average economic growth of approximately 7 percent over the last five years; GDP expected to end the year with a positive variation; unemployment just above 7 percent; significant direct investment inflows; inflation under control; sound financial sector performance; improved public debt indicators; reduced poverty and migration flows.
- Social response: Plan de Emergencia Social and subsequent targeted social plans helped reduce poverty from 26 percent in 2007 to 20.5 percent in 2008, and extreme poverty from 2 percent to 1.5 percent.
- Debt management achievements: lengthened public debt maturities from 7.4 years in 2004 to 12.8 years in 2009; de-dollarization of debt from 89 percent in foreign currency five years ago to 71 percent currently; nearly US$ 4 billion (about 13 percent of GDP) of public debt held by the Pension Fund Administrators (AFAPs).
- Inflation control: twelve-month inflation 6.5 percent in October; inflationary expectations 6.15 percent in October 2009-September 2010; Central Bank’s target range cited as from 3 percent to 7 percent. Government collaborated, under exceptional circumstances, with monetary policy to avoid second-round indexation effects and prevent inflation rising above 10 percent.

*International Monetary Fund — Public Information Notice and staff report content as provided.*

### 10.      Maintaining a flexible exchange rate system and without pushing against the

### 10.      Maintaining a flexible exchange rate system and without pushing against the wind

### Exchange rate policy and reserves
- The Central Bank has intervened in the exchange rate market to smooth volatility while maintaining a flexible exchange rate system and "without pushing against the wind."
- Interventions have led to an increase in international reserves, allowing Uruguay to build up a considerable financial buffer.
- The authorities agree with staff’s conclusion that “there is no evidence of competitiveness problems and a potential misalignment of the real exchange rate”.

### Labor market developments
- Real wages: substantial decrease during the crisis—about 20 percent in 2002 and 4 percent in 2003—followed by a considerable rise in recent years as part of recovery from the deep decline.
- Productivity has increased significantly alongside wage recovery.
- Unemployment figures are at historic low levels.
- Income policies and labor reforms were implemented with attention to consistency with the authorities’ broad concept of stability.

### Financial regulation and supervision
- Regulation and supervision of the financial system have been substantially strengthened.
- The Financial Sector Assessment Program (FSAP) by IMF and World Bank staff provided important input; suggestions were carefully considered by the authorities.
- An IMF Working Paper concludes: “the gradual but persistent reforms have brought financial regulation and supervision generally up to international best practices, while also embracing innovative elements such as dynamic provisions and explicit liquidity requirements”. (IMF Working Paper 09/199)
- Public banks (BROU and BHU) have undergone noticeable transformations in functioning and incentives.

### Market diversification and regional exposure
- Market and product diversification has reduced Uruguay’s dependence on regional events.
- There has been a substantial decrease in non-resident deposits, further weakening regional economic and financial linkages.
- Chapter III of the Selected Issues (as referenced) indicates Uruguay’s current situation and outlook are less exposed to surrounding-region occurrences, though regional developments still matter.

### Program ownership, international support, and reforms
- Support from the international community has been key but success depends critically on authorities’ ownership.
- After the Stand-By Arrangement was approved in June 2005, Uruguay’s Minister of Finance publicly stated “this is the economic program of Uruguay and not of the Fund”.
- The Buff statement issued on June 6, 2005 underscored authorities’ commitment to make Uruguay “a successful case for the benefit of the Uruguayan people and also for the Fund” and their “firm willingness to establish a well articulated exit strategy from the Fund’s financial support”.
- Exit strategy: Uruguay repaid its outstanding debt to the Fund based on economic and financial arguments, demonstrating continued ownership.
- Reforms approved include those on the tax system and revenue administration, autonomy to the Central Bank, approval of the bankruptcy law, reforms on the financial system, and reforms on BHU.

### External environment, crisis episode, and policy response
- Until 2008 Uruguay benefited from a favorable external environment, which the authorities capitalized on rather than squandered.
- Uruguay faced less benign external conditions than many countries because it is an oil importer; staff noted “the concurrent oil price shock has led to a deterioration in Uruguay’s terms of trade”.
- Combined with years of severe drought (necessitating oil products to substitute for lack of hydroelectric power), substantial fiscal costs were incurred.
- During the international crisis, Uruguay experienced a slowdown from high past growth rates but effects were moderate:
  - GDP declined only in the first quarter of 2009, and growth continued thereafter.
  - Growth performance during the crisis was attained with extremely moderate countercyclical fiscal policies.
  - Revenues (relative to GDP, which has continued rising) will increase in 2009 in comparison with 2008.
- Financial indicators show remarkable resilience.
- Foreign direct investment (FDI) continued and supported employment and unemployment records, more than offsetting negative effects of the international crisis.

### Future priorities and structural reforms
- Authorities acknowledge the need to continue implementing structural reforms and share many staff views.
- Priority areas for further progress:
  - Energy sector reforms.
  - Public sector reforms to enhance the business environment and boost potential growth.
  - Refinement of macroeconomic policies consistent with new circumstances and future challenges, including progressing towards a more formal framework of countercyclical fiscal policies.
  - Continued work on social issues.
- Authorities emphasize increasing opportunities for all, expanding access to knowledge and generating knowledge by boosting research and further integrating into the global economy.

### Social policy highlights
- Numerous structural reforms have been implemented in recent years, including substantial transformation of public health service provision.
- The Plan Ceibal: providing one laptop with Internet connection to every child in public schools—presented as an emblematic reform reflecting objectives to achieve higher and sustainable growth, better employment, improved social conditions, and increased social equity.

*Source: _cr1048 - 10.      Maintaining a flexible exchange rate system and without pushing against the wind_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1048.pdf_