## _cr1406

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### Social policies, growth, and recent performance
- 2012 concluded the decade with the strongest average GDP growth on record in Uruguay and a remarkable improvement in living standards.
- Key drivers since the 2002 crisis: important institutional reforms, large FDI projects attracted by a stable macroeconomic environment and business-friendly investment climate, and favorable external conditions.
- Outcomes:
  - Strong rise in employment, real wages, and consumption.
  - Poverty rates declined sharply and income inequality declined further since 2004.
- Poverty and social indicators:
  - Poverty decreased from 25.7 percent in 2006 to 8.4 percent in 2012.
  - Extreme poverty decreased from 1.5 percent to 0.3 percent over the same period.
  - Health insurance coverage increased to about 95 percent of the population.

### Real sector developments and outlook
- Growth and investment:
  - Real GDP growth: averaged 7.7 percent in 2010–11; moderated to 3.9 percent in 2012.
  - Staff projection: 4 percent for 2013; projected to soften to 3.5 percent in 2014.
  - Private investment: close to historic highs as a share of GDP; decelerated after a 2012 boom.
  - Medium-term growth: expected somewhat below potential growth rate of 4 percent for 2015–18.
- Unemployment:
  - Averaged 6¾ percent in the six months through August; near historic lows.
- Sectoral shocks in 2012:
  - 2012 slowdown partly due to lower export and tourism revenues from Argentina and Brazil, and a drop in hydroelectric output due to a drought.
  - Phasing-out of rebound in hydroelectric generation subtracts 1.5 percentage points from 2014 growth; start of pulp mill production and exports adds 1 percentage point.

### Inflation, wages, and labor policy
- Inflation performance and expectations:
  - Central bank target range: 4–6 percent; announced widening to 3–7 percent starting July 2014.
  - Nontradables inflation: averaged about 9 percent since mid-2011 (vs slightly less than 8 percent in prior three years).
  - Headline inflation: 7.5 percent in December 2012; climbed back to 9 percent in September 2013.
  - Twelve-month-ahead inflation expectations: about 8 percent (up from 7.5 percent six months earlier).
- Wages and guidance:
  - Recent real wage growth: about 4 percent in the last two years; government guideline expects moderation to 2–2.5 percent in the 2013 wage round.
  - Two guideline options for three-year contracts: (1) increases in line with central bank inflation target plus a real adjustment between zero and 3 percent; (2) contracts without backward indexation.
  - Staff supports wage-setting guidelines to keep real wage growth in range 0–3 percent and reduce backward-indexation to lower inflation inertia and facilitate de-dollarization.

### External sector, exchange rate, and capital flows
- Current account and trade:
  - Current account widened from 2.9 percent of GDP in 2011 to 5.4 percent of GDP in 2012.
  - Two thirds of the increase reflected a wider trade deficit—higher imports of capital goods (Montes del Plata pulp mill) and a surge in oil imports for electricity after the drought.
  - Services revenues (mainly tourism) weakened in late 2012.
- Capital flows and CFMs:
  - Sharp portfolio inflow surge into locally-issued, peso-denominated public securities in early 2012; surge ended in June 2013.
  - Reserve requirements on nonresidents’ purchases introduced/extended in September 2012 and late May 2013; 50 percent reserve requirement for locally-issued Treasury notes announced in June 2013.
- Exchange rate and REER:
  - REER strengthened 13 percent in the twelve months through April 2013; vs Argentina and Brazil: 19 and 14 percent, respectively.
  - Peso weakened by 16 percent against the U.S. dollar between late-May and end September; REER depreciation about 8 percent from May to August.
  - Staff estimates REER remains slightly on the strong side (0–10 percent).
- Balance of payments and reserves:
  - A steady inflow of FDI has more than financed the current account deficit in recent years.
  - Central bank reserves at end-2012: around 19 percent of GDP in free reserves (gross reserves minus reserve requirements against foreign currency denominated deposits).
  - Reserve adequacy metrics: reserves amply exceed prudential benchmarks; ratio of gross reserves plus banks' foreign assets to ST debt plus foreign currency deposits: 169.0 (percent, as presented).

### Credit, housing, and financial system indicators
- Credit growth:
  - Credit to households (mostly local currency): growing about 8 percent (y-o-y) in real terms.
  - Credit to firms (mostly U.S. dollars): about 18 percent (y-o-y).
  - Stock of credit to private sector: 24 percent of GDP in August 2013.
- Housing and real estate:
  - Growth of house prices moderated in 2012.
  - Mortgages: 4 percent of GDP in July 2013.
  - Recent real estate expansion concentrated in urban luxury segment with substantial foreign (mainly Argentine) investment.
- Banking sector soundness:
  - Bank credit to private sector low at 24 percent of GDP.
  - Non-performing loans: less than 1.5 percent of total loans.
  - Main vulnerability: 27.5 percent of bank loans in foreign currency are to firms whose earnings are in local currency.
  - Stress tests in FSAP suggest banks can withstand significant shocks; banks generally liquid with low loan-to-deposit ratios.
  - BROU (state-owned bank) accounts for about 40 percent of bank assets; BROU non-performing loans at 1.5 percent.

### Fiscal stance, public debt, and liquidity buffers
- Fiscal outcomes and projections:
  - Primary balance: declined to -0.2 percent of GDP in 2012 from 2 percent in 2011.
  - Primary balance expected to improve to a 0.6 percent of GDP surplus in 2013 (largely due to recovery in profits of state energy enterprise).
  - Under unchanged policies, overall public sector deficits would settle around 2¼ percent of GDP in the medium term—about 1.0–1.5 percentage points of GDP higher than envisaged in last year’s budget.
- Public debt and liquid assets (2012 data and projections):
  - Gross public debt: about 60 percent of GDP (broadly unchanged).
  - Net public debt (gross minus liquid assets): around 36–37 percent of GDP between 2013 and 2015; net public debt stood at 37.2 percent of GDP in 2012.
  - Liquid assets of public sector: 22.4 percent of GDP at end-2012.
  - Contingent credit lines with multilateral agencies: some 4 percent of GDP.
- Debt management and financing:
  - Active liability management reduced share of foreign currency debt and increased average maturity.
  - Access to foreign funding at favorable costs (example: 4.5 percent for a US$ denominated 10-year bond issued in August 2013).
  - DSA baseline projections (selected figures, as of October 22, 2013):
    - Nominal gross public debt (percent of GDP): 82.0 (2011), 60.0 (2012), 59.6 (2013), 59.2 (2014), 59.0 (2015), 58.9 (2016), 59.3 (2017), 59.5 (2018), 59.7 (projection series).
    - Net public debt (percent of GDP): 51.0 (2011), 37.4 (2012), 37.2 (2013), 37.3 (2014), 37.2 (2015), 37.5 (2016), 37.9 (2017), 38.1 (2018), 38.3 (projection series).
    - Public gross financing needs (percent of GDP): 14.8 (2011), 10.9 (2012), 14.8 (2013), 16.1 (2014), 17.1 (2015), 20.3 (2016), 17.5 (2017), 20.0 (2018), 18.2 (projection series).
- Fiscal recommendations:
  - Keep net public sector debt on a firmly downward-trending path; return overall public sector deficit to 1 percent of GDP in the medium term (as envisaged in 2011 Rendicion de Cuentas) from the 2.0–2.5 percent projected.
  - Restrain growth of expenditures while safeguarding infrastructure investments and safety net for the poor.
  - Scope for raising contributions to public pension and health care insurance plans was identified by staff; authorities saw limited room.
  - Authorities saw scope to increase tax revenues in the longer run mainly from higher-income earners; preserve investment-friendly corporate tax structure.

### Monetary policy operations and recent changes
- Policy actions (June 2012–March 2013):
  - Central bank raised reserve requirements on bank deposits and increased the policy rate by a cumulative 50 basis points.
  - Policy rate at 9.25 percent from end-December; remained 300–400 basis points below staff’s estimates of the neutral short-term interest rate.
  - Central bank stepped up reserve accumulation to limit peso appreciation.
- May–June 2013 operational changes:
  - New reserve requirement of 50 percent for nonresidents’ purchases of locally-issued Treasury notes.
  - Replaced overnight interest rate target with targets for M1 plus saving deposits (M1+).
  - Announced widening of inflation-target-band to 3–7 percent starting in July 2014 (from 4–6 percent).
  - M1+ targets for 2013Q3 and 2013Q4: 12.5–13 percent and 15–17 percent, respectively; authorities envisage reduction in M1+ growth to 8 percent by mid-2015.
- Market reaction since July 2013:
  - Overnight interbank rate: average 4.5 percent in July; tightened liquidity in Aug–Sep drove average to 17.5 percent.
  - Early October: nominal peso yields for 1–60 months maturities about 4 percentage points above May levels.
- Staff views and operational advice:
  - Tightening of monetary stance was appropriate given above-target inflation.
  - Broadening CFMs was justified by macro considerations but should not substitute for warranted macro adjustment and should be removed once inflow surges subside.
  - Shift to M1+ target raised practical challenges; staff recommended active communication of inflation goal and readiness to revise M1+ targets or consider other operational frameworks if link between M1+ growth and inflation is not stable.
  - Widening inflation target band requires enhanced communication; credibility could be improved by bringing inflation into the band and narrowing it over time.

### Risks, scenarios, and channels of spillovers
- General risk assessment:
  - Near-term risks mostly to the downside.
  - Uruguay exposed to inward spillovers and domestic overheating risks.
  - Medium-term upside from iron-ore mining.
- Specific risks (direction, likelihood, impact as presented):
  - Large decline in Uruguay’s export prices (due to lower-than-anticipated emerging market growth potential, sharp slowdown in China): downside; Likelihood M; Impact H.
  - Protracted economic and financial volatility in emerging markets triggered by exit from unconventional monetary policy in advanced economies: downside; Likelihood H; Impact L.
  - Re-emergence of financial stress in the euro area and tightening in global financial conditions: downside; Likelihood M; Impact L.
  - Sharply lower growth in the region: downside; Likelihood M; Impact M.
  - Global oil price shock triggered by geopolitical events: downside; Likelihood L; Impact L.
  - Domestic overheating followed by a hard landing: up/downside; Likelihood L; Impact M.
  - Increased mining revenues in the medium term: upside; Likelihood H; Impact H.
- Transmission channels and amplifiers:
  - Export commodity prices: About two-thirds of Uruguay’s exports are commodity based (mostly food related).
  - Regional growth linkages: trade, tourism, and FDI with Argentina and Brazil.
  - Tighter global financial conditions: could tighten financing, trigger peso depreciation, weaken FDI; high credit dollarization could affect bank balance sheets—impact contained by banks’ capital and foreign assets.
  - Domestic wage outcomes: excessive real wage growth or insufficient monetary tightening could raise inflation and reduce competitiveness.

### Macroeconomic buffers, balance of payments stability, and external debt
- Macroeconomic buffers:
  - Non-financial public sector financial assets: 5.8 percent of GDP.
  - Central government liquid assets would cover debt service needs through 2014.
  - Contingent credit lines: 4 percent of GDP.
  - BCU free reserves at end-2012: around 19 percent of GDP.
- Balance of payments assessment (Box 3 highlights):
  - REER: appreciated over last decade; about 40 percent above pre-2002 crisis levels.
  - Current account: widened to 5.4 percent of GDP in 2012; expected to narrow to about 3.5 percent of GDP over the medium term as transient factors dissipate.
  - Exchange rate assessments (deviation from equilibrium, in percent): Average: 4.1 (positive indicates overvaluation); CGER MB: -1.3; CGER ES: 3.3; CGER ERER: 2/8.8; EBA: 3/3.2; Big Mac Index: 4/9.3.
- External debt and DSA (Annex and DSA excerpts):
  - Baseline external debt (percent of GDP): 2008: 50.7; 2009: 59.4; 2010: 47.4; 2011: 39.5; 2012: 42.3; 2013: 42.3; 2014: 41.7; 2018: 40.9.
  - External debt-to-exports ratio (percent): 2008: 164.3; 2009: 206.1; 2010: 171.9; 2011: 142.5; 2012: 159.0; 2013: 178.6; 2018: 152.6.
  - Gross external financing need (US$, billions): 2008: 6.4; 2009: 5.9; 2010: 8.2; 2011: 8.8; 2012: 8.8; 2013: 12.1; 2018: 13.3.
  - Stress test stylized combined downside scenario (per DSA text):
    - Permanent 20 percent exchange rate depreciation + temporary drop in growth and primary balances + permanent increase in real interest rates.
    - Under scenario: gross debt ratio rises by about 15 percentage points over five-year forecast horizon; net debt rises by about 10 percentage points.
  - DSA projections (selected macro indicators, projections):
    - Real GDP growth (percent): 4.0 (2011), 6.5 (2012), 3.9 (2013), 4.0 (2014), 3.5 (2015), 3.3 (2016), 3.5 (2017), 3.8 (2018), 3.9 (projection series).
    - Inflation (GDP deflator, percent): 8.0 (2011), 8.0 (2012), 8.8 (2013), 8.9 (2014), 7.5 (2015), 7.7 (2016), 7.2 (2017), 6.8 (2018), 6.4 (projection series).
    - Effective interest rate (percent): 5.6 (2011), 5.5 (2012), 5.0 (2013), 5.7 (2014), 6.6 (2015), 7.7 (2016), 7.7 (2017), 6.9 (2018), 6.5 (projection series).

### Financial sector reform, supervision, and inclusion
- Supervision and SSF resources (2014 actions):
  - New unit for operational supervision; new unit for capital market supervision; new unit on authorizations.
  - Conversion of twenty temporary externally-funded staff to permanent positions.
  - Addition of an analyst dedicated to monitor BROU.
  - SSF initiating ISO9000 certification for activities and processes; in 2014 ISO certification to cover supervisory process, infrastructure, and sanctions.
- Stress testing and contingency planning:
  - By end-2013, banks to submit results of first capital adequacy evaluation.
  - SSF considering more stringent stress testing to establish capital surcharges (Pillar II) in 2014.
  - Coordination with COPAB to propose legal reforms for information exchange and bank resolution.
  - 2014: independent assessment of private pension system including BSE strategy.
- Regulatory progress:
  - Implementation progress on Basel II and III; additional capital requirements in 2013 for market and operational risks.
  - Capital surcharge (capped at 2 percent) applied for systemically important banks.
  - Net stable funding ratio and liquidity coverage ratio to be in place by 2018.
- Financial inclusion:
  - Financial inclusion law under discussion expected to improve access to finance, expand services, reduce costs, promote youth savings, and encourage formalization and electronic payments.
  - FSAP recommendation: easing domestic investment mandate of pension funds could support capital market development; draft law would allow private pension funds to offer two portfolio options instead of a single one.

### Policy recommendations and contingency guidance
- Monetary and capital flow measures:
  - Use exchange rate as main shock absorber in significant terms-of-trade worsening.
  - Use reserves and liquidity buffers to smooth excess volatility; unwind CFMs if disruptive portfolio outflows occur.
  - If terms-of-trade decline is long-lasting, counter-cyclical fiscal policy unlikely appropriate.
- Fiscal policy:
  - A tighter fiscal stance would alleviate burden on monetary policy and reduce real appreciation pressures.
  - Return overall public sector deficit to 1 percent of GDP in the medium term to keep net public debt on downward path.
  - Options to reduce deficit: restrain growth of expenditures while protecting infrastructure and social spending; consider new revenues, particularly from higher-income earners.
- Labor and wages:
  - Promote prudent wage growth and reduce backward-indexation; support guidelines for non-indexed wages and include safeguard clauses to reduce wage rigidity.
- Structural priorities:
  - Boost public infrastructure and raise labor market efficiency to sustain productivity and investment growth.
  - Improve access to finance and spur capital market development to increase financial sector contribution to growth.
- Consultation:
  - Staff proposes Uruguay remains on the 12-month Article IV consultation cycle.

*Source: IMF staff report excerpts (IMF staff report on Uruguay, _cr1406)._

### 1. Social Policies for Inclusive Growth ____________________________________________________________ 22

### 1. Social Policies for Inclusive Growth

### Overview and recent performance
- The year 2012 concluded the decade with the strongest average GDP growth on record in Uruguay and a remarkable improvement in living standards.
- Key drivers of the strong rebound since the 2002 crisis: important institutional reforms, large FDI projects attracted by a stable macroeconomic environment and business-friendly investment climate, and favorable external conditions.
- Outcomes:
  - Strong rise in employment, real wages, and consumption.
  - Poverty rates declined sharply and income inequality declined further since 2004.

### Real sector developments
- Growth:
  - After averaging 7.7 percent in 2010–11, real GDP growth moderated to 3.9 percent in 2012.
  - Staff’s growth projection of 4 percent for 2013.
  - Private investment remains close to historic highs as a share of GDP but decelerated somewhat after a 2012 boom.
- Unemployment:
  - Averaged 6¾ percent in the six months through August; near historic lows.
- Hydroelectric output and exports:
  - 2012 slowdown partly due to lower export and tourism revenues from Argentina and Brazil, and a drop in hydroelectric output due to a drought.

### Inflation and wages
- Inflation:
  - Central bank target range: 4–6 percent.
  - Nontradables inflation averaged about 9 percent since mid-2011 (compared to slightly less than 8 percent in the previous three years).
  - Headline inflation dipped to 7.5 percent in December 2012, then climbed back to 9 percent in September 2013.
  - Twelve-month-ahead inflation expectations rose to about 8 percent from 7.5 percent half a year earlier.
- Wages:
  - Government guidelines for the 2013 wage round expect moderation in real wage growth from about 4 percent in the last two years to 2–2.5 percent in the new round.
  - Two guideline options for three-year contracts: (1) increases in line with central bank inflation target plus a real adjustment between zero and 3 percent; (2) contracts without backward indexation.

### External sector and exchange rate
- Current account:
  - Widened from 2.9 percent of GDP in 2011 to 5.4 percent of GDP in 2012.
  - About two thirds of the increase reflected a wider trade deficit—higher imports of capital goods (Montes del Plata pulp mill) and a surge in oil imports for electricity after the drought.
  - Services revenues (mainly tourism) weakened in late 2012.
- Capital flows:
  - Sharp portfolio inflow surge into locally-issued, peso-denominated public securities in early 2012; surge ended in June 2013.
  - Reserve requirements on nonresidents’ purchases were introduced/extended in September 2012 and late May 2013 (50 percent for locally-issued Treasury notes announced in June 2013).
- Exchange rates:
  - REER strengthened 13 percent in the twelve months through April 2013; particularly vs Argentina and Brazil (19 and 14 percent, respectively).
  - Peso weakened by 16 percent against the U.S. dollar between late-May and end September; REER depreciation was about 8 percent from May to August.
  - Staff estimates REER remains slightly on the strong side (0–10 percent).

### Credit, housing, and banking indicators
- Credit:
  - Credit to households (mostly local currency) growing about 8 percent (y-o-y) in real terms; to firms (mostly U.S. dollars) about 18 percent (y-o-y).
  - Stock of credit to the private sector: 24 percent of GDP in August 2013.
- Housing:
  - Growth of house prices moderated in 2012; mortgages at 4 percent of GDP in July 2013.
  - Much of recent real estate expansion concentrated in urban luxury segment with substantial foreign (mainly Argentine) investment.

### Fiscal stance and debt management
- Fiscal outcomes:
  - Primary balance declined to -0.2 percent of GDP in 2012 from 2 percent in 2011.
  - Primary balance expected to improve to a 0.6 percent of GDP surplus in 2013, largely due to recovery in profits of the state energy enterprise.
  - Under unchanged policies, overall public sector deficits would settle around 2¼ percent of GDP in the medium term—about 1.0–1.5 percentage points of GDP higher than envisaged in last year’s budget.
- Public debt and assets:
  - Gross public debt to GDP ratio would remain broadly unchanged at about 60 percent of GDP.
  - Net debt (gross debt minus liquid assets) would remain around 36–37 percent of GDP between 2013 and 2015.
  - Liquid assets of the public sector: 22.4 percent of GDP at end-2012.
  - Contingent credit lines secured with multilateral agencies: some 4 percent of GDP.
- Debt management policy:
  - Active liability management reduced share of foreign currency debt and increased average maturity.
  - Access to foreign funding at favorable costs (example: 4.5 percent for a US$ denominated 10-year bond issued in August 2013).

### Monetary policy and operational changes
- Actions June 2012–March 2013:
  - Central bank raised reserve requirements on bank deposits and increased the policy rate by a cumulative 50 basis points.
  - Policy rate at 9.25 percent from end-December, remaining 300–400 basis points below staff’s estimates of the neutral short-term interest rate.
  - Central bank stepped up reserve accumulation to limit peso appreciation.
- May–June 2013 changes:
  - Announced new reserve requirement of 50 percent for nonresidents’ purchases of locally-issued Treasury notes.
  - Replaced overnight interest rate target with targets for M1 plus saving deposits (M1+).
  - Announced widening of inflation-target-band to 3–7 percent starting in July 2014 (from 4–6 percent).
  - M1+ targets for 2013Q3 and 2013Q4: 12.5–13 percent and 15–17 percent, respectively.
  - Authorities envisage reduction in M1+ growth to 8 percent by mid-2015.
- Market reaction since July 2013:
  - Overnight interbank rate dipped to an average 4.5 percent in July.
  - In August–September, tightened liquidity drove overnight rate to an average of 17.5 percent.
  - In early October, nominal peso yields for 1–60 months maturities were about 4 percentage points above their levels in May.

### Outlook and projections
- Growth:
  - Projected to soften to 3.5 percent in 2014.
  - Factors: phasing-out of rebound in hydroelectric generation subtracting 1.5 percentage points; start of pulp mill production and exports adding 1 percentage point.
  - Growth for 2015–18 expected somewhat below potential growth rate of 4 percent.
- Inflation:
  - Projected to ease over time as monetary policy is tightened.
  - Recent peso depreciation implies upside risk to inflation in the year ahead.
- Current account:
  - Projected to improve gradually in line with recovery in external demand.

### Risks and scenarios
- General assessment:
  - Near-term risks mostly to the downside.
  - Uruguay exposed to inward spillovers and domestic overheating risks.
  - Medium-term upside possibility from iron-ore mining.
- Specific risks (sources, direction, likelihood, impact as presented):
  - Large decline in Uruguay’s export prices (due to lower than anticipated emerging market growth potential, sharp slowdown in growth in China): downside; Likelihood M; Impact H.
  - Protracted economic and financial volatility in emerging markets triggered by prospective exit from unconventional monetary policy in advanced economies: downside; Likelihood H; Impact L.
  - Re-emergence of financial stress in the euro area and tightening in global financial conditions: downside; Likelihood M; Impact L.
  - Sharply lower growth in the region: downside; Likelihood M; Impact M.
  - Global oil price shock triggered by geopolitical events: downside; Likelihood L; Impact L.
  - Domestic overheating followed by a hard landing: up/downside; Likelihood L; Impact M.
  - Increased mining revenues in the medium term: upside; Likelihood H; Impact H.
- Channels and amplifiers:
  - Export commodity prices: About two-thirds of Uruguay’s exports are commodity based (mostly food related); a sustained decline in food prices would hurt growth, though lower energy prices could partially buffer effects via a lower import bill.
  - Regional growth: Significant connections with Argentina and Brazil imply downside spillovers via trade, tourism, and FDI.
  - Oil prices and geopolitical risk: Short-term threat of higher oil prices.
  - Tighter global financial conditions: Prospective exit from accommodative monetary policy in advanced economies could tighten global financial conditions, trigger peso depreciation, weaken FDI, and weigh on growth. High credit dollarization could adversely affect bank balance sheets, but impact would be contained given broadly adequate capital and strong foreign assets of banks and the public sector.
  - Domestic wage outcomes: If monetary conditions do not tighten sufficiently or wage negotiations yield strong real wage growth, inflationary pressures and competitiveness deterioration could produce an overheating scenario and harder landing.

*IMF staff report on Uruguay (excerpt: “1. Social Policies for Inclusive Growth”)*

### 16.      The Uruguayan economy is generally well placed to manage these risks as liquidity

### _cr1406 - 16.      The Uruguayan economy is generally well placed to manage these risks as liquidity

### Macroeconomic buffers and near-term risks
- Public sector liquidity buffers are strong:
  - Non-financial public sector has financial assets of 5.8 percent of GDP.
  - Central government has liquid assets that would cover debt service needs through 2014.
  - Access to contingent credit lines equivalent to 4 percent of GDP.
- Central bank reserves:
  - At end-2012, the BCU had around 19 percent of GDP in free reserves (gross reserves minus reserve requirements against foreign currency denominated deposits).
  - BCU’s reserves amply exceed various prudential benchmarks.
- External stability risks are limited:
  - The peso appears “somewhat on the strong side,” but external financing risks are limited in the near term due to high central bank reserves and solid FDI prospects.
- Financial system vulnerabilities are modest overall:
  - Bank credit to the private sector is low at 24 percent of GDP.
  - Most banks are liquid, with low loan-to-deposit ratios.
  - Non-resident deposits are more than matched by banks’ liquid foreign assets and reserve requirements.
  - The foreign assets of the commercial banks and the central bank exceed the sum of foreign-currency deposits and short term-external debt.
  - Main point of vulnerability: 27.5 percent of bank loans in foreign currency are to firms whose earnings are in local currency.
  - Non-performing loans are less than 1.5 percent of total loans.
  - Stress tests in the recent FSAP suggest banks can withstand significant shocks, despite some pockets of vulnerability.

### Authorities’ views and outlook
- Authorities broadly agreed with staff’s outlook but perceived more limited downside risks:
  - Reduced trade and tourism linkages with Argentina imply lower spillovers than in the past.
  - Commodity-based exports to Brazil could find alternative markets if Brazilian growth disappointed.
  - A rebalancing of demand in China—from investment toward consumption—would likely improve Uruguay’s terms of trade by boosting food prices and lowering energy prices.
  - Strong liquidity buffers eliminate past risks of debt-financing problems and allow for counter-cyclical policy responses if adverse shocks occur.

### Monetary policy, capital flows, and inflation management
- Inflation and policy framework:
  - Staff supports the central bank’s goal to gradually reduce inflation; above-target inflation and expectations reduce scope to ease monetary policy and harm low income households.
  - Staff views main drivers of high inflation as: an inflation target not anchoring expectations within the range, robust growth in domestic demand, and rising unit labor costs.
- Capital flow management measures (CFM) and operational target change:
  - Authorities extended CFMs to locally-issued central government securities to contain portfolio inflows driven by yield differentials.
  - Authorities replaced the overnight interest rate target with a monetary aggregate target, arguing modest transmission from overnight rates to deposit and lending rates in the context of excess liquidity and elevated dollarization.
  - Staff agreed broadening CFMs was justified by macro considerations; CFMs should not substitute for warranted macro adjustment and should be removed once inflow surges subside.
- Monetary stance and communication:
  - Tightening of the monetary policy stance was appropriate given above-target and rising inflation.
  - The shift to a monetary aggregate target raised practical challenges and put a premium on communication: overnight rates fluctuated in a range from 2.5 percent to almost 40 percent since early July as markets adjusted.
  - Staff recommended active communication of the inflation goal and how instruments will achieve it; the central bank’s communication of an envisaged monetary growth target for mid-2015 was a useful step.
  - The effectiveness of the M1+ target must be monitored; the central bank should be ready to test and, if necessary, revise M1+ targets. Other operational frameworks may need to be considered if the link between M1+ growth and inflation is not stable.
  - Widening the inflation target band requires further communication to avoid perceptions of tolerance for higher inflation; staff noted credibility could be enhanced if inflation is brought into the band and the band narrowed over time.

### Labor market and wage policy
- Prudent wage-setting is critical:
  - Cumulative real wage growth has exceeded aggregate output per worker growth, increasing real unit labor costs and contributing to inflation.
  - Staff supports authorities’ wage-setting guidelines to keep growth of real wages in the range of 0–3 percent depending on GDP performance and sector (envisaged decline from about 4 percent in recent years).
  - Safeguard clauses to allow re-negotiation in case of substantial sector performance changes were welcomed to reduce wage rigidity and buffer employment.
  - Authorities’ guidelines for non-indexed wage adjustments were supported; reducing backward-indexation in wage contracts is crucial to lower inflation inertia and facilitate de-dollarization and de-indexation.

### Fiscal policy stance and public debt dynamics
- Fiscal policy interactions with monetary policy:
  - Staff emphasized that a tighter fiscal stance would alleviate some of the burden on monetary policy in fighting inflation and reduce real appreciation pressures.
  - Staff estimates (from a Selected Issues Paper) that a one percent of GDP reduction in the central government primary balance is associated with a 0.45 percentage point decline in inflation.
- Public debt and liquidity:
  - Initial objective (2010–15) was to reduce gross public debt to 40–45 percent of GDP by 2015 (from 66 percent of GDP in 2009).
  - At end-2012, gross public debt stood at about 60 percent of GDP; the deviation from earlier projections reflected stronger accumulation of foreign assets.
  - Debt net of liquid assets declined from 44 percent of GDP in 2009 to about 37 percent of GDP in 2012; staff projects it to remain broadly stable around that level under current policies and outlook.
  - Staff recommended keeping net public sector debt on a firmly downward-trending path; returning the overall deficit of the public sector to 1 percent of GDP in the medium term (as envisaged in the 2011 Rendicion de Cuentas) from the 2.0-2.5 percent projected now would be consistent with that goal.
- Options to reduce the fiscal deficit:
  - Staff called for restraining the growth of expenditures while safeguarding infrastructure investments and the safety net for the poor.
  - Staff saw scope for raising contributions to public pension and health care insurance plans given broader-than-expected costs; authorities felt contributions were already high and saw limited room to raise them.
  - Authorities saw scope to increase tax revenues in the longer run mainly from higher-income earners; Uruguay’s marginal tax rates for higher income earners remain below international comparators.
  - Authorities preferred to preserve an investment-friendly corporate tax structure with competitive marginal tax rates and targeted tax breaks; standards for qualifying for such breaks were raised last year.

### Policy responses to inward spillovers (staff recommendations)
- If a significant worsening of the terms of trade (e.g., persistent slowdown in large emerging markets):
  - Exchange rate should be the main shock absorber.
  - Reserves and liquidity buffers could be used to smooth excess volatility.
  - CFMs can be unwound if there are disruptive portfolio outflows.
  - A counter-cyclical fiscal policy response is unlikely to be appropriate if the terms of trade decline is long-lasting.
- If there is sharply lower regional growth (likely temporary):
  - Automatic fiscal stabilizers could be used to buffer the shock, but within limits given adverse implications for public debt dynamics.
  - International reserves, liquidity buffers, and adjustments to reserve requirements could be used to curb excessive volatility.
- Authorities agreed on the important role of exchange rate flexibility in buffering shocks and considered Uruguay’s strong liquidity buffers would afford a fiscal policy response, at least through automatic stabilizers.

*International Monetary Fund — Selected staff appraisal and policy discussions on Uruguay (excerpt).*

### 34.      The authorities have taken several important steps to enhance financial stability

### 34.      The authorities have taken several important steps to enhance financial stability

### Strengthening supervision and SSF resources
- Creation in 2014 of a new unit dedicated to operational supervision and addition of three new financial analysts to enhance SSF resources.
- Creation in 2014 of a new unit dedicated to capital market supervision.
- Creation in 2014 of a new unit on authorizations to improve due process and handling of requests by financial institutions.
- Increase in financial and human resources of the SSF by converting twenty temporary externally-funded staff to permanent positions.
- Addition of an analyst dedicated to monitor BROU, the state-owned bank that accounts for about 40 percent of bank assets in Uruguay.
- Review of the internal structure of the SSF and its supervisory methodology to enhance risk-based supervision.
- SSF initiating an international certification process (ISO9000) for its different activities and processes, including regulation, authorization, financial intelligence, and customer service; in 2014 the ISO certification process will cover the supervisory process, infrastructure, and sanctions.

### Supervisory process, stress testing, and contingency planning
- By end-2013, banks will submit the results of their first capital adequacy evaluation.
- SSF considering a more stringent stress testing exercise to be used to establish capital surcharges for individual banks in 2014 in line with adopting Pillar II.
- SSF coordinating closely with COPAB, the deposit insurance fund, to propose legal reforms to improve exchange of information and coordinate action in the event of bank resolution.
- In 2014, SSF will conduct a profound independent assessment of the private pension system, including a review of the strategy and business model of the BSE, the public insurance company that provides annuities.
- Progress in securities regulation: new rules on corporate governance, insider reporting, and takeover bids came into effect in February 2013.

### Regulatory framework and Basel implementation
- Significant progress with implementation of Basel II and III.
- Additional capital requirements introduced in 2013 to cover market and operational risks.
- A capital surcharge (capped at 2 percent) is being applied for systemically important banks.
- Central bank updated its roadmap to implement remaining elements of Basel III, such as the net stable funding ratio and liquidity coverage ratio, which should be in place by 2018.

### Medium-term growth prospects and structural priorities
- A medium-term potential growth rate of four percent is feasible but will require policy actions across several areas, including sustaining total factor productivity growth and strengthening human and physical capital accumulation to offset lower labor force growth.
- Labor market:
  - Review of changes introduced to labor market regulations in recent years is warranted to balance dynamic labor market needs and worker protection.
  - Reducing backward-indexation in wage contracts and promoting non-indexed wages are highlighted as important to raise resilience of labor demand.
- Infrastructure:
  - Advances in diversifying Uruguay’s energy supply: half of the energy supply will be based on renewable sources by 2015.
  - Delays remain in addressing infrastructure gaps—ports and roads—through private-public partnerships.
- Financial markets and inclusion:
  - Room to deepen financial markets and enhance efficiency of the financial sector; higher competition and lower costs would improve services for households and SMEs.
  - Financial inclusion law under discussion in Congress expected to improve access to finance for excluded segments, expand services, reduce costs, promote youth savings, and encourage formalization and electronic payments.
  - FSAP recommendation: easing domestic investment mandate of pension funds could support capital market development.
  - Draft law being considered by Congress would allow private pension funds to offer two portfolio options instead of a single one.

### Tax transparency, AML/CFT, and mining framework
- Tax treaties and information exchange:
  - Government has signed 12 double taxation treaties and 11 tax information exchange treaties (1 and 6 of each, respectively, are pending parliamentary approvals in Uruguay and/or the partner country).
  - Negotiations for 7 double taxation treaties and 6 tax information exchange treaties are either complete or under way.
  - An information exchange treaty with Argentina, which includes double taxation components, became effective in February 2013.
- Increased transparency: law requiring registration with BCU of all holdings of stocks and shares.
- Financial inclusion law expected to strengthen AML efforts by requiring a number of commercial transactions to be done electronically.
- Mining framework:
  - Proven reserves under current prices would generate exports of some US$1.5 billion per year (3 percent of 2012 GDP).
  - A law regulating large scale mining projects has been approved by Congress.
  - The law sets a taxation regime in line with contemporary international standards and would create an intergenerational sovereign wealth fund that would receive 70 percent of mining related government revenues.
  - Staff recommendation: ensure spending financed by mining revenues is designed to avoid budgetary risks from finite and potentially volatile mining revenue.

### Staff appraisal: outlook, risks, and policy recommendations
- Outlook and recent developments:
  - After a decade of strong expansion, growth has moderated to a more sustainable pace.
  - External demand weakened, but domestic consumption and investment remain robust.
  - Inflation persists above the target range.
  - Current account deficit has widened but is expected to narrow as external demand gradually recovers.
  - Foreign direct investment is poised to stay strong.
- Risks to the outlook:
  - Global downside risks: lasting drop in export commodity prices and tighter global financial conditions.
  - Regional risks: weaker prospects for trading partners could imply downside risks through trade, tourism and FDI.
  - Domestic risks: continued strong increases in labor costs could stoke higher inflation and further real appreciation, hurting export competitiveness and growth.
- Macro-financial vulnerabilities:
  - Financial system not likely to amplify external shocks given small size and muted links to real sector; banks well regulated and balance sheets generally robust.
  - Central bank and commercial banks have sizable net foreign asset positions.
  - Public debt vulnerabilities are low: share of domestic currency debt above 50 percent and average maturity of debt is high.
  - Central government has a comfortable level of liquid foreign assets and contingent credit lines.
- Assessment of policy measures:
  - Good progress towards implementing 2012 FSAP recommendations; staff welcomes steps to enhance SSF resources, crisis preparedness, stress testing, and supervisory process.
  - Extension of CFMs to locally-issued government securities was warranted by macroeconomic conditions at the time; CFMs should be temporary and removed once clear evidence that capital inflow surge has abated.
  - Inflation above the ceiling of the BCU’s target band is an important policy issue; recent tightening of monetary policy stance over the last two months is welcomed as evidenced by the rise in nominal peso yields.
  - Change in operational target for monetary policy raises practical challenges and heightens the importance of communication; central bank should increase communication of its targeted stance and inflation goal.
  - Moderation in wage growth is critical to lower inflation and bolster employment; prudent real wage growth and reduction of backward-indexation are important. Authorities’ guidelines for non-indexed wages are an important step and should be promoted strongly.
  - A tighter fiscal policy stance would better support lowering inflation; fiscal policy was neutral or slightly expansionary this year after a positive impulse last year.
  - Returning the overall deficit of the public sector to 1 percent of GDP by the medium term is recommended to keep net public debt on a firmly downward-sloping path.
  - To lower the deficit, slowing growth of spending is desirable (while shielding infrastructure and spending that protects the poor); because discretionary expenditures are a relatively small share, new revenues may also be needed.
- Policy response to shocks:
  - Significant worsening of terms of trade: exchange rate should be the main shock absorber; reserves and liquidity buffers could smooth volatility; CFMs (if in force) can be unwound if disruptive portfolio outflows occur; counter-cyclical fiscal policy unlikely appropriate for long-lasting terms of trade decline.
  - Sharply lower regional growth (likely temporary): automatic fiscal stabilizers could be used to buffer the shock, within limits to maintain prudent public debt dynamics; international reserves, liquidity buffers, and reserve requirements could be used to curb excessive volatility.
- Medium-term policy priorities:
  - Boost public infrastructure and raise labor market efficiency to sustain productivity and investment growth and enhance competitiveness.
  - Improve access to finance and spur capital market development to increase financial sector contribution to growth.
- Consultation cycle:
  - Staff proposes that Uruguay remains on the 12-month Article IV consultation cycle.

*Source: IMF staff report.*

### Box 3. Uruguay: Assessment of Balance of Payments Stability

### Box 3. Uruguay: Assessment of Balance of Payments Stability

### Staff assessment (summary)
- The peso is slightly overvalued but stability risks remain contained.
- Uruguay’s real effective exchange rate (REER) has appreciated over the last decade and is now about 40 percent above its pre-2002 crisis levels.
- Much of the appreciation, until recently, reflected Uruguay’s stronger fundamentals—high commodity prices and productivity gains, supported by strong FDI flows.

### Current account developments and outlook
- During 2012, surging capital inflows and weakening performance in key trading partners widened the current account deficit (CAD) and added to appreciation pressures.
- The widening of the CAD to 5.4 percent of GDP in 2012 was partly associated with transient factors:
  - higher capital goods imports (due to the construction of the Montes del Plata pulp mill);
  - higher imports of oil (due to a drought);
  - lower tourism earnings and industrial exports due to foreign exchange restrictions in Argentina and slower growth in Brazil and Europe.
- As these factors gradually dissipate, the current account deficit is expected to narrow to about 3.5 percent of GDP over the medium term, close to the MB and EBA norms.

### Exchange rate assessments (deviation from equilibrium, in percent)
- I. CGER Macroeconomic Balance (MB) approach: -1.3
- II. CGER External Sustainability (ES) approach: 3.3
- III. CGER Equilibrium Real Exchange Rate (ERER) approach (REER as of June/July 2013): 2/8.8
- IV. EBA - Current Account Model: 3/3.2
- Memo Item: Big Mac Index: 4/9.3
- Average: 4.1
- Note: Positive values indicate overvaluation. The CGER Equilibrium Real Exchange Rate approach suggests that as of July 2013 the currency was about 10 percent stronger than levels consistent with Uruguay’s fundamentals.
- The depreciation of the peso against the U.S. dollar in August does not change the thrust of this assessment since the change in Uruguay’s REER was limited (as Uruguay’s main emerging market trading partners also experienced depreciations).

### External financing, reserves, and international investment position
- A steady inflow of FDI has more than financed the current account deficit in recent years.
- The deterioration in the net international investment position since 2004-09 mainly reflects higher FDI liabilities.
- Uruguay’s international reserves amply exceed various prudential benchmarks, such as the sum of short-term external debt and nonresident deposits; they are also high as a ratio to monthly imports.
- These factors increase the resilience to withstand external shocks, including a reversal of portfolio capital flows.

### Selected reserve and external position statistics (exact figures as presented)
- In billions of U.S. dollars (latest, 1/ July 2013): Assets 88.7, 65.0, 63.3
- In months of imports (2012): 12.3
- Of which (in percent of):
  - Portfolio investment: 10.8, 9.5, 8.5
  - Currency and deposits: 48.9, 29.1, 24.5
- Short-term (ST) debt (end-2012): 238.0
- Reserve assets: 19.0, 22.9, 26.0
- ST debt and foreign currency deposits (Q2 2013): 107.3
- Liabilities: 96.4, 75.0, 77.8
- ST debt and nonresident deposits (Q2 2013): 145.0
- Of which:
  - FDI: 22.8, 33.6, 34.0
  - Portfolio investment: 27.5, 20.0, 21.4
- Memo items:
  - Loans: 24.1, 10.3, 11.1
  - IMF's new reserve adequacy metric range in 3.9 to 5.9
  - General government: 13.1, 6.5, 5.5
- US$, billions (2013Q1) BCU: 5.9, 0.0, 1.5
- Banks foreign assets (US$, billions): 8.8
- Other: 3.1, 2.5, 4.2
- Ratio of gross reserves plus banks' foreign assets to ST debt plus foreign currency deposits (percent): 169.0
- Nonresident deposits: 13.4, 7.6, 7.4
- Net position: -7.7, -9.9, -14.5
- Sources: Banco Central del Uruguay and Fund staff calculations.

*Source: Fund staff calculations (from Box 3, Uruguay: Assessment of Balance of Payments Stability).*

### Box 6. Uruguay: Draft Law on Large-Scale Mining (Concluded)

### Box 6. Uruguay: Draft Law on Large-Scale Mining (Concluded)

### Investment rules for the FSII
- The funds of the FSII could be invested in Uruguayan sovereign and central bank securities, traded securities issued by Uruguayan or foreign private enterprises (subject to the approval of the financial supervisory agency), term deposits in local or foreign currency, and highly-rated fixed income securities issued by multilateral organizations or foreign governments.
- The amount invested in local currency assets would not exceed 20 percent of the total; there would be limits on the share of non-fixed income securities and concentration as well.
- The funds could also be used for:
  - paying down long-term external public debt, and
  - financing research and development projects, integration of technology into education, and projects related to the mitigation of the effects of climate change.

### Asset-liability management and use of revenues
- As the revenues from extraction come on stream, the authorities would be advised to integrate the investment decisions for the intergenerational wealth fund into an overall sovereign asset-liability management framework.
- In such a framework, debt management and investment decisions would be coordinated to minimize the risk to the sovereign balance sheet, and paying down more expensive debt may be an option.
- Once the revenue is transferred to the fund, it should be invested to maximize the financial return subject to an acceptable level of risk set according to the fund’s objectives.
- Clear withdrawal triggers and mechanisms to channel financial resources to specific public expenditure projects should also be put in place to avoid political pressures, while earmarking revenues should be minimized to avoid procyclicality.

### Governance and mandate clarity
- An essential governance principle is to establish a clear chain of governing bodies from the legislature down to the individual asset managers, with accountability at every level.
- There should be a clear and transparent division of roles between the fund’s owner (the state) and the fund’s manager who implements a clearly defined investment strategy according to the mandate set out by the owner.
- In this context, identifying clear objective for the fund and its time horizon would determine the appropriate investment strategy and risk tolerance.

*Box 6. Uruguay: Draft Law on Large-Scale Mining (Concluded).*

### Annex I. Is the Uruguayan Economy Decoupling from its Neighbors?

### Annex I. Is the Uruguayan Economy Decoupling from its Neighbors? An Empirical Analysis of Inward Spillovers to Uruguay

### Overview
- Uruguay is a small open economy integrated significantly with Argentina and Brazil through trade, tourism, and investment flows.
- Trade and financial linkages with Argentina have diminished in recent years, while Brazil remained Uruguay’s main export destination in the past decade.
- China has become an important source of demand for Uruguay’s exports.
- Uruguay maintained robust growth in 2012, contrasting with decelerations in Argentina and Brazil.

### External Linkages — Trade in Goods
- Exports were 20 percent of GDP in 2012.
- Market concentration:
  - Brazil and Argentina account for roughly 25 percent of total exports (declined from over 40 percent on average during the 1990s).
  - EU accounts for about 20 percent.
  - China and the rest of Americas had average shares during 2005–12 of 10.8 percent and 17.8 percent of total exports, respectively (5.5 percent and 14.3 percent in 1996–2004, respectively).
- Product concentration:
  - Food accounted for about 48 percent of total exports in 2012.
  - Crude materials (mainly soybeans) increased to 23 percent of total exports in 2012 from 5 percent in 2000, reflecting China’s emergence as an important market.
- Brazil and Argentina are particularly important markets for manufactured goods, machinery and transport equipment, mineral fuels and chemical products.

### External Linkages — Tourism
- Argentina is the main source of tourism revenues:
  - 54.8 percent of tourist arrivals and 49.4 percent of tourism receipts on average during 2006–12.
- Brazil, Paraguay, and Chile combined are the second largest source of tourism.
- Uruguay is a net exporter of tourism services:
  - Tourism receipts were 4.2 percent of GDP in 2012.
  - Tourism spending was 1.8 percent of GDP in 2012 (more than half to Argentina).

### External Linkages — Foreign Direct Investment (FDI)
- FDI as percent of GDP:
  - Increased from 1.4 percent of GDP in 2001 to a peak of 7.6 percent in 2006; moderated to 5.4 percent in 2011.
- Sources of FDI:
  - Argentina and Europe are the main sources; Argentina’s importance rose in recent years, Europe’s share dropped in the last two years (relative to the sample).
- Sectoral allocation shifts (2001–02 to 2010–11):
  - Financial sector FDI declined to less than 10 percent of total in 2010–11 from about 40 percent in 2001–02.
  - FDI in agriculture rose to about 15 percent of total.
  - FDI in construction rose to about 25 percent of total.

### External Linkages — Non-Resident Deposits
- Non-resident foreign currency deposits drove private deposit growth prior to 2002, peaking at over 40 percent of total deposits (or 45 percent of GDP).
- Nominal value of non-resident deposits declined by more than 80 percent from the peak in late 2001 to the trough in early 2003.
- By end-2012 non-resident deposits were around 16 percent of total deposits (about 7 percent of GDP).

### Inward Spillovers — Methodology
- Quarterly data for 1990Q1 to 2012Q4 is used.
- Model variables ordered by exogeneity: global variables (global output, real short-term interest rate, export and import prices), regional variables (Brazil and Argentina output), then Uruguay’s GDP.
- Uruguay’s export and import price indices are used instead of broader global commodity price indices to better capture shocks specific to Uruguay’s export products and to help disentangle common shocks versus idiosyncratic shocks to Argentina.

### Inward Spillovers — Key Empirical Findings
- Sensitivity to Argentina:
  - Impact of Argentina’s GDP growth on Uruguay’s GDP growth remains significant but diminished over time.
  - For the overall sample, the impact lasts six to seven quarters.
  - The cumulative impact of a 1 percentage point change in Argentina’s GDP growth translates into roughly 1.85 percentage points over eight quarters (overall sample).
  - Elasticity declines to 0.5 percentage points for the period 2004–2012, consistent with reduced financial and trade linkages after the early 2000s crisis.
- Sensitivity to Brazil:
  - Spillovers from Brazil are found to be negative but largely insignificant.
  - Brazil’s overall GDP may not represent shocks most relevant to Uruguay given Brazil’s larger and more diverse economy.
- Global factors:
  - Shocks to global GDP and export prices have positive effects on Uruguay’s GDP.
  - Shocks to import prices have only a minor impact.
  - An increase in the real short-term interest rate has an initial positive impact followed by a lagged negative impact.
- Contribution of external factors to Uruguay’s GDP growth variance:
  - External factors explain about 36 percent of the variation in Uruguay’s GDP growth.
  - Breakdown of contributions (in percent of GDP variance explained by external factors):
    - Argentina: 25 percentage points (bulk represents direct effects).
    - Brazil: 3 percentage points (about half direct Brazil-specific shocks; the other half are global shocks transmitted through Brazil).
    - Global shocks direct effect: 8 percentage points.
  - Most external spillovers reflect direct effects rather than indirect global effects transmitted through Argentina and Brazil.
  - As Argentina’s share in trade declined over time, the importance of global factors is likely to have grown relative to the averages estimated.

### Empirical Impulse Responses
- Uruguay’s GDP growth responses to one standard deviation shocks (responses reported with +/-2 standard errors) were estimated for:
  - Global GDP shock (positive effect)
  - LIBOR shock (initial positive then lagged negative effect)
  - Export price shock (positive effect)
  - Import price shock (minor effect)
  - Argentina’s GDP shock (significant positive and persistent effect, stronger in earlier sample)
  - Brazil’s GDP shock (negative but largely insignificant)
  - Uruguay’s own GDP shock (endogenous response)
- The Argentina effect is amplified in 1990–2003 and attenuated in 2004–2012.

*Prepared by Sumiko Ogawa, with inputs by Garth P. Nicholls. Source: Fund staff calculations and country data as presented in the annex.*

### 2012. Most of these holdings reflect the pre-financing of the central government’s debt service

### _cr1406 - 2012. Most of these holdings reflect the pre-financing of the central government’s debt service

### Public asset and debt positions (2012)
- The stock of liquid foreign assets of the public sector stood at 22.4 percent of GDP.
- Net public debt (gross debt minus liquid assets) stood at 37.2 percent of GDP in 2012.
- The stock of liquid foreign assets was calculated as total gross public sector assets minus the reserve requirements held at BCU for foreign currency deposits and domestic currency claims of the nonfinancial public sector on resident banks.

### Baseline and alternative DSA scenarios
- Under the DSA baseline scenario:
  - Gross debt would remain broadly stable at around 60 percent of GDP.
  - Public gross financing needs gradually increase over the forecast horizon due the upward trend in global and domestic interest rates.
  - Public sector debt net of liquid assets remains around its current level of about 37 percent of GDP.
  - The baseline assumes a debt profile tilted to the medium and long term, and a high share of local currency debt.
- Historical scenario:
  - A “historical” scenario (assuming key macro variables follow the last decade) yields a downward sloping gross debt path because Uruguay experienced high growth and exchange rate appreciation during recovery from its 2002 crisis.
- Model validation:
  - Analysis of past forecast errors suggests baseline assumptions are generally realistic.
  - The projected primary balance is comparable to historical levels.

### Macroeconomic context and financial sector
- Bank credit:
  - Uruguay has recently experienced rapid growth in bank credit, but bank credit to the private sector remains low at about 24 percent of GDP.
  - Part of the credit growth reflects financial deepening; with a small and well-regulated banking system, macro-financial vulnerabilities are contained.

### Vulnerability of the financing profile (2012 observations)
- Gross public financing needs are above the benchmark of 15 percent of GDP, driven primarily by the short-term nature of central bank securities.
- Refinancing risks are contained because the short-term debt stock is smaller than the central bank’s liquid foreign reserves.
- The relatively high change in short-term public debt in 2012 mostly reflects issuance of short-term central bank debt to mop up liquidity from accumulation of international reserves.
- The share of public sector debt held by non-residents and total external financing needs in 2012 are slightly above benchmarks, but risks are mitigated by:
  - High liquidity buffers (strong levels of financial assets and contingent credit lines).
  - The current account in 2012 was smaller than FDI into Uruguay; continued strong FDI prospects would help mitigate external financing risks.
- Market perception:
  - Market perceptions of Uruguay’s public debt are favorable.
  - A temporary spike in the EMBI bond spread for Uruguay occurred in August 2013, but the spread has been below the risk assessment benchmark since mid-September.

### Stress tests and shock sensitivity
- Stylized combined downside scenario (described in text):
  - Combines a permanent 20 percent exchange rate depreciation (relative to the baseline) with a temporary drop in growth and primary balances and a permanent increase in real interest rates.
  - Under this scenario:
    - Gross debt ratio rises by about 15 percentage points over the five-year forecast horizon.
    - Net debt rises by about 10 percentage points over the same horizon.
  - Sensitivity:
    - Sensitivity of net debt to exchange rate shocks is lower than that of gross debt because roughly similar amounts of foreign currency debt and assets imply offsetting valuation effects.
- Fan charts and projected distributions:
  - Fan charts of projected gross debt distribution confirm generally manageable debt dynamics under statistical distributions of combined shocks.

### Key DSA projections and indicators (selected figures as of October 22, 2013 / projections)
- Nominal gross public debt (percent of GDP, selected years): 82.0 (2011), 60.0 (2012), 59.6 (2013), 59.2 (2014), 59.0 (2015), 58.9 (2016), 59.3 (2017), 59.5 (2018), 59.7 (projection series).
- Public gross financing needs (percent of GDP, selected years): 14.8 (2011), 10.9 (2012), 14.8 (2013), 16.1 (2014), 17.1 (2015), 20.3 (2016), 17.5 (2017), 20.0 (2018), 18.2 (projection series).
- Net public debt (percent of GDP, selected years): 51.0 (2011), 37.4 (2012), 37.2 (2013), 37.3 (2014), 37.2 (2015), 37.5 (2016), 37.9 (2017), 38.1 (2018), 38.3 (projection series).
- Real GDP growth (in percent, selected years): 4.0 (2011), 6.5 (2012), 3.9 (2013), 4.0 (2014), 3.5 (2015), 3.3 (2016), 3.5 (2017), 3.8 (2018), 3.9 (projection series).
- Inflation (GDP deflator, in percent, selected years): 8.0 (2011), 8.0 (2012), 8.8 (2013), 8.9 (2014), 7.5 (2015), 7.7 (2016), 7.2 (2017), 6.8 (2018), 6.4 (projection series).
- Effective interest rate (in percent, defined as interest payments divided by debt stock at end of previous year): 5.6 (2011), 5.5 (2012), 5.0 (2013), 5.7 (2014), 6.6 (2015), 7.7 (2016), 7.7 (2017), 6.9 (2018), 6.5 (projection series).
- Change in gross public sector debt (cumulative, percent of GDP): 0.7 (2011), -1.6 (2012), -0.4 (2013), -0.4 (2014), -0.2 (2015), -0.1 (2016), 0.4 (2017), 0.2 (2018), 0.2 (projection series), 0.1 (final projection year).
- Identified debt-creating flows (cumulative): -2.7 (2011), -5.6 (2012), -3.4 (2013), -3.7 (2014), -1.8 (2015), -1.7 (2016), -1.3 (2017), -1.5 (2018), -1.7 (projection series), -11.8 (cumulative).
- Primary deficit (percent of GDP, annual): -2.5 (2011), -2.0 (2012), 0.2 (2013), -0.8 (2014), -0.3 (2015), -0.6 (2016), -0.6 (2017), -0.6 (2018), cumulative -3.5.
- Primary (noninterest) revenue (percent of GDP, cumulative projection total): 30.8 (2011), 31.9 (2012), 31.3 (2013), 32.7 (2014), 32.6 (2015), 32.8 (2016), 32.7 (2017), 32.7 (2018), 32.7 (projection series), cumulative 196.2.
- Primary (noninterest) expenditure (percent of GDP, cumulative projection total): 28.3 (2011), 29.9 (2012), 31.5 (2013), 31.9 (2014), 32.3 (2015), 32.1 (2016), 32.1 (2017), 32.2 (2018), 32.2 (projection series), cumulative 192.7.
- Automatic debt dynamics contribution (cumulative): -2.5 (2011), -5.4 (2012), -5.0 (2013), -4.0 (2014), -2.5 (2015), -1.9 (2016), -1.8 (2017), -2.1 (2018), -2.2 (projection series), cumulative -14.4.
  - Interest rate/growth differential contribution: -5.0 (2011), -5.1 (2012), -4.3 (2013), -4.0 (2014), -2.5 (2015), -1.9 (2016), -1.8 (2017), -2.1 (2018), -2.2 (projection series), cumulative -14.4.
  - Of which real interest rate: -2.0 (2011), -1.6 (2012), -2.2 (2013), -1.9 (2014), -0.6 (2015), -0.2 (2016), 0.1 (2017), 0.0 (2018), -0.1 (projection series), cumulative -2.7.
  - Of which real GDP growth: -3.0 (2011), -3.5 (2012), -2.1 (2013), -2.1 (2014), -1.9 (2015), -1.8 (2016), -1.9 (2017), -2.0 (2018), -2.1 (projection series), cumulative -11.7.
- Exchange rate depreciation contribution (percent of GDP): 2.5 (2011), -0.3 (2012), -0.7 (2013).
- Other identified debt-creating flows (percent of GDP): 2.3 (2011), 1.8 (2012), 1.4 (2013), 1.1 (2014), 0.9 (2015), 0.8 (2016), 1.1 (2017), 1.1 (2018), 1.0 (projection series), cumulative 6.1.
- Residual (percent of GDP): 3.5 (2011), 4.0 (2012), 3.0 (2013), 3.3 (2014), 1.6 (2015), 1.6 (2016), 1.7 (2017), 1.8 (2018), 1.9 (projection series), cumulative 11.9.

### Stress test scenarios (parameters and outcomes highlighted)
- Macro-fiscal stress tests include:
  - Primary Balance Shock
  - Real GDP Growth Shock
  - Real Interest Rate Shock
  - Real Exchange Rate Shock
  - Combined Macro-Fiscal Shock
- Outcome illustrations (high-level):
  - Gross Nominal Public Debt under baseline and shocks ranges in charts between about 40 and 70 percent of GDP across 2013–2018 depending on scenario.
  - Public Gross Financing Needs under shocks can reach higher percentages of GDP (visual range up to 50 percent of GDP in scenario charts).
- Scenario parameter examples (selected assumptions shown):
  - Combined Shock example:
    - Real GDP growth: 4.0 (2013), 1.3 (2014), 1.1 (2015), 3.5 (2016), 3.8 (2017), 3.9 (2018)
    - Inflation: 8.9 (2013), 6.9 (2014), 7.2 (2015), 7.2 (2016), 6.8 (2017), 6.4 (2018)
    - Primary balance: 0.8 (2013), -0.6 (2014), -1.1 (2015), 0.6 (2016), 0.6 (2017), 0.6 (2018)
    - Effective interest rate: 5.7 (2013), 7.0 (2014), 8.1 (2015), 8.7 (2016), 8.2 (2017), 8.0 (2018)
    - Nominal exchange rate deviation from baseline: 0.0 (listed for each year in the scenario tables)

*Source: Fund staff (Uruguay Public DSA excerpt as provided).*

### Annex III. External Debt Sustainability Analysis (DSA)

### Annex III. External Debt Sustainability Analysis (DSA)

### Projections (Table A3.1: Uruguay: External Debt Sustainability Framework, 2008-2018)
- Baseline: External debt 1/ (percent of GDP) by year:
  - 2008: 50.7
  - 2009: 59.4
  - 2010: 47.4
  - 2011: 39.5
  - 2012: 42.3
  - 2013: 42.3
  - 2014: 41.7
  - 2015: 41.5
  - 2016: 41.3
  - 2017: 40.7
  - 2018: 40.9
  - Debt-stabilizing non-interest current account 7/: -5.7

- Change in external debt (percent of GDP) by year:
  - 2008: -12.5
  - 2009: 8.7
  - 2010: -12.0
  - 2011: -7.9
  - 2012: 2.8
  - 2013: 0.0
  - 2014: -0.6
  - 2015: -0.2
  - 2016: -0.2
  - 2017: -0.6
  - 2018: 0.1

- Identified external debt-creating flows (4+8+9) (percent of GDP) by year:
  - 2008: -15.6
  - 2009: -3.5
  - 2010: -17.2
  - 2011: -10.2
  - 2012: -2.9
  - 2013: -1.8
  - 2014: -2.2
  - 2015: -2.7
  - 2016: -2.5
  - 2017: -2.5
  - 2018: -2.4

- Components (percent of GDP):
  - Current account deficit, excluding interest payments (line 4):
    - 2008: 3.0
    - 2009: -1.4
    - 2010: -0.3
    - 2011: 1.1
    - 2012: 3.9
    - 2013: 3.4
    - 2014: 2.4
    - 2015: 2.2
    - 2016: 2.1
    - 2017: 2.2
    - 2018: 2.3
  - Deficit in balance of goods and services (line 5):
    - 2008: 3.2
    - 2009: -1.7
    - 2010: -1.6
    - 2011: -0.2
    - 2012: 2.7
    - 2013: 2.2
    - 2014: 1.1
    - 2015: 1.0
    - 2016: 0.9
    - 2017: 0.9
    - 2018: 1.0
  - Exports (percent of GDP) (line 6):
    - 2008: 30.9
    - 2009: 28.8
    - 2010: 27.6
    - 2011: 27.7
    - 2012: 26.6
    - 2013: 23.7
    - 2014: 25.2
    - 2015: 25.5
    - 2016: 25.9
    - 2017: 26.3
    - 2018: 26.8
  - Imports (percent of GDP) (line 7):
    - 2008: 34.0
    - 2009: 27.1
    - 2010: 26.0
    - 2011: 27.5
    - 2012: 29.3
    - 2013: 25.9
    - 2014: 26.3
    - 2015: 26.5
    - 2016: 26.8
    - 2017: 27.2
    - 2018: 27.8
  - Net non-debt creating capital inflows (negative) (line 8):
    - 2008: -6.9
    - 2009: -5.0
    - 2010: -5.9
    - 2011: -5.4
    - 2012: -5.6
    - 2013: -5.3
    - 2014: -4.5
    - 2015: -4.4
    - 2016: -4.4
    - 2017: -4.4
    - 2018: -4.3
  - Automatic debt dynamics (line 9):
    - 2008: -11.6
    - 2009: 2.9
    - 2010: -11.0
    - 2011: -5.9
    - 2012: -1.3
    - 2013: 0.1
    - 2014: -0.1
    - 2015: -0.4
    - 2016: -0.2
    - 2017: -0.3
    - 2018: -0.3
  - Contribution from nominal interest rate (line 10):
    - 2008: 2.7
    - 2009: 2.7
    - 2010: 2.1
    - 2011: 1.9
    - 2012: 1.4
    - 2013: 1.5
    - 2014: 1.3
    - 2015: 0.9
    - 2016: 1.1
    - 2017: 1.1
    - 2018: 1.1
  - Contribution from real GDP growth (line 11):
    - 2008: -3.5
    - 2009: -1.1
    - 2010: -4.1
    - 2011: -2.6
    - 2012: -1.4
    - 2013: -1.5
    - 2014: -1.4
    - 2015: -1.3
    - 2016: -1.4
    - 2017: -1.5
    - 2018: -1.5
  - Contribution from price and exchange rate changes 3/ (line 12):
    - 2008: -10.9
    - 2009: 1.4
    - 2010: -9.0
    - 2011: -5.2
    - 2012: -1.3
    - 2013: ..................
  - Residual, incl. change in gross foreign assets (2-3) 4/ (line 13):
    - 2008: 3.1
    - 2009: 12.2
    - 2010: 5.2
    - 2011: 2.3
    - 2012: 5.7
    - 2013: 1.8
    - 2014: 1.6
    - 2015: 2.5
    - 2016: 2.4
    - 2017: 1.9
    - 2018: 2.5

- External debt-to-exports ratio (in percent) by year:
  - 2008: 164.3
  - 2009: 206.1
  - 2010: 171.9
  - 2011: 142.5
  - 2012: 159.0
  - 2013: 178.6
  - 2014: 165.4
  - 2015: 162.8
  - 2016: 159.5
  - 2017: 154.9
  - 2018: 152.6

- Gross external financing need (in billions of US dollars) 5/ by year:
  - 2008: 6.4
  - 2009: 5.9
  - 2010: 8.2
  - 2011: 8.8
  - 2012: 8.8
  - 2013: 12.1
  - 2014: 10.7
  - 2015: 11.2
  - 2016: 11.6
  - 2017: 12.4
  - 2018: 13.3

- Gross external financing need (in percent of GDP) shown as multiple labels in table (preserve original labels):
  - 21.2
  - 19.4
  - 21.0
  - 18.9
  - 17.7
  - 10-Year10-Year21.0
  - 17.8
  - 17.7
  - 17.7
  - 17.4
  - 17.3
  - 17.5

- Scenario with key variables at their historical averages 6/ (external debt change, in percent of GDP) by projection horizon (presented inline in table):
  - 42.3
  - 34.3
  - 27.8
  - 21.5
  - 15.3
  - 9.9
  - -6.1

### Key Macroeconomic Assumptions Underlying Baseline (Historical, Average, Standard Deviation shown as in table)
- Real GDP growth (in percent) by year/entry:
  - Historical: 7.2
  - 2008: 2.2
  - 2009: 8.9
  - 2010: 6.5
  - 2011: 3.9
  - 2012: 5.3
  - 2013: 2.2
  - 2014: 4.0
  - 2015: 3.5
  - 2016: 3.3
  - 2017: 3.5
  - 2018: 3.8
  - Average: 3.9

- GDP deflator in US dollars (change in percent):
  - Historical: 20.8
  - 2008: -2.6
  - 2009: 18.0
  - 2010: 12.2
  - 2011: 3.4
  - 2012: 8.6
  - 2013: 10.6
  - 2014: 10.4
  - 2015: 1.3
  - 2016: 2.1
  - 2017: 2.2
  - 2018: 2.5
  - Average: 2.6

- Nominal external interest rate (in percent):
  - Historical: 5.6
  - 2008: 5.2
  - 2009: 4.6
  - 2010: 4.7
  - 2011: 3.9
  - 2012: 5.3
  - 2013: 0.9
  - 2014: 4.2
  - 2015: 3.2
  - 2016: 2.2
  - 2017: 2.9
  - 2018: 2.9
  - Average: 3.0

- Growth of exports (US dollar terms, in percent):
  - Historical: 35.2
  - 2008: -7.1
  - 2009: 23.0
  - 2010: 20.0
  - 2011: 3.2
  - 2012: 18.0
  - 2013: 13.6
  - 2014: 2.1
  - 2015: 11.7
  - 2016: 6.7
  - 2017: 7.6
  - 2018: 7.9
  - Average: 8.6

- Growth of imports (US dollar terms, in percent):
  - Historical: 52.5
  - 2008: -20.7
  - 2009: 23.2
  - 2010: 26.7
  - 2011: 14.4
  - 2012: 20.9
  - 2013: 19.1
  - 2014: 1.4
  - 2015: 6.8
  - 2016: 6.0
  - 2017: 7.1
  - 2018: 8.1
  - Average: 8.7

- Current account balance, excluding interest payments (percent of GDP):
  - Historical: -3.0
  - 2008: 1.4
  - 2009: 0.3
  - 2010: -1.1
  - 2011: -3.9
  - 2012: 1.3
  - 2013: 3.2
  - 2014: -3.4
  - 2015: -2.4
  - 2016: -2.2
  - 2017: -2.1
  - 2018: -2.2
  - Average: -2.3

- Net non-debt creating capital inflows:
  - Historical: 6.9
  - 2008: 5.0
  - 2009: 5.9
  - 2010: 5.4
  - 2011: 5.6
  - 2012: 5.3
  - 2013: 1.5
  - 2014: 5.3
  - 2015: 4.5
  - 2016: 4.4
  - 2017: 4.4
  - 2018: 4.4
  - Average: 4.3

### Notes and Definitions (as provided)
- 1/ External debt includes non-resident deposits.
- 2/ Automatic debt dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- 3/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- 4/ For projection, line includes the impact of price and exchange rate changes.
- 5/ Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- 6/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- 7/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

### Bound Tests and Shock Scenarios (Figure A3.1 summary)
- Figure title: Uruguay: External Debt Sustainability: Bound Tests 1/ 2/ 3/ (External debt in percent of GDP)
- Notes from figure captions:
  - Shaded areas represent actual data.
  - Individual shocks are permanent one-half standard deviation shocks.
  - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
  - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.
  - External debt includes non-resident deposits.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2010.
- Selected scenario labels and baseline comparison values shown in figure:
  - Interest rate shock: Baseline 41, i-rate shock 42
  - Historical: Baseline 41, Historical 10
  - Baseline and historical scenarios: Baseline 41
  - CA shock (Non-interest current account shock): Baseline 41, CA shock 48
  - Combined shock: Baseline 41, Combined shock 46
  - Combined shock with 30% depreciation: Baseline 41, Combined shock 61
  - Real depreciation shock: Baseline 41, Real depreciation 61
  - Growth shock: Baseline 41, Growth shock 43
  - Gross financing need under baseline shown on right scale (no numeric series reproduced beyond labels)
- Baseline and scenario average projections displayed in figure captions (values preserved as printed):
  - Baseline: 2.8; Scenario: 3.3; Historical: 5.3
  - Baseline: 3.6; Scenario: 2.5; Historical: 5.3
  - Baseline: -2.2; Scenario: -3.9; Historical: 1.3

*Source: Annex III. External Debt Sustainability Analysis (DSA), Table A3.1 and Figure A3.1, Uruguay staff report materials.*

### 2. Designing the Uruguay Rail Sector

### Designing the Uruguay Rail Sector

### Regulator
- Document header: "Regulator June 2014".
- Note: "*This corresponds to Delivery to Board in lending projects, and delivery to client in of AAAs.*"

### Financial relations with the Inter-American Development Bank (IDB)
- IDB Board approved new Country Strategy with Uruguay (2010–2015) in August 2011.
- Sovereign-guaranteed lending under the new program is expected to reach approximately US$1.8 billion.
- Lending under previous Country Strategy (2005–2009) reached approximately US$1.3 billion.
- Priority sectors identified: (i) transport; (ii) energy; (iii) water, sanitation, and solid waste; (iv) science and technology; (v) social protection; (vi) education and job training; (vii) agribusiness; (viii) services exports; (ix) public management and finances; and (x) urban development and citizen security.
- As of August 31, 2013, Bank’s portfolio in Uruguay includes loans for 40 projects; six without sovereign guarantee.
- Lending portfolio amounts to US$2,435.4 million, of which US$1,333.7 million are pending disbursement.
- Disbursements in 2013 are expected to total US$185.4 million.
- Current portfolio by sector (amount and share of approved amounts):
  - Infrastructure and environment: US$905.1 million; 37%.
  - Social sector: US$97.2 million; 4%.
  - Institutional capacity and finance: US$229.0 million; 9%.
  - Integration and trade: US$577.0 million; 24%.
  - Private sector loans: 7 loans totaling US$627.1 million; 26%.
- In 2013, the Bank approved loans to the public sector in integration (US$550 MM) and transportation (US$18.3 million).

- Financial relations time series (in millions of U.S. dollars; Total Outstanding Loans: US$1,855.1 as of August 31, 2013):
  - Disbursement by year: 2004: 57.6; 2005: 242.3; 2006: 114.8; 2007: 112.9; 2008: 337.2; 2009: 477.3; 2010: 54.3; 2011: 177.2; 2012: 272.8; 2013p: 185.4.
  - Amortization by year: 2004: 113.0; 2005: 222.3; 2006: 520.8; 2007: 142.1; 2008: 138.7; 2009: 160.8; 2010: 463.9; 2011: 114.2; 2012: 119.5; 2013p: 591.9.
  - Net Loan Flows by year: 2004: -55.5; 2005: 20.0; 2006: -406.0; 2007: -29.2; 2008: 198.5; 2009: 316.5; 2010: -409.6; 2011: 63.0; 2012: 153.2; 2013p: -406.5.
- Note: "Only loans with sovereign guarantee are considered."

### Statistical issues and data adequacy (as of September 30, 2013)
- Overall assessment: 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 SNA93.
  - Shortcomings: limited coverage of enterprise survey; poor quality source data for some GDP components; inadequate information on the informal economy; incomplete quarterly accounts.
  - Household consumption not independently derived; changes in inventories obtained as residuals.
  - Household income and expenditure survey conducted every ten years.
  - BCU compiles and disseminates annual GDP estimates (current and previous year prices) by production and expenditure approaches, and quarterly constant price GDP estimates by production and expenditure approaches. Gross national income, gross disposable income and gross savings available annually.
- Prices:
  - CPI base period: December 2010 = 100.
  - CPI has national coverage and includes more than forty thousand price quotations.
  - CPI does not cover implicit rent or net acquisitions of owner-occupied dwellings.
  - WPI base updated to 2001. PPI (March 2010 =100) for national products recently disseminated; PPI does not cover utilities, construction, business and other services, and exported output.
  - Authorities do not provide trade price and volume indices for publication in IFS.
- Government finance statistics:
  - Official data on central administration, state enterprises and social security system are complete and current; timeliness problems for local governments.
  - Timeliness problems for financing and debt data reported for inclusion in Fund publications.
  - Monthly and quarterly financing and debt data disseminated on BCU website from 1999 onwards for central government and total public sector; not reported for publication in IFS.
  - GFS Yearbook data cover consolidated central government revenues and expenses; local governments’ revenue and expense not reported since 1994.
- Monetary and financial statistics:
  - Prepared in accordance with IMF Monetary and Financial Statistics Manual (2000).
  - Authorities report monetary data for central bank, other depository corporations, and other financial corporations (OFCs) using SRFs; OFC data limited to off-shore financial institutions.
  - Potential mission to expand institutional coverage of OFCs suggested.
  - Authorities reported annual Financial Soundness Indicators (FSI) for 2008, 2009, and 2010; authorities have not responded to queries regarding 2009 and 2010 data; historical series and updates not submitted.
- External sector statistics:
  - Balance of payments compiled and published quarterly, following BPM5.
  - Uruguay reports quarterly BOP and annual IIP to STA for publication in IFS and BOPS Yearbook.
  - New surveys improving private sector coverage in IIP.
  - Uruguay started disseminating international reserves and foreign currency liquidity data template in 2005.
  - BCU disseminates quarterly external debt statistics per SDDS on NSDP.
- Data standards and quality:
  - Uruguay subscribed to the SDDS in February 2004 and is in observance.
  - Data ROSC published on October 1, 2001.
  - A data ROSC mission on CPI and NA conducted in August 2012.
- Reporting to STA:
  - Annual GFS regularly reported to STA for GFS Yearbook. No high frequency GFS reported for publication in IFS.

### Article IV consultation — Outlook and recent developments (Press Release No. 13/461, November 20, 2013)
- IMF Executive Board concluded 2013 Article IV consultation with Uruguay on November 13, 2013.
- Economic performance:
  - Uruguay has experienced a decade of strong and inclusive expansion since its 2002 crisis.
  - Growth moderated since 2012, mostly due to weaker external demand.
  - Real GDP growth projected at 4 percent in 2013 and 3.5 percent in 2014 (staff projections).
  - Annual inflation at 9.0 percent in September 2013; current target range is 4–6 percent.
  - Uruguayan peso appreciated amid swelling capital inflows to May 2013; authorities introduced a new reserve requirement on foreign purchases of Treasury notes in June 2013 and tightened monetary policy stance.
  - Portfolio inflows appear to have come to a stop since policy changes; peso depreciated against the U.S. dollar thereafter.
- Outlook and risks:
  - Outlook solid but exposed to inward spillovers from external developments and domestic wage and cost pressures.
  - Financial vulnerabilities modest; public sector net debt reduced significantly; important financial buffers built.
  - Policy space constrained by above-target inflation and desire to further reduce net public debt.
  - Longer-term priority: sustain high growth rates for productivity, and human and physical capital investment.

### Executive Board assessment — Policy guidance and recommendations
- Commendation: Directors commended Uruguay’s strong performance and poverty reduction over the past decade.
- Near-term policy stance:
  - Support for recent tightening of monetary policy given above-target and rising inflation.
  - Note change in operational target for monetary policy; encourage authorities to enhance communication of targeted policy stance and monitor effectiveness in delivering inflation targets.
  - Broadening of capital flow management measures considered useful but generally should be temporary.
- Labor and wages:
  - Prudent wage growth recommended to lower inflation, curb overheating, and safeguard competitiveness.
  - Reduce use of backward-indexation in wage contracts; welcome authorities’ guidelines for non-indexed wages and encourage promotion.
- Fiscal policy:
  - A tighter fiscal stance would better align with reducing inflation and further decreasing net public debt.
  - Emphasized desirability to reduce overall deficit, exploring both revenue and expenditure options, while protecting priority social and infrastructure spending.
- Structural reforms:
  - Maintaining solid and stable growth requires additional financial and structural reforms.
  - Commended 2012 FSAP progress and urged implementation of envisaged financial sector reform agenda, including steps for financial deepening.
  - Priority to boost public infrastructure and raise labor market efficiency, ensuring protection for workers.

### Selected economic indicators (2009–15; staff preliminary projections)
- Real GDP (annual percent change): 2009: 2.2; 2010: 8.9; 2011: 6.5; 2012: 3.9; 2013: 4.0; 2014: 3.5; 2015: 3.3.
- Real consumption (annual percent change): 2009: -0.9; 2010: 12.0; 2011: 8.3; 2012: 6.4; 2013: 5.9; 2014: 4.3; 2015: 4.1.
- Real investment (annual percent change): 2009: -5.7; 2010: 13.3; 2011: 5.5; 2012: 19.4; 2013: 8.3; 2014: -4.3; 2015: 3.6.
- CPI inflation (average): 2009: 7.1; 2010: 6.7; 2011: 8.1; 2012: 8.1; 2013: 8.5; 2014: 8.0; 2015: 7.5.
- Terms of trade (annual percent change): 2009: 6.6; 2010: -3.1; 2011: 0.0; 2012: 6.3; 2013: 1.5; 2014: 0.1; 2015: 2.2.
- Public sector finances (percent of GDP):
  - Total revenues: 2009: 29.0; 2010: 29.8; 2011: 29.0; 2012: 28.5; 2013: 29.8; 2014: 29.7; 2015: 29.9.
  - Non-interest expenditure: 2009: 28.2; 2010: 28.5; 2011: 27.2; 2012: 28.7; 2013: 29.2; 2014: 29.5; 2015: 29.3.
  - Primary balance: 2009: 1.2; 2010: 1.6; 2011: 2.0; 2012: -0.2; 2013: 0.8; 2014: 0.3; 2015: 0.6.
  - Overall balance: 2009: -1.7; 2010: -1.5; 2011: -0.9; 2012: -2.8; 2013: -2.2; 2014: -2.5; 2015: -2.1.
  - Gross public sector debt: 2009: 66.1; 2010: 61.6; 2011: 60.0; 2012: 59.6; 2013: 58.6; 2014: 58.9; 2015: 58.4.
  - Outstanding external debt: 2009: 46.5; 2010: 37.2; 2011: 32.4; 2012: 35.5; 2013: 32.1; 2014: 32.0; 2015: 32.3.
  - Public external debt (of which): 2009: 37.8; 2010: 34.0; 2011: 32.0; 2012: 31.9; 2013: 30.3; 2014: 30.1; 2015: 30.4.
- Money and credit (percent change, end-of-period over one year earlier; note: for 2013, latest available data):
  - Base money (eop): 2009: 6.5; 2010: 16.2; 2011: 17.3; 2012: 26.7; 2013: 15.7.
  - M-1: 2009: 12.2; 2010: 28.9; 2011: 18.8; 2012: 9.1; 2013: 1.2.
  - M-2: 2009: 15.0; 2010: 30.3; 2011: 22.0; 2012: 12.3; 2013: 4.6.
  - M-3: 2009: -2.6; 2010: 22.1; 2011: 18.0; 2012: 10.0; 2013: 16.4.
  - Growth of credit to households (in real UY$): 2009: -20.5; 2010: 15.8; 2011: 2.1; 2012: 7.3; 2013: 8.0.
  - Growth of credit to firms (in US$): 2009: 3.4; 2010: 18.8; 2011: 26.5; 2012: 17.5; 2013: 18.3.
- Balance of payments (percent of GDP unless otherwise specified):
  - Current account balance: 2009: -1.3; 2010: -1.9; 2011: -3.0; 2012: -5.4; 2013: -4.9; 2014: -3.7; 2015: -3.1.
  - Merchandise exports, fob: 2009: 21.1; 2010: 20.7; 2011: 20.0; 2012: 19.8; 2013: 18.4; 2014: 19.4; 2015: 19.3.
  - Merchandise imports, fob: 2009: 22.8; 2010: 22.0; 2011: 23.1; 2012: 24.6; 2013: 20.4; 2014: 20.8; 2015: 20.7.
  - Services, income and transfers (net): 2009: 0.4; 2010: -0.5; 2011: 0.1; 2012: -0.6; 2013: -2.9; 2014: -2.3; 2015: -1.7.
  - Capital and financial account: 2009: 3.9; 2010: 2.7; 2011: 9.0; 2012: 12.9; 2013: 8.9; 2014: 5.1; 2015: 4.5.
  - Foreign direct investment: 2009: 5.1; 2010: 5.9; 2011: 5.4; 2012: 5.6; 2013: 5.3; 2014: 4.5; 2015: 4.4.
  - Overall balance of payments (in millions of U.S. dollars): 2009: 1588.3; 2010: -360.8; 2011: 2564.4; 2012: 3287.0; 2013: 2267.0; 2014: 844.0; 2015: 873.0.
  - Gross official reserves (in millions of U.S. dollars): 2009: 8039.8; 2010: 7655.3; 2011: 10301.9; 2012: 13604.4; 2013: 15871.4; 2014: 16715.4; 2015: 17588.4.
  - Reserves in percent of short-term debt: 2009: 159.2; 2010: 139.0; 2011: 212.6; 2012: 214.9; 2013: 246.1; 2014: 229.5; 2015: 232.6.
  - Reserves in percent of short-term debt and non-resident deposits: 2009: 89.9; 2010: 80.9; 2011: 126.2; 2012: 140.0; 2013: 129.1; 2014: 127.3; 2015: 131.2.
  - External debt service (percent of exports of goods and services): 2009: 23.9; 2010: 29.9; 2011: 21.5; 2012: 15.2; 2013: 27.8; 2014: 18.8; 2015: 15.5.
- Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and IMF Staff calculations.

### Statement by Pablo Garcia-Silva, Executive Director for Uruguay and David Vogel, Advisor (November 13, 2013)
- Uruguay’s potential growth estimated at about 4 percent.
- Historical context:
  - Mid-to-late twentieth century average growth about 1 percent.
  - 2013 marks eleventh consecutive year of positive growth; decade shows much higher average rates.
- Contributing factors to robust growth: institutional reforms, large FDI projects attracted by stable macroeconomic environment and business-friendly climate, favorable external conditions.
- Trade diversification:
  - Current exports to Argentina (5.7 percent) and Brazil (18.1 percent) total about 24 percent of external sales, compared with almost double that share at end of the 1990s.
- Governance and transparency:
  - Transparency International corruption perception index: Uruguay and Chile score 72 on a scale of 0–100; highest position in the region.
- Tax administration and VAT evasion:
  - VAT evasion estimated at 13.4 percent in 2012 (relative to potential revenue), down from about 40 percent ten years earlier; Uruguay has the lowest evasion rate in the region.
- Debt management improvements:
  - Average time to maturity increased from 7.4 years in 2004 to 11 years (current).
  - Percentage of debt denominated in foreign currency reduced from 89 percent to 47 percent.
  - Percentage of debt in floating rate reduced from 23 percent to 5 percent.
- Financial sector reforms:
  - Central Bank reform led to modern structure and functioning.
  - Sound financial system indicators: capitalization, liquidity, non-performing loans.
  - Reduction of non-resident deposits eliminated a key channel for regional shock transmission.
  - BROU non-performing loans at 1.5 percent.
- Draft Law for Financial Inclusion to improve access to credit and financial services for weaker sectors.
- Investment transformation:
  - Between 2005 and 2012 FDI doubled in terms of GDP.
  - Uruguay ranks second in Latin America (behind Chile) in attracting FDI relative to GDP.
  - Increased investment explains widening of current account deficit but underpins productivity and quality improvements.
- Public debt and fiscal position observations:
  - Authorities note accumulation of international reserves (more than 30 percent of GDP) due to interventions.
  - Net public debt has critically decreased; staff analysis focuses on gross debt.
  - Authorities raise issues about comparability of debt metrics, treatment of sterilization debt, and treatment of contingent liabilities and central bank capitalization.
- Policy commitments:
  - Authorities committed to reducing inflation within a flexible exchange rate system.
  - Introduced temporary capital flow management measures and changed monetary operational targets; tightened monetary policy stance.
  - Inflation decreased from 9 percent in September to 8.67 percent in October (monthly report cited by authorities).
- Social outcomes:
  - Poverty decreased from 25.7 percent in 2006 to 8.4 percent in 2012.
  - Extreme poverty decreased from 1.5 percent to 0.3 percent over same period.
  - Health insurance coverage increased to about 95 percent of the population.
  - Survey: 80 percent of Uruguayans responded "very satisfied" or "somewhat satisfied" with the way democracy works in their country (reported in The Economist), double the regional average.

*Source: _cr1406 - 2. Designing the Uruguay Rail Sector.*

### Conclusion

### Conclusion

### External risks and vulnerabilities
- As any small and open economy, Uruguay is exposed to the changing circumstances of the world economy.
- The expected monetary tapering in advanced countries "has the potential of creating noises and transitory volatility."
- Protectionist policies constitute "another critical risk for an open economy like Uruguay."

### Policy achievements and resilience
- The country’s policies and reforms "have created appropriate conditions to keep growing at a robust rate (in line with its potential growth)."
- Policies and reforms have positioned Uruguay "to be ready to withstand eventual global or regional shocks."
- Policies and reforms have helped "to continue improving the social conditions of its inhabitants."

### Remaining priorities and reform agenda
- "Clearly, much remains to be done in many areas."
- "It is important to reiterate that reducing inflation constitutes a highest priority."
- "Improving levels of education and infrastructure will be vital to face Uruguay’s future challenges and pave the way for further social and economic development."

### Overall assessment
- Uruguay’s policy stance and reforms have produced appropriate conditions for robust, potential-growth-consistent expansion, resilience to shocks, and social improvement, while external risks (monetary tapering and protectionism) and domestic priorities (inflation reduction, education, infrastructure) remain central to the outlook.

*Source: _cr1406 - Conclusion*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1406.pdf_