## _cr1581 ## Source details **Canonical URL:** [_cr1581](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1581.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1581.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1581.pdf.json) --- ### Context and recent developments - Uruguay’s economy performed strongly over the last decade; per capita income has risen by 75 percent following the 2002 crisis. - Buoyant FDI inflows since 2005 contributed to strong growth in productivity and real incomes; poverty and inequality have declined to historic lows. - Net public debt is less than half its post-crisis peak; the average maturity of central government debt is among the longest in the world. - Investments in renewable energy have started reducing dependence on oil imports and the volatility of the public sector balance. - Recent macro dynamics (selected exact items): - Real GDP growth: estimated to have declined to around 3¼ percent in 2014 from 4½ percent in 2013. - Private consumption: slowed from 2010–11 torrid pace but remained robust. - Private investment: moderating from record high levels. - Peso weakened by about 30 percent against the U.S. dollar and 7 percent in real effective terms since the Fed’s May 2013 tapering announcement. - Authorities sold about US$500 million in forward contracts in the second half of 2014. - CPI inflation: eased to 8¼ percent at end-2014 after near 10 percent in early 2014. - Core CPI inflation (excluding fruit, vegetable, and administered price inflation): remains around 10 percent. - One-off measures since March 2014 estimated to subtract about ½ percentage point from the CPI for a temporary period. - Since July 2013 money growth targets: M1+ growth declined from around 14 percent in the previous year to about 7 percent in 2014Q3. - Current fiscal spending grew faster than real GDP in 2014—implying an expansionary fiscal policy stance. ### External accounts and current account - Services and tourism: - Weakening in the net services balance since 2011 mostly due to lower bilateral tourism balance vis a vis Argentina. - Trade and financing: - Goods export volume growth to immediate region and Europe has been weak; trade balance broadly unchanged historically. - FDI has exceeded the current account deficit in most recent years. - Current account figures and projections: - Current account deficit estimated at 4¾ percent of GDP in 2014. - Projected to decrease to 3¾ percent of GDP in 2015 (lower oil import bill projected to more than offset the impact of lower prices for many agricultural commodity exports). - Over the medium term, the CAD is projected to return to about 3½ percent of GDP as goods and services exports recover. - Annex I merchandise trade (percent of GDP; four quarters through 2014Q3): - Trade balance: -1.4, -3.0, -4.7, -2.3, -1.8 (2010–2014). - Exports: 20.7, 19.6, 19.8, 18.5, 19.1 (2010–2014). - Imports: 22.0, 22.7, 24.5, 20.8, 20.9 (2010–2014). - Fuel: 4.1, 4.3, 5.7, 3.7, 3.2 (2010–2014). - Impact of oil price decline (2015): - Drop in global crude oil prices expected to lower Uruguay’s oil import bill by almost 1½ percentage points of GDP in 2015. - Decline in oil prices expected to reduce the current account deficit despite projected slowdown in export earnings. - Pass-through to end-user prices expected to be gradual as state-owned petroleum company absorbs part of windfall. ### Macroeconomic policy mix and public debt - Public sector debt composition (September 2014): - Currency: 57% Pesos, 43% Foreign Currency. - Maturity: 12% 1 Year, 21% 1–5 Years, 67% 5 Years+. - Residence: 53% Non-residents, 47% Residents. - Fiscal outcomes and dynamics: - Primary balance weakened in 2014 and net public debt increased. - Real current primary spending growth continued to outpace real GDP. - DSA summary (Annex III): - Gross debt projected to increase to 67 percent of GDP in 2019 from 62 percent of GDP in 2013. - Net public debt stood at 36½ percent of GDP at end-2013 and projected to increase to 43 percent of GDP in 2019 under the baseline. - Debt-stabilizing primary balance estimated at about 1¼ percent of GDP, about 1½ percentage points of GDP above projected medium term primary balance. - Contingent credit lines: 3½ percent of GDP; stock of liquid financial assets of public sector: 26 percent of GDP at end-2013. - Key DSA projection series (selected exact figures): - Nominal gross public debt (percent of GDP): 2013: 59.5; 2014: 62.1; 2015: 63.6; 2016: 64.3; 2017: 65.1; 2018: 65.5; 2019: 66.2/66.9 (table entries vary). - Net public debt (percent of GDP): 2013: 37.2; 2014: 36.5; 2015: 37.6; 2016: 38.6; 2017: 39.7; 2018: 40.9; 2019: 41.9/43.0. - Gross public financing needs (percent of GDP): 2014: 13.4; 2015: 13.5; 2016: 17.1; 2017: 16.8; 2018: 18.8; 2019: 18.1. ### Monetary policy, inflation targeting, and the money-targeting framework - Monetary framework change (July 2013): - BCU switched to announcing reference ranges for M1+ growth as intermediate target within inflation targeting. - BCU intended to reduce M1+ growth from about 14 percent to 8 percent by mid-2015; M1+ growth declined to under 8 percent by 2014Q3. - Findings (Box 2): - M1+ growth undershot the reference range in four out of six quarters of implementation. - Deviations mostly reflected money demand shocks; undershooting appropriate for disinflation objective. - Operational implication: allow some variability in money targets to react to new shocks and correct past prediction errors. - Taylor rule assessment: - A standard Taylor Rule calibrated with a real neutral rate estimate of 3.5 percent implies short-term interest rate levels consistent with bringing inflation into the target range. - Inflation and expectations: - CPI headline and core inflation remain above the 3–7 percent target range. - Short term interest rates are about 600 basis points above inflation; current stance consistent with lowering inflation. ### Banking sector and financial soundness - Key aggregate indicators (latest available data August 2014 unless noted): - Regulatory capital (% risk-weighted assets): 12.8 (2014) [16.1 (2010), 13.7 (2011), 12.8 (2012), 11.7 (2013)]. - NPLs (% total loans): 1.6 (2014) [1.0 (2010), 1.3 (2011), 1.5 (2012), 1.3 (2013)]. - NPLs (% total household loans): 3.6 (2014). - Specific loan-loss provisions (% of NPLs): 61.6 (2014). - Operating costs (% gross income): 86.4 (2014). - ROA: 0.9 (2014). - ROE: 12.0 (2014). - Liquidity ratio: 56.8 (2014). - Dollar loans (% total loans): 60.9 (2014). - Dollar deposits (% total deposits): 77.6 (2014). - Non-resident deposits (% total deposits): 14.7 (2014). - Private sector credit (% GDP): 24.6 (2014, latest available 2014Q2). - Household consumer credit (% GDP): 9.5 (2014). - Implicit exchange rate risk (share FX credit to unhedged borrowers): 31.0 (2014). - Memorandum (constant exchange rate, January 2013): Loan dollarization 50.2 (2014); Deposit dollarization 70.0 (2014). - Overall assessment: - Banks report adequate capital levels and ample liquidity; NPLs remain low (< 2 percent). - Some weakening: foreign currency credit to nontradables increased as share of total credit; capital buffers declined somewhat; NPL share inched up in 2014. - Profitability subdued due to high deposit dollarization, high U.S. dollar liquidity, low U.S. dollar asset yields, and high operating costs. - Prudential changes: - December 2012: capital requirements modified to cover operational risks and systemic capital surcharges of 0.5–2.0 percentage points. ### Financial regulation, supervision, stress testing, and macroprudential options - Staff recommendations: - Impose Basel III Liquidity Coverage Ratio requirements by currency and account for higher potential run-off rates of nonresident deposits. - Monitor FX-denominated lending risks and apply higher capital risk-weights to FX loans to unhedged borrowers (current FX loans risk weight: 125 percent per Table 3). - Make supervisory stress tests more stringent and require banks facing capital shortfalls to submit capital plans. - Differentiate impact of shocks across corporate versus household borrowers and by currency denomination starting with 2015 stress tests. - Supervisory stress test disclosures (authorities’ May 2014 stress test): - real GDP shock: -3.2 percent, - exchange rate shock: 11.3 percent, - inflation shock: 9.1 percent, - increments of country risk and international interest rates: 335 and 70 basis points, respectively. - Key prudential parameters (highlights): - Capital requirements: FX loans 125 percent risk weight; peso loans (except housing) 100 percent; peso housing loans 75 percent. - Liquidity requirements (must be met with liquid assets in FX and local currency): FX liabilities to residents up to 180 days: 25 percent; FX liabilities to nonresidents: 30 percent; peso liabilities up to 29 days: 17 percent. - Limits on open FX positions: net asset or liability position cannot exceed 150 percent of net worth. - Reserve requirements: marginal reserve requirements effective August 1, 2013: 45 percent on FX deposits and 25 percent on peso deposits on the daily average balance minus the corresponding April 2011 balance. ### Outlook, medium-term projections, and key risks - Near-term and medium-term growth: - 2015 GDP growth projection: around 2¾ percent. - Medium-term potential growth: 3–3½ percent. - Downward revision to medium-term growth from 4 percent projected one year ago due to weaker trading partners. - Montes del Plata pulp mill exports: US$300 million in 2014; US$700 million in 2015 (close to 1½ percent of GDP). - Inflation and public debt path: - CPI inflation projected to decline gradually to within the target range as monetary policy remains tight. - Net public debt projected to crawl up to 43 percent of GDP by 2019 from 36½ percent in 2013 with primary balance remaining below the debt-stabilizing level. - Risk assessment (selected items from RAM): - External: slowdown in Argentina and Brazil; protracted slower growth in advanced/emerging economies including China (High/Medium likelihood; impact Medium (↓)); abrupt surge in global financial volatility and U.S. dollar strength (High/Medium likelihood; impact Medium/Low (↓)); slowdown in FDI inflows (Low likelihood; impact High (↓)). - Domestic: delay in tightening fiscal stance (Medium likelihood; impact Medium (↓)); increased mining revenues in medium term (Medium likelihood; impact Medium (↑)). - Stress-test combined downside scenario (Annex III): - Permanent exchange rate depreciation of about 18 percent combined with temporary drop in growth and primary balances and permanent increase in real interest rates → gross debt ratio rises by about 16 percentage points over five years; net debt ratio rises by 12 percentage points. ### Policy issues and recommendations - A. Confronting inflation - Objective: Reduce inflation to 5 percent (the mid-point of the target range). - Recommended comprehensive disinflation strategy (measures to be implemented together): - Maintain tight macroeconomic policies. - Reduce backward-looking indexation of wages; government’s wage-setting guidelines for 2015 and 2016 should solely recommend nominal contracts. - Strengthen the central bank’s influence on inflation expectations through forward-looking communication (publish inflation forecasts; provide detailed assessment of money growth impact on inflation). - Enhance autonomy for the Banco Central del Uruguay (BCU); consider legislation delinking terms for President and Board members from electoral cycle as envisaged in December 2005 draft law. - Monitor new monetary framework closely and consider allowing more variable M1+ growth targets to ensure responsiveness to shocks. - Specific stance notes: - Short term interest rates are about 600 basis points above inflation; monetary policy needs to stay tight for some time. - B. Reinforcing fiscal sustainability - Staff recommendation: Increase the structural fiscal balance by an additional 2 percentage points of GDP in the following four years to keep net public debt close to current levels in 2019 and on a firm downward trend in the medium run. - Adjustment mix (recommended): - Expenditure: cap real primary expenditure growth at 2 percent from 2016 onwards (would contribute two-thirds of recommended adjustment over four years); incorporate a numerical expenditure rule in next five-year budget; target higher spending efficiency. - Revenue: consider lowering the minimum income threshold for the PIT (currently only about 35 percent of employees are estimated to contribute to the PIT); limit VAT exemptions (estimated at 3 percent of GDP); review business tax exemptions (about 2 percent of GDP) and eliminate those not conducive to long-term growth. - Authorities’ stance: agreed stabilizing net debt desirable; planned five-year budget to be submitted by June 2015; noted limited scope for reducing tax exemptions given FDI attraction concerns. - Exchange rate policy and FX intervention - Floating exchange rate should remain the main absorber of shocks; FX intervention should not substitute for strong macroeconomic policies. - Staff considers FX interventions in Sept–Oct 2014 justified given depreciation pressures and comfortable reserves. - Central bank reserves: stood around 32 percent of GDP in October 2014; ‘liquid’ reserves (excluding required reserves against FX deposits) amounted to 18½ percent of GDP. - Public sector contingent credit lines: central government access to 3½ percent of GDP in contingent credit lines; liquid financial assets sufficient to cover public debt service through end-2015 (4½ percent of GDP). ### Supply-side reforms, inclusive growth, and financial inclusion - Supply-enhancing reforms needed to secure medium-run growth given limited labor force growth; priorities: - Infrastructure: modernize and maintain highways and railroads; PPPs to pick up; review PPP process and approval procedures. - Education: reverse quality decline in secondary education; authorities expect education spending to increase by 1 percent of GDP over next five to ten years; reform to establish analytical skills, common core curriculum, national standardized evaluation. - Labor skills: review government-funded training to align with production structure; improve job training for youth; address skill gaps in services and IT. - Business environment: evaluate labor market regulations to balance efficiency and protection; national system of competitiveness to promote innovation. - Financial inclusion and household savings: - Financial inclusion law adopted April 2014 requires all salaries and pension benefits to be paid into bank accounts or debit cards by May 2017; mandates access to affordable credit from these accounts; incentivizes electronic transactions through temporary VAT cuts on card purchases. - Early impact: number of debit card transactions tripled from less than 1 percent to around 3 percent of total transactions in the two months following VAT cuts in August 2014; authorities expect cash transactions to halve by August 2015. - Money market fund shares backed by central bank securities can now be purchased at payment service providers to enhance competition for peso deposits. ### Data, statistical issues, and IMF engagement - Data adequacy (as of January 27, 2014): broadly adequate for surveillance but national accounts have shortcomings (fixed input-output ratios from 1997 cover about 60 percent of GDP calculation; household consumption not independently derived; household income and expenditure survey conducted every ten years). - Uruguay subscribed to SDDS in February 2004 and is in observance. - IMF Article IV Executive Board assessment (Press Release No. 15/77, February 26, 2015) summarized main policy recommendations consistent with staff appraisal above. ### Key headline statistics and projections (selected exact figures from the text) - 2014 real GDP growth: around 3¼ percent (estimated). - 2015 GDP growth projection: around 2¾ percent. - Medium-term potential growth: 3–3½ percent. - Downward revision from previous medium-term projection: from 4 percent (one year ago). - Net public debt: projected to 43 percent of GDP by 2019 from 36½ percent in 2013. - Montes del Plata exports: US$300 million in 2014; US$700 million in 2015. - Staff recommended additional structural fiscal balance improvement: 2 percentage points of GDP over the following four years. - Capping real primary expenditure growth recommendation: 2 percent from 2016 onwards. - VAT exemptions estimated at 3 percent of GDP. - Business tax exemptions estimated at about 2 percent of GDP. - PIT coverage: currently only about 35 percent of employees are estimated to contribute to the PIT. - Short term interest rates: about 600 basis points above inflation. - Current account deficit: 4¾ percent of GDP in 2014; projected 3¾ percent of GDP in 2015. - Central bank reserves (latest): 17.9 (US$, billions); reserves around 32 percent of GDP in October 2014; liquid reserves 18½ percent of GDP. - Gross external financing need (percent of GDP): 2014: 17.4; 2015: 16.5; 2019: 15.0. - External debt (percent of GDP baseline series): 2014: 44.5; 2015: 44.4; 2019: 43.8. - Selected banking system indicators (2014): regulatory capital 12.8; NPLs 1.6 percent of total loans; dollar loans 60.9 percent of total loans; dollar deposits 77.6 percent of total deposits. *International Monetary Fund staff report content as provided in the source PDF.* ### 1. Uruguay‘s Experience with Inclusive Growth ___________________________________________________ 27 ### 1. Uruguay‘s Experience with Inclusive Growth ### Context - Uruguay’s economy performed strongly over the last decade and has so far weathered the regional slowdown quite well. - Buoyant FDI inflows since 2005 contributed to strong growth in productivity and real incomes. - Per capita income has risen by 75 percent following the 2002 crisis. - Poverty and inequality have declined to historic lows. - Net public debt is less than half its post-crisis peak; the average maturity of central government debt is among the longest in the world. - Investments in renewable energy have started reducing dependence on oil imports and the volatility of the public sector balance. - The economy cooled in the context of a regional slowdown but achieved a robust pace of growth through 2014. - Policy priorities to entrench medium-term growth: reinforce macroeconomic stability and accelerate supply-enhancing reforms. - Recent fiscal trajectory: robust growth accompanied by above-target inflation and a marked decline in the primary fiscal balance. ### Recent Developments - Real GDP growth: - Estimated to have declined to around 3¼ percent in 2014 from 4½ percent in 2013. - Private demand: - Private consumption growth slowed from 2010–11 torrid pace but remained robust. - Private investment moderating from record high levels. - Exports and external demand: - Commodity exports were solid in 2014, but overall export receipts growth slowed markedly from previous years. - Weak economic conditions in Argentina continued to weigh on Uruguay’s external services balance and current account. - Exchange rate and reserves: - The peso weakened by about 30 percent against the U.S. dollar and 7 percent in real effective terms since the Fed’s May 2013 tapering announcement. - Authorities eased reserve requirements on nonresident purchases of public debt securities in September 2014. - Authorities sold about US$500 million in forward contracts in the second half of 2014. - International reserves remain comfortably above norms; the exchange rate is slightly on the strong side of fundamentals (0–5 percent, Annex I). - Inflation dynamics: - CPI inflation eased to 8¼ percent at end-2014 after near 10 percent in early 2014. - Core CPI inflation (excluding fruit, vegetable, and administered price inflation) remains around 10 percent. - Above-target inflation reflects a shrinking but still positive output gap, upward shocks to food and fuel prices in 2010–13, and pervasive backward-looking wage indexation. - One-off measures since March 2014 estimated to subtract about ½ percentage point from the CPI for a temporary period (reduced VAT on fruits, vegetables, and energy and telephone tariffs; a subsidy on health care contributions; lower lottery prices). Core CPI excludes these effects. - Monetary and fiscal stances in 2014: - Since money growth targets introduced in July 2013, M1+ growth declined from around 14 percent in the previous year to about 7 percent in 2014Q3. - Peso yield curve hovered 400–500 basis points above its level prior to July 2013. - Monetary tightening and cooling demand have slowed both peso and FX loans. - Current fiscal spending grew faster than real GDP in 2014—implying an expansionary fiscal policy stance. - 2015 budget: central government discretionary spending constant in nominal terms per post-election convention. - Projected improvement in public sector primary balance by ¾ percentage point of GDP due to moderated public enterprise investment and strengthened operating balances. ### External Accounts and Current Account - Services and tourism: - Weakening in the net services balance since 2011 was mostly due to a lower bilateral tourism balance vis a vis Argentina. - Tourism flows between Uruguay and Argentina show spending by Argentines in Uruguay and spending by Uruguayans in Argentina trends affecting services balance. - Trade and financial account: - Goods export volume growth to the immediate region and Europe has been weak. - Trade balance broadly unchanged historically. - FDI has exceeded the current account deficit in most recent years. - Current account composition: - Movements in the current account largely reflected those of the services balance and oil imports. - Latest observation coverage: the 4 quarters through 2014Q3 (figures referenced). ### Macroeconomic Policy Mix and Public Debt - Public sector debt composition (September 2014): - Currency: 57% Pesos, 43% Foreign Currency. - Maturity: 12% 1 Year, 21% 1–5 Years, 67% 5 Years+. - Residence: 53% Non-residents, 47% Residents. - Strengths and vulnerabilities: - Long average maturity of public debt is a strength. - High share of non-resident holdings may present a vulnerability. - Fiscal outcomes: - Primary balance weakened in 2014 and net public debt increased (figures shown in percent of GDP). - Real current primary spending growth continued to outpace real GDP. ### Monetary Policy Stance and Inflation Targeting - Interest rates and money: - Local currency yield curve and 12-month Central Bank security yields indicate tighter conditions. - Nominal peso yield curve and bank lending rates rose (dec-2012 to dec-2014 observations). - Taylor rule assessment: - A standard Taylor Rule calibrated with a real neutral rate estimate of 3.5 percent was used: it implies short-term interest rate levels consistent with bringing inflation into the target range. - Monetary Conditions Index (MCI) shows tightening since mid-2013. - Inflation: - CPI headline and core inflation series show inflation remains above the 3–7 percent target range. - Inflation expectations have not been anchored within the target range. ### Banking Sector and Financial Soundness - Key aggregate indicators (latest available data August 2014, unless noted): - Regulatory capital in percent of risk-weighted assets: 12.8 (2014) [prior years: 16.1 (2010), 13.7 (2011), 12.8 (2012), 11.7 (2013)]. - Non-performing loans (NPLs) in percent of total loans: 1.6 (2014) [1.0 (2010), 1.3 (2011), 1.5 (2012), 1.3 (2013)]. - Non-performing loans in percent of total household loans: 3.6 (2014). - Specific loan-loss provisions in percent of NPLs: 61.6 (2014). - Operating costs in percent of gross income: 86.4 (2014). - Return on assets (ROA): 0.9 (2014). - Return on equity (ROE): 12.0 (2014). - Liquidity ratio: 56.8 (2014). - Dollar loans in percent of total loans: 60.9 (2014). - Dollar deposits in percent of total deposits: 77.6 (2014). - Non-resident deposits in percent of total deposits: 14.7 (2014). - Private sector credit in percent of GDP: 24.6 (2014, latest available 2014Q2). - Household consumer credit in percent of GDP: 9.5 (2014). - Implicit exchange rate risk (foreign currency bank credit to borrowers without natural hedges as a share of total bank loans to the private sector): 31.0 (2014). - Memorandum items (constant exchange rate, January 2013): Loan dollarization 50.2 (2014); Deposit dollarization 70.0 (2014). - Overall assessment: - Banks account for the bulk of financial intermediation and report adequate capital levels and ample liquidity. - Bank resilience: NPLs < 2 percent of total loans; total loan-loss provisions on average three times larger than NPLs; net foreign exchange positions below 1 percent of capital. - Some indicators weakened: foreign currency credit to nontradables borrowers increased as share of total credit; capital buffers declined somewhat; NPL share inched up in 2014. - Bank profitability subdued due to high deposit dollarization, high U.S. dollar liquidity, low interest rates on U.S. dollar assets, and high operating costs. - Note: In December 2012 capital requirements were modified to cover operational risks and systemic capital surcharges (0.5–2.0 percentage points). - Profitability indicators for 2014 are held down by an inflation adjustment to fixed assets (accumulated inflation exceeded 25 percent threshold in prior 3 years); excluding this adjustment, profitability indicators largely unchanged from end-2013. ### Credit Dynamics - Credit growth: - Private firms (US$) and households (real UY$) showed buoyant credit growth in recent years (figures presented). - Non-performing loans by sector: - NPLs to domestic non-financial corporate sector rose from very low levels but remain modest in absolute terms (figures by sector provided). - FX lending: - Share of FX loans to unhedged borrowers stands around one-third of total loans (figures show 2010–2014Q2 trend). ### Outlook and Risks - Economy is decelerating gradually; near-term risks appear manageable given strong liquidity cushions. - Uncertain external environment calls for continued prudence in macroeconomic management. - Post-election period presents an opportunity to consolidate macroeconomic stability, strengthen institutions, and accelerate supply-side reforms. *International Monetary Fund staff report content as provided in the source PDF.* ### 8. The sharp decline in oil prices will start having a significant effect on Uruguay’s ### _cr1581 - 8. The sharp decline in oil prices will start having a significant effect on Uruguay’s ### Impact of the sharp decline in oil prices (2015) - The drop in global crude oil prices is expected to lower Uruguay’s oil import bill by almost 1½ percentage points of GDP in 2015. - The decline in oil prices is expected to reduce the current account deficit despite the projected slowdown in export earnings. - Pass-through to end-user prices is expected to be gradual because part of the windfall will initially be absorbed by the state-owned petroleum company to shore up its operating balance. - Montes del Plata pulp mill: exports estimated at US$300 million in 2014 and expected to increase to US$700 million in 2015 (close to 1½ percent of GDP). ### Near-term growth outlook (2015) - GDP growth is projected to soften to around 2¾ percent in 2015. - Drivers and offsets: - Programmed slowdown in fiscal spending and continued weak external conditions—including lower export prices for soy and grains—are projected to outweigh the positive impact of lower gasoline prices on private consumption and the ramping up of Montes del Plata exports. ### Medium-term projections - Growth is projected to return to the potential rate of 3–3½ percent as external demand growth recovers and private investment growth picks up. - The downward revision to medium-term growth—from the 4 percent projected one year ago—reflects significant downward revisions to growth prospects in key trading partners. - CPI inflation is projected to decline gradually to within the target range as monetary policy remains tight, the output gap closes, and lower oil prices are gradually passed through to retail prices. - Net public debt is projected to crawl up to 43 percent of GDP by 2019 from 36½ percent in 2013 with the primary balance remaining below the debt-stabilizing level. ### Risk Assessment (selected external and domestic risks from the RAM) - External: - Immediate region: Subpar performance in Argentina and Brazil has lowered Uruguay’s growth and poses further near- and medium-term risks. (A one percentage point drop in Argentina’s GDP growth is estimated to reduce Uruguay’s GDP growth by slightly more than ½ percentage point; the impact could be lower now given diminished economic linkages.) - Global economy: As a small open economy that mostly exports agricultural commodities, imports all its oil, and has nonresidents holding a high share of its public debt, Uruguay is vulnerable to further changes in global commodity prices or global financial conditions. - Protracted slower growth in advanced and emerging economies / China: High/Medium relative likelihood; impact Medium (↓). A slowdown could reduce export prices (two-thirds of exports linked to agricultural commodities), though accompanying lower oil prices would buffer the adverse impact by reducing the import bill. - Abrupt surge in global financial market volatility, tighter global financial conditions, and persistent U.S. dollar strength: High/Medium relative likelihood; impact Medium/Low (↓). Possible effects include higher bond yields, slowdown or reversal of capital flows, peso depreciation putting upward pressure on inflation, and higher default rates on FX loans to unhedged borrowers. Near-term public sector financing risks would be limited given comfortable liquid dollar assets and high average debt maturity; external financing risks contained by high reserves and high share of FDI-financing of the current account deficit. - Slowdown in FDI inflows: Low relative likelihood; impact High (↓). FDI averaged 5¼ percent of GDP from 2003–12; a sharp slowdown would hurt medium-term growth prospects, though it would also reduce capital goods imports and lower current account deficits. - Domestic: - Delay in tightening the fiscal stance: Medium relative likelihood; impact Medium (↓). The fiscal withdrawal projected for 2015 would not be sufficient to stabilize the net debt to GDP ratio under staff’s baseline. A delay beyond 2015 would raise the possibility of a more austere procyclical adjustment later. - Increased mining revenues in the medium term: Medium relative likelihood; impact Medium (↑). Large-scale iron mining would boost investment and eventually exports and fiscal revenues; current account could widen initially due to FDI-financed capital goods imports. ### Policy issues — A. Confronting Inflation - Inflation remains a priority because it taxes low income households, obstructs financial de-dollarization, risks unhinging inflation expectations, and prevents monetary policy from being countercyclical. - Objective: Reduce inflation to 5 percent (the mid-point of the target range). - Recommended comprehensive disinflation strategy (measures to be implemented together for mutual reinforcement): - Maintain tight macroeconomic policies. - Reduce backward-looking indexation of wages. - Strengthen the central bank’s influence on inflation expectations through forward-looking communication. - Enhance autonomy for the Banco Central del Uruguay (BCU). - Such a strategy would reduce the need for ad hoc measures (e.g., fiscally costly VAT cuts) in response to commodity price shocks. - Specific policy notes: - Policy stance: Short term interest rates are about 600 basis points above inflation; current stance consistent with lowering inflation. Monetary policy needs to stay tight for some time with appropriate recalibration if circumstances change. Tighter fiscal policy would also help lower inflation. - Reducing inflation persistence: Government’s wage-setting guidelines for the bargaining rounds of 2015 and 2016 should solely recommend nominal contracts. Success depends on lowering inflation further and tightening inflation expectations via central bank communication. - Improving the policy framework: It is important to monitor the new monetary framework closely and consider allowing more variable M1+ growth targets to ensure responsiveness to shocks and avoid carrying over past errors in predicting money demand. - Enhancing central bank communication and autonomy: - Communication: Publish inflation forecasts, provide more detailed assessment of the impact of money growth on inflation, and explain how monetary policy would respond to shocks. - Autonomy: Consider legislation that delinks the terms for the President and Board members from the electoral cycle (as envisaged in the draft central bank law submitted in December 2005). - Authorities’ views: - Expected inflation to trend down in the near term given tight monetary stance and eventual pass-through of lower crude oil prices to retail prices. - Some recent decline in administrative prices reflects structural changes (e.g., cheaper electricity from wind power). - Consider current policy mix consistent with lowering inflation; do not see fiscal policy as having a significant effect on inflation at this time. - Viewed BCU autonomy as appropriate and noted challenges in communicating variable monetary growth targets. ### Policy issues — B. Reinforcing Fiscal Sustainability - The upcoming budget is an opportunity to restore a downward trend in the public debt-to-GDP ratio. - Under unchanged fiscal policies beyond 2015 and staff’s macroeconomic projections, the net debt ratio would creep upwards over the medium term; adverse shocks to growth, interest rates, and the exchange rate could worsen debt dynamics. - Staff recommendation: Increase the structural fiscal balance by an additional 2 percentage points of GDP in the following four years to keep net public debt close to current levels in 2019 and on a firm downward trend in the medium run. - Adjustment mix: - Expenditure side: - Real spending growth could be kept below real GDP growth. - Capping the growth of real primary expenditures at 2 percent from 2016 onwards would contribute two-thirds of the recommended adjustment over four years. - Incorporate a numerical expenditure rule in the next five-year budget to help ensure compliance; convert real expenditure growth targets into nominal expenditure ceilings for each year and reduce them over time if disinflation proceeds faster than expected. - Target higher spending efficiency to accommodate priorities without stretching the expenditure envelope. - Revenue side: - Consider lowering the minimum income threshold for the PIT (currently, only about 35 percent of employees are estimated to contribute to the PIT). - Limit VAT exemptions (estimated at 3 percent of GDP). - Review business tax exemptions (about 2 percent of GDP) and eliminate those not clearly conducive to long-term growth. - Revenue measures could be adopted upfront in 2016 to reduce eventual adjustment needs and achieve visible debt direction change immediately. - Authorities’ views on fiscal policy: - Agreed that keeping the net debt to GDP ratio stable over the next five-year budget period would be desirable. - Planned to outline a precise policy strategy in the next five-year budget to be submitted to Parliament by June 2015. - Noted that investment projects by nonfinancial public enterprises would be completed in the near term, improving the public sector balance. - Saw limited scope for reducing tax exemptions, considering them well targeted and important for attracting FDI; cautioned that revising business tax exemptions could create uncertainty and undermine investment prospects. - Emphasized that their fiscal framework already incorporates a net debt rule imposing a limit on the annual increase in net liabilities of the consolidated public sector; they noted staff’s argument that an expenditure rule would entail less procyclicality than a net debt rule. ### Key statistics and projections (selected exact figures from the text) - 2015 GDP growth projection: around 2¾ percent. - Medium-term potential growth: 3–3½ percent. - Downward revision from previous projection: from 4 percent (one year ago). - Net public debt: projected to 43 percent of GDP by 2019 from 36½ percent in 2013. - Montes del Plata exports: US$300 million in 2014; US$700 million in 2015 (close to 1½ percent of GDP). - Staff recommended additional structural fiscal balance improvement: 2 percentage points of GDP over the following four years. - Capping real primary expenditure growth recommendation: 2 percent from 2016 onwards. - VAT exemptions estimated at 3 percent of GDP. - Business tax exemptions estimated at about 2 percent of GDP. - PIT coverage: currently only about 35 percent of employees are estimated to contribute to the PIT. - Short term interest rates: about 600 basis points above inflation. *International Monetary Fund staff report excerpts for Uruguay (content unit: _cr1581 - 8).* ### 20. The floating exchange rate should remain the main ### _cr1581 - 20. The floating exchange rate should remain the main ### Exchange rate policy and FX intervention - The floating exchange rate should remain the main absorber of external shocks; exchange rate intervention should not substitute for strong macroeconomic policies. - There is scope to respond to external shocks by reducing reserves towards prudential norms if macroeconomic policy settings are at appropriate levels and the exchange rate is not deemed stronger than warranted by fundamentals. - Staff considers the FX intervention in September–October 2014 to have been justified by exchange rate depreciation pressures emanating from the volatile external environment (particularly in the immediate region) in the context of: - a disinflationary monetary policy stance, - an effective real exchange rate very close to equilibrium, - and international reserves well-above prudential norms. - Authorities’ view: with international reserves significantly above traditional prudential benchmarks and money growth in line with the BCU’s reference range, occasional FX intervention is appropriate for smoothing potential excessive volatility. They argued that foreign currency sales entailed lower fiscal costs than issuing central bank securities to withdraw peso liquidity. ### Macroeconomic policy space and automatic stabilizers - There is limited scope to respond to adverse spillovers with countercyclical macroeconomic policies because: - inflation is above the target range, - and the structural primary fiscal balance is lower than the level that would stabilize the public debt-to-GDP ratio. - Automatic fiscal stabilizers in Uruguay’s social safety net and tax system would help shelter the economy from adverse developments. ### Public sector and banking system liquidity buffers - Public sector financing and liquid assets: - central government has access to 3½ percent of GDP in contingent credit lines, - has a stock of liquid financial assets sufficient to cover public debt service through end-2015 (4½ percent of GDP). - Central bank reserves stood around 32 percent of GDP in October 2014; ‘liquid’ reserves (excluding required reserves against FX deposits) amounted to 18½ percent of GDP, comfortably exceeding prudential benchmarks. - Vulnerabilities: - high share of private nonresident holdings of Uruguay’s public debt could make domestic financial conditions susceptible to changes in global financial sentiment. - FX-denominated bank credit to borrowers in the nontradables sector is around one third of total loans to the private sector or 7 percent of GDP. ### Banking system resilience and macroprudential options - The modestly sized and highly liquid banking system is unlikely to act as a major amplifier of shocks, but continued close monitoring of banks and their customers is needed. - Macroprudential policy settings could be eased in case of liquidity strains: - the reserve requirement on nonresident holdings of central bank paper could be unwound if there were disruptive portfolio outflows, - in case of liquidity stress in the local banking system, reserve requirements on bank deposits could be lowered. ### Regulation, supervision, and stress testing - Heightened external risks call for continued vigilant regulation and supervision of the highly dollarized banking system. - A comprehensive set of regulations for mitigating FX-related credit, market, and liquidity risks is in place. - Staff recommendations on prudential rules and stress testing: - impose Basel III Liquidity Coverage Ratio requirements by currency and take into account higher potential run-off rates of nonresident deposits, - continue proactive efforts to monitor risks associated with FX-denominated lending and apply higher capital risk-weights to FX loans to unhedged borrowers, - make supervisory stress tests more stringent and require banks to incorporate test results into capital planning, - differentiate impact of shocks across corporate versus household borrowers and by currency denomination (planned starting with the 2015 stress tests), - make stress test results more binding by requiring banks facing capital shortfalls to submit capital plans for authorities’ approval. - Staff noted that the real depreciations assumed in the “adverse” scenario of the latest supervisory stress tests (carried out in 2014Q2) were less than five percent and called to make them more stringent. - Authorities’ view on stress tests: - authorities presented internal stress tests for the Financial Stability Committee featuring deeper exchange rate stress, - argued that any capital deficiencies could be resolved through recapitalization without creating systemic risks, - planned introduction in 2015 of banks’ self-assessment of capital adequacy to start dialogue with banks on stress test implications. - Supervisory stress test disclosures (authorities’ May 2014 stress test): - real GDP shock: -3.2 percent, - exchange rate shock: 11.3 percent, - inflation shock: 9.1 percent, - increments of country risk and international interest rates: 335 and 70 basis points, respectively. ### Key prudential regulations for FX-related risks (highlights from Table 3) - Capital requirements: - FX loans: 125 percent risk weight; - Peso loans (except housing): 100 percent; - Peso housing loans: 75 percent. - Capital requirements for market risk are applied to open FX positions by currency (8 percent for currencies with an associated sovereign rating of AA or above and 10 percent for other currencies). - Provisioning for loan losses: - FX commercial loans: banks assess borrowers’ payment ability under real peso depreciations of 20 or 35 percent; higher provisions required if payment ability is anticipated to be a problem. - FX consumer loans: monthly payments do not exceed 15 percent of income (as opposed to 30 percent for peso loans) — considered normal; monthly payments exceed 15 percent of income → higher provisions required. - Liquidity requirements (must be met with liquid assets in FX and local currency): - FX liabilities to residents: up to 180 days: 25 percent; over 180 days: 19 percent. - FX liabilities to nonresidents: 30 percent. - Peso liabilities: up to 29 days: 17 percent; 30 to 90 days: 9 percent; 91 to 180 days: 6 percent; 181 to 366 days: 4 percent. - Limits on open FX positions: - net asset or liability position cannot exceed 150 percent of net worth. - Reserve requirements (differentiated minimum reserve requirements applied to FX liabilities): - FX liabilities to residents: up to 180 days: 18 percent; over 180 days: 14 percent. - FX liabilities to nonresidents: 18 percent. - Peso liabilities: up to 29 days: 15 percent; 30 to 90 days: 9 percent; 91 to 180 days: 6 percent; 181 to 366 days: 4 percent. - Effective August 1, 2013, marginal reserve requirements: 45 percent on FX deposits and 25 percent on peso deposits on the daily average balance minus the corresponding April 2011 balance. Both the minimum and marginal reserves at BCU are remunerated. ### Progress on financial safety net and FSAP recommendations - Organizational change of the Superintendency of Financial Services (SSF) to enhance supervisory capacity will be incorporated in the 2015 budget. - Strengthening safety net and crisis management: - information exchange agreement between the SSF and COPAB (the deposit insurance fund); - considering amendments to the bank resolution legal framework consistent with the 2012 FSAP and recent Fund technical assistance; - planning a simulation exercise for bank resolution to enhance coordination among involved agencies. ### Bolstering inclusive growth: supply-side reforms - Need for supply-enhancing reforms to secure strong medium-run growth given limited scope for higher labor force growth; continued high investment rates and TFP growth will be required. - Structural reform agenda priorities: - Infrastructure: - transport infrastructure investment has fallen below needs; modernization and maintenance of highways and railroads are priorities with several rehabilitation projects to be launched as PPPs in the near term. - authorities expect PPP investments to pick up as private sector familiarity grows and plan to review the PPP process and approval procedures. - Education: - reversing quality decline in secondary education is essential; - incoming administration committed to reforms to boost enrollment and completion rates and learning outcomes in secondary education; - reform will establish analytical skills, a common core curriculum, and a national system of standardized evaluation; - authorities expect education spending to increase by 1 percent of GDP over the next five to ten years. - Labor skills: - labor market has been tight with anecdotal evidence of skill shortages in some sectors; - need to review government-funded training programs to align with production structure demands, improve job training especially for youth, and address skill gaps in fast-growing sectors such as services and IT. - Business environment: - labor market efficiency ranked as the most difficult aspect of doing business; evaluate recent labor market regulations to balance efficiency and worker protection. - authorities plan a national system of competitiveness to facilitate an innovation-friendly environment by improving infrastructure, human capital, and promoting research, development and entrepreneurial capacities. ### Financial inclusion and household savings - Financial inclusion law adopted April 2014 will broaden access and promote electronic payments: - requires all salaries and pension benefits to be paid into bank accounts or debit cards by May 2017, - mandates access to affordable credit serviced directly from these accounts, - incentivizes electronic transactions through temporary VAT cuts on purchases with credit and debit cards. - Early impacts and expectations: - number of debit card transactions tripled from less than 1 percent to around 3 percent of total transactions in the two months following the introduction of VAT cuts in August 2014, - authorities expect cash transactions to halve by August 2015. - Household saving instruments: - shares in money market funds backed by central bank securities can now be purchased at payment service providers, expected to enhance competition for peso-denominated bank deposits and strengthen monetary policy transmission once take-up increases. ### Staff appraisal: current outlook and policy recommendations - Economic dynamics: - Uruguayan economy is decelerating gradually after a decade of strong and inclusive growth; export receipts are growing at a markedly lower clip and domestic demand growth is slowing towards a more sustainable pace, - inflation remains above the target range and the primary fiscal balance has weakened further in 2014. - External environment: - Uruguay faces risks from lower global growth and tighter global financial conditions given its export mix and nonresident holdings of public debt, - the drop in global crude oil prices provides an opportunity to improve fiscal and balance of payments positions and reduce inflation. - Policy space and constraints: - strong liquidity buffers allow orderly adjustment to adverse shocks (high public debt maturity, reserves exceed prudential benchmarks, ample U.S. dollar liquidity), - above-target inflation limits room for countercyclical monetary policy response, - a primary balance insufficient to stabilize net public debt limits policy space for discretionary stimulus. - Disinflation strategy recommended: - maintain a monetary policy stance tight enough to keep inflation on a downward trend, - move towards tighter fiscal policy, - reduce backward-looking component of wage setting to temper inflation persistence, - bolster the central bank’s influence on inflation expectations through well-crafted communication efforts, - enhanced central bank autonomy would be beneficial. - Fiscal recommendation: - the upcoming five-year budget is an opportunity to reinforce fiscal sustainability; improving the primary fiscal balance by about 2 percent of GDP over the medium term would help ensure net public debt is put on a firmly declining path, - the improvement could be achieved by keeping spending growth moderately below potential GDP growth over the next five years and modestly increasing revenues. *International Monetary Fund staff summary drawn from the provided content unit.* ### 39. Financial regulation and supervision are solid, but could benefit from fine-tuning in ### _cr1581 - 39. Financial regulation and supervision are solid, but could benefit from fine-tuning in ### Financial regulation and supervision: assessment - Financial regulation and supervision are described as "solid." - Exposures to exchange rate depreciation risks require continued close monitoring. - Specific areas for potential strengthening: - Risk weights for foreign currency loans to unhedged borrowers could be strengthened. - Supervisory stress tests should incorporate greater exchange rate stress. - Banks facing capital shortfalls in the stress tests should be required to submit contingent capital plans for the SSF’s approval. - Measures to assist financial deepening could enhance growth and social inclusion. ### Macro‑policy recommendation: consultations and medium‑term growth - Staff proposes that Uruguay remains on the 12-month Article IV consultation cycle. - A key challenge is bolstering strong growth in the medium run to continue deepening Uruguay’s social gains. - The incoming government’s commitments noted as welcome: - Boost infrastructure investments. - Revamp secondary education and skill formation for the youth. - Foster an innovation-friendly business environment. ### Inclusive growth: historical context and policy implications (Box 1) Findings on social outcomes and policies - Uruguay has a long history of high living standards comparable to many developed countries and made further progress in improving social conditions in the last decade. - The 2002 crisis recession severely affected social indicators; rising employment and labor incomes and the introduction of targeted public transfers kept poverty on a declining trend after 2005 and reduced it to multi-decade lows. - Income inequality declined after 2007. - Public social spending increased from 20 percent of GDP in 2005 to 25 percent in 2012. - The government implemented a temporary social emergency plan (PANES) between 2005 and 2007 aimed at reducing extreme poverty through targeted cash transfers. - The Equity Plan launched in 2007 expanded coverage and amount of social assistance transfers and included far-reaching tax and health care reforms. - The tax reform introduced personal income taxes and improved the progressivity of the tax system. - The health care reform doubled by 2010 the health insurance coverage under public plans. - In 2010, further steps expanded coverage of health care, unemployment insurance, and non-contributory pension benefits. Policy implications emphasized - Preserving strong and stable growth and ensuring the fiscal sustainability of social policies are essential to cementing and deepening social gains. - The reduction in poverty following the 2002 crisis owed in large part to strong economic growth, which raised employment and incomes while enabling higher social spending. ### Human capital, education, and labor market considerations - Strong skill formation, especially for women and youth, would help ensure that the reduction in poverty is durable. - Although cash transfer policies reduced the poverty rate, a sizable share of the population remains at risk of falling back into poverty. - Strengthening job training opportunities and job search assistance, especially for women and youth, would help insert the poor and vulnerable into the labor market. - Education quality is crucial for equity and long‑term growth potential. - Declining PISA scores and the high dependence of student performance on socioeconomic conditions are a concern. - Uruguay currently spends about 4.6 percent of GDP on education, below the 5.4 percent average among OECD countries. - While additional resources could be allocated to improve education quality, there is room to improve the efficiency of education spending as well. *Source: IMF staff report excerpts from _cr1581.* ### Box 2. Uruguay’s Money-Targeting Framework: Takeaways From the First Six Quarters ### Box 2. Uruguay’s Money-Targeting Framework: Takeaways From the First Six Quarters ### Background and implementation - In July 2013, the BCU switched from using the overnight interest rate as the intermediate target to announcing reference ranges for the growth of M1+ within its inflation targeting framework. - At the inception of the framework, the BCU announced its intention to reduce M1+ growth from an average of about 14 percent in the previous year to 8 percent by mid-2015, and started setting M1+ growth targets for the quarter ahead. - M1+ growth declined to under 8 percent by 2014Q3. ### Findings on monetary stance and target performance - The new framework has delivered a significant tightening in the monetary policy stance. - M1+ growth has undershot the reference range in four out of the six quarters of implementation. - Analysis based on a calibrated macroeconomic model suggests that the observed deviations from the reference range mostly reflected money demand shocks—i.e. unexpected decreases in money demand. - The undershooting of targets was appropriate in view of the disinflation objective, as keeping M1+ growth in the originally-announced reference range would have implied a looser monetary stance. - In the converse case of higher-than-expected monetary demand, it would be preferable to avoid an overshooting of targets and hold on to the gains in lowering inflation. ### Operational implications and policy recommendations - There is a need to analyze the deviations of M1+ growth from the reference range and ensure that errors in predicting money demand do not get carried over. - The BCU has been working with the year-on-year growth rate of M1+, which allows abstracting from seasonality. - Setting a smooth path for year-on-year growth could lead to a carry-over of past errors in predicting money demand, as the growth rate is applied to the M1+ level one year ago. - Accepting some variability in money targets is essential to calibrate the policy stance appropriately—both to react to new shocks and to correct for past errors in predicting money demand. *Source: IMF staff analysis (Box 2).* ### Annex I. Uruguay: External Stability Assessment ### Annex I. Uruguay: External Stability Assessment ### Current Account Developments - Uruguay’s non-oil current account (CA) deficit widened in 2013 as weak external conditions, particularly in Argentina, hit the external services balance. - Historical and recent CA behavior: - Averaged -1.2 percent of GDP from 2002–11. - CAD widened significantly in 2012 due to a drought that necessitated higher oil imports for electricity generation. - Services balance averaged 3 percent of GDP in surpluses from 2009–12, declined to almost zero in 2013, and is projected to turn slightly negative in 2014. - Trade/goods developments: - Trade deficit improved in 2013 relative to 2012 due to lower oil imports, and is projected to shrink further in 2014 due to strong commodity exports and a lower oil import bill. - Merchandise trade statistics (in percent of GDP) — 2010, 2011, 2012, 2013, 2014 (four quarters through 2014Q3): - Trade balance: -1.4, -3.0, -4.7, -2.3, -1.8 - Exports: 20.7, 19.6, 19.8, 18.5, 19.1 - Imports: 22.0, 22.7, 24.5, 20.8, 20.9 - Fuel: 4.1, 4.3, 5.7, 3.7, 3.2 - Non-fuel: 18.0, 18.3, 17.2, 17.2, 17.9 - Capital: 3.7, 3.4, 3.1, 3.5, 4.0 - Consumption: 5.2, 5.3, 5.3, 5.1, 5.3 - Intermediary: 9.1, 9.6, 8.8, 8.7, 8.6 - Recent and projected current account deficits: - Current account deficit estimated at 4¾ percent of GDP in 2014. - Projected to decrease to 3¾ percent of GDP in 2015 (lower oil import bill projected to more than offset the impact of lower prices for many agricultural commodity exports). - Over the medium term, the CAD is projected to return to about 3½ percent of GDP as goods and services exports recover gradually. ### Capital Flows and Financing - FDI and other inflows: - FDI averaged 5¼ percent of GDP and more than financed Uruguay’s CAD most years between 2003 and 2013; estimated to have done so in 2014 as well. - Net portfolio investment inflows averaged 4 percent of GDP in 2011–13, but slowed to 2 percent of GDP in the 4 quarters through 2014Q3. - Other investment flows have been volatile and have not shown a clear trend. ### Exchange Rate Assessment and EBA Results - EBA current account model (based on data available as of October 2014): - Suggests a cyclically-adjusted current account “norm” of -3.2 percent of GDP for Uruguay. - Actual cyclically adjusted CA balance in 2014 is projected to be -3.3 percent of GDP, in line with the norm. - External stability and REER assessments: - Calculations based on the EBA external stability approach indicate that a current account of -1.3 percent of GDP would be required to stabilize Uruguay’s net foreign assets to GDP ratio in the medium-term. - Based on staff estimates of the relationship between the current account and the REER for Uruguay, the EBA current account and external stability results suggest Uruguay’s REER is between 0 and 5 percent above its norm. - An estimate using an EBA-like equilibrium real exchange rate regression suggests that Uruguay’s REER is 3 percent above its equilibrium value. - Note: Uruguay is not included in the official EBA REER regression due to data gaps; therefore, an auxiliary regression was estimated based on a cross-country sample, using an imputed series for Uruguay’s financial home bias. - Technical parameter: - The CA elasticity used to translate CA gap to REER gap is 0.415. ### External Stability Indicators and Reserves - Despite the relatively high CA deficit, external stability risks remain contained due to strong reserves and stable financing: - Uruguay’s international reserves remain comfortably above the upper bound of the IMF reserve adequacy metric range and other prudential benchmarks. - The sum of the foreign assets of the central bank and commercial banks exceeds the sum of foreign currency denominated bank deposits (resident and nonresident) and short-term external debt. - Given the strong level of reserves and the high contribution of relatively stable FDI inflows in financing the CAD, external stability risks remain contained. - Reserve and related metrics (values presented in source): - In billions of U.S. dollars (latest) 17.9 - In months of imports (2013) 14.6 - In percent of: GDP (2013) 32.2 - Short-term external (STE) debt (2013 Q4) 291.1 - STE debt and foreign currency deposits (2013 Q4) 67.1 - STE debt and nonresident deposits (2013 Q4) 174.7 - M2 (latest) 197.7 - M3 (latest) 72.8 - Memo items: - IMF's new reserve adequacy metric range in 5.8 to 8.7 US$, billions (2013 Q4) 1/ - Banks' gross foreign assets (US$, billions) 8.3 98.0 - Exchange Rate Assessment deviations from equilibrium (summary of approaches, deviation in percent; positive values indicate overvaluation): - I. EBA - Current Account Model: 2/ 4/0.2 - II. External Sustainability (ES) approach: 3/ 4/5.2 - III. Equilibrium Real Exchange Rate (ERER) approach: 5/3.2 - Source note included in calculations: Desk calculations and auxiliary regressions used for Uruguay (see staff calculations). ### Annex II — Uruguay’s Economic Ties with Argentina and Brazil - Argentina linkages: - The shares of Uruguay’s merchandise and service exports to Argentina have diminished in recent years but remain relevant. - The share of nonresident deposits (traditionally dominated by Argentine holders) in Uruguay’s bank deposits has fallen from a peak of 40 percent in 2001 to about 15 percent in 2014. - Argentina accounts for 60 percent of tourism spending in Uruguay. - Tourism and spending flows: - Spending by Argentine tourists in Uruguay dropped from 2.7 percent of GDP in 2011 to 2 percent in 2013 following the introduction of foreign exchange controls in Argentina. - Spending by Uruguayans in Argentina increased from 0.8 percent of GDP to 1.3 percent of GDP against the backdrop of a sharp depreciation of the Argentine peso. - Trade and FDI: - In 2013, Argentina accounted for 5 percent of Uruguay’s goods exports (1 percent of GDP), a historical low compared to an average of 10 percent of exports during the last two decades. - In 2009–12, FDI from Argentina accounted for about one-third of total FDI inflows into Uruguay (mainly into agriculture and real estate). Anecdotal evidence suggests a decline in real estate purchases by Argentines in 2013 following a bilateral tax information exchange treaty. - Brazil linkages: - Brazil remains an important trade destination and its share in tourism and FDI inflows has increased over the past decade. - Brazil’s share in Uruguay’s goods exports increased from 13 percent in 2005 to 19 percent in 2013. - Nature of exports: - Exports to Argentina are more specialized manufactured products without easy alternative markets; the majority of exports to Brazil are commodity-based and easier to redirect when growth slows in Brazil. - Tourism and FDI: - Brazil, combined with Chile and Paraguay, has accounted for around one-fifth of tourism receipts (0.8 percent of GDP) in recent years. - FDI inflows from Brazil increased from less than 1 percent in 2001 to almost 9 percent in 2012. *Sources: Banco Central del Uruguay and Fund staff calculations.* ### Annex III. Uruguay: Public Sector Debt Sustainability Analysis ### Annex III. Uruguay: Public Sector Debt Sustainability Analysis (DSA) ### Summary findings - Under current policies and macroeconomic projections, the gross debt of Uruguay’s public sector is projected to increase to 67 percent of GDP in 2019 from 62 percent of GDP in 2013. - High level of liquid financial assets of the public sector—26 percent of GDP at end-2013—along with high average maturity of public debt, mitigate near-term financing risks. - Gross financing needs exceed the DSA benchmarks because short-term central bank securities are included in the total public sector debt stock; the central bank’s debt is more than covered by its “free” reserve assets. - Net public debt—gross debt minus liquid assets—stood at 36½ percent of GDP at end-2013 and is projected to increase to 43 percent of GDP in 2019 under the baseline. ### Composition of the public sector financial balance sheet - Gross public sector debt institutional coverage includes: - Central government debt: 40 percent of GDP at end-2013; average maturity close to 15 years; about half of the debt is in local-currency. - Central bank debt: 17 percent of GDP at end-2013; mostly shorter-term securities (maturity below 2 years) issued to sterilize liquidity from reserve accumulation; about 85 percent of central bank debt is in local currency. - Public enterprises’ debt: 4 percent of GDP at end-2013. - Currency composition and indexing: - At end-2013 about 40 percent of public sector gross debt was in foreign currency. - About 70 percent of the local-currency debt of the public sector was in CPI-indexed units. - Assets and contingent lines: - Contingent credit lines: 3½ percent of GDP. - Total gross financial assets at end-2013: 38 percent of GDP. - Gross foreign reserve assets of the central bank: about 29 percent of GDP at end-2013. - Financial assets of the non-financial public sector: 5½ percent of GDP at end-2013 (aligned with prefunding policy to cover at least 12 months of interest and amortization). - Stock of liquid foreign assets of the public sector: 26 percent of GDP (total gross public sector assets minus required reserves held by BCU against foreign currency deposits and minus domestic currency claims of the nonfinancial public sector on resident banks). ### Baseline and alternative scenarios - Baseline projections: - Net public debt increases from 36½ percent of GDP in 2013 to 43 percent of GDP in 2019. - Gross public debt increases from 62 percent of GDP in 2013 to about 67 percent of GDP in 2019, assuming moderated asset accumulation and slower issuance of central bank securities. - Gross financing need rises over the medium term, consistent with higher global interest rates and a rising debt stock. - Baseline assumes maturity profile remains tilted to medium and long term, and share of local currency debt remains slightly above 50 percent of total. - Debt-stabilizing primary balance: - Assuming real GDP growth rate, real interest rates, exchange rate depreciation, and pace of asset purchases remain at levels projected for 2019, the medium term debt-stabilizing primary balance is estimated at about 1¼ percent of GDP, about 1½ percentage points of GDP above the projected medium term level of the primary balance. - Historical scenario: - A “historical” scenario (assuming key macro variables behave as in the last decade) yields a downward-sloping debt path due to high growth rates and exchange rate appreciation experienced in the last decade. ### Vulnerability of the financing profile - Gross public and external financing needs do not imply near-term vulnerabilities but are slightly above the benchmark level of 15 percent of GDP; elevated gross public financing needs primarily reflect short-term maturity of central bank securities. - Refinancing risks for central bank securities are contained because their amount is smaller than the central bank’s liquid foreign reserves. - External financing risks are mitigated by high liquidity buffers, including liquid public sector financial assets and contingent credit lines. - Current account deficits in recent years have been more than or mostly covered by FDI inflows; a softening in FDI flows would likely accompany a decline in capital goods imports, lowering current account deficits and external financing needs. - Public debt held by nonresidents: 53 percent of total public sector debt—slightly above the benchmark—and should be monitored as it could increase susceptibility to external shocks. ### Stress tests and sensitivity analysis - Stylized combined downside scenario: - Combines a permanent exchange rate depreciation of about 18 percent (relative to baseline) with a temporary drop in growth and primary balances and a permanent increase in real interest rates. - Result: gross debt ratio rises by about 16 percentage points over the five-year forecast horizon; net debt ratio rises by 12 percentage points in the same scenario. - Net debt is less sensitive to exchange rate shocks than gross debt because similar amounts of foreign currency assets and debt generate offsetting valuation effects. - Fan charts and predictive densities: - Under statistical distributions of combined shocks, gross public debt would remain below 80 percent of GDP in the vast majority of scenarios. - Under the combined shock scenario, net public debt would remain below 55 percent of GDP in the majority of scenarios. - Macro-fiscal stress test scenarios (selected assumptions preserved from source): - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock; scenario assumptions and outcomes are presented in stress-test figures and tables in the source. - Identified sensitivity metrics and benchmarks (as reported): - Benchmarks used include gross financing needs benchmark of 15 percent of GDP; public debt held by non-residents lower and upper benchmarks of 15 percent and 45 percent of total; share of foreign-currency denominated debt benchmarks of 20 and 60 percent; bond spread shocks of 200 and 600 basis points; external financing requirement shocks of 5 and 15 percent of GDP; change in share of short-term debt benchmarks of 0.5 and 1 percent. - Market perception indicators (as of January 09, 2015 excerpt): - EMBIG (bp): 232 - 5Y CDS (bp): 192 - Ratings: Moody's Baa2/Baa2 (Foreign/Local); S&P's BBB-/BBB- ; Fitch BBB-/BBB (Foreign/Local) - Historical and projection figures (selected series from DSA table): - Nominal gross public debt (percent of GDP): 2012: 76.3; 2013: 59.5; 2014: 62.1; 2015: 63.6; 2016: 64.3; 2017: 65.1; 2018: 65.5; 2019: 66.2; projection for 2019 in text: 66.9 (table entries vary by row and column labeling in source). - Public gross financing needs (percent of GDP): 2012: 12.9; 2013: 12.0; 2014: 13.4; 2015: 13.5; 2016: 17.1; 2017: 16.8; 2018: 18.8; 2019: 18.1; 2020/other columns: 20.9 (table entries as in source). - Net public debt (percent of GDP): 2012: 47.0; 2013: 37.2; 2014: 36.5; 2015: 37.6; 2016: 38.6; 2017: 39.7; 2018: 40.9; 2019: 41.9; table also shows 43.0 in projection column. - Real GDP growth (percent): 2012: 5.5; 2013: 3.7; 2014: 4.4; 2015: 3.3; 2016: 2.8; 2017: 2.9; 2018: 3.0; 2019: 3.3; projection repeated as 3.3 in summary rows. - Inflation (GDP deflator, percent): 2012: 7.8; 2013: 7.4; 2014: 7.6; 2015: 8.7; 2016: 7.8; 2017: 7.4; 2018: 7.0; 2019: 6.7; projection row shows 6.4 in later year. - Effective interest rate (percent): 2012: 5.4; 2013: 4.9; 2014: 5.3; 2015: 5.5; 2016: 5.9; 2017: 6.3; 2018: 6.2; 2019: 6.0; projection row shows 5.9 in final column. - Contribution to change in gross public debt (cumulative for projection horizon): change in gross public sector debt cumulative: -5.6 (2003-2011 actual), then per-year projections include 0.5, 2.7, 1.4, 0.7, 0.8, 0.4, 0.7, 0.6, 4.7 (table entries as provided). - Identified debt-creating flows (cumulative projected): -6.4, 0.6, 3.8, 1.7, 1.0, 1.6, 1.3, 1.7, 1.6, 8.9 (table entries as provided). - Automatic debt dynamics (cumulative series): -7.0, -2.6, 0.5, 1.4, 0.7, 0.8, 0.6, 0.4, 0.5, 4.4 (table entries as provided). - Interest rate/growth differential (series): -5.2, -1.9, -2.0, -1.8, -0.9, -0.6, -0.6, -0.7, -0.7, -5.4 (table entries as provided). - Other identified debt-creating flows (asset purchases series): 3.3, 3.1, 3.8, 0.0, 0.6, 0.9, 0.5, 1.0, 0.9, 3.9 (table entries as provided). ### Policy-relevant observations and monitoring points - Maintain prefunding policy to hold sufficient liquid assets to cover at least 12 months of interest and amortization payments (current non-financial public sector assets: 5½ percent of GDP). - Monitor share of public debt held by nonresidents (53 percent) as a potential channel for external shock transmission. - Continue managing central bank short-term securities issuance mindful of gross financing needs and reserve coverage. - Track FDI inflows and capital goods imports given their role in covering current account deficits and external financing needs. - Prepare contingency plans for combined shocks (exchange rate depreciation, growth slowdown, primary balance deterioration, and interest rate increases) given sensitivity shown in stress tests. *Source: Annex III. Uruguay: Public Sector Debt Sustainability Analysis, IMF staff estimates and calculations (as reproduced in the provided content).* ### Annex IV. Uruguay: External Debt Sustainability Analysis (DSA) ### Annex IV. Uruguay: External Debt Sustainability Analysis (DSA) ### Projections (Table A4.1 highlights) - Baseline: External debt (in percent of GDP) by year: - 2009: 51.3 - 2010: 47.5 - 2011: 40.0 - 2012: 40.3 - 2013: 42.9 - 2014: 44.5 - 2015: 44.4 - 2016: 42.2 - 2017: 44.5 - 2018: 44.4 - 2019: 43.8 - Debt-stabilizing non-interest current account 7/: -5.5 - Change in external debt (yearly, percent of GDP): - 2009: -7.7 - 2010: -3.8 - 2011: -7.5 - 2012: 0.3 - 2013: 2.6 - 2014: 1.6 - 2015: -0.1 - 2016: -0.2 - 2017: 0.4 - 2018: -0.1 - 2019: -0.7 - Identified external debt-creating flows (4+8+9) (percent of GDP): - 2009: -3.2 - 2010: -15.1 - 2011: -10.9 - 2012: -1.9 - 2013: -4.4 - 2014: -2.3 - 2015: -2.6 - 2016: -2.0 - 2017: -1.9 - 2018: -1.9 - 2019: -1.7 - Components (percent of GDP): - Current account deficit, excluding interest payments: - 2009: 0.6 - 2010: 1.9 - 2011: 3.0 - 2012: 5.1 - 2013: 5.0 - 2014: 3.6 - 2015: 2.4 - 2016: 3.4 - 2017: 3.7 - 2018: 2.9 - 2019: 2.8 - Deficit in balance of goods and services: - 2009: -1.5 - 2010: -1.6 - 2011: -0.2 - 2012: 2.5 - 2013: 2.3 - 2014: 1.6 - 2015: 0.5 - 2016: 0.7 - 2017: 0.5 - 2018: 0.4 - 2019: 0.2 - Exports (percent of GDP): - 2009: 24.9 - 2010: 27.6 - 2011: 28.1 - 2012: 25.6 - 2013: 25.5 - 2014: 27.0 - 2015: 26.1 - 2016: 26.1 - 2017: 26.1 - 2018: 26.5 - 2019: 26.7 - Imports (percent of GDP): - 2009: 23.4 - 2010: 26.0 - 2011: 27.9 - 2012: 28.1 - 2013: 27.8 - 2014: 28.5 - 2015: 26.6 - 2016: 26.7 - 2017: 26.8 - 2018: 26.8 - 2019: 26.9 - Net non-debt creating capital inflows (negative) (percent of GDP): - 2009: -4.3 - 2010: -5.9 - 2011: -5.5 - 2012: -4.8 - 2013: -5.7 - 2014: -5.8 - 2015: -5.3 - 2016: -4.9 - 2017: -4.7 - 2018: -4.4 - 2019: -4.0 - Automatic debt dynamics 2/ (percent of GDP): - 2009: 0.5 - 2010: -11.1 - 2011: -8.4 - 2012: -2.2 - 2013: -3.7 - 2014: 0.0 - 2015: 0.3 - 2016: -0.4 - 2017: -1.0 - 2018: -0.4 - 2019: -0.5 - Contribution from nominal interest rate: - 2009: 0.7 - 2010: 0.0 - 2011: 0.0 - 2012: 0.0 - 2013: 0.4 - 2014: 1.4 - 2015: 1.5 - 2016: 0.7 - 2017: 0.3 - 2018: 1.0 - 2019: 0.9 - Contribution from real GDP growth: - 2009: -1.4 - 2010: -3.4 - 2011: -2.9 - 2012: -1.4 - 2013: -1.6 - 2014: -1.4 - 2015: -1.2 - 2016: -1.1 - 2017: -1.2 - 2018: -1.4 - 2019: -1.4 - Contribution from price and exchange rate changes 3/: - 2009: 1.2 - 2010: -7.7 - 2011: -5.5 - 2012: -0.8 - 2013: -2.5 - 2014: (dots in source indicate not shown) - Residual, incl. change in gross foreign assets (2-3) 4/ (percent of GDP): - 2009: -4.5 - 2010: 11.3 - 2011: 3.4 - 2012: 2.2 - 2013: 7.0 - 2014: 3.8 - 2015: 2.5 - 2016: 1.7 - 2017: 2.3 - 2018: 1.8 - 2019: 1.1 - External debt-to-exports ratio (in percent): - 2009: 206.3 - 2010: 171.9 - 2011: 142.6 - 2012: 157.6 - 2013: 168.5 - 2014: 165.1 - 2015: 170.3 - 2016: 169.5 - 2017: 169.7 - 2018: 168.0 - 2019: 164.0 - Gross external financing need (in billions of US dollars) 5/: - 2009: 4.7 - 2010: 6.1 - 2011: 7.5 - 2012: 8.1 - 2013: 8.9 - 2014: 9.2 - 2015: 9.0 - 2016: 8.5 - 2017: 9.7 - 2018: 9.8 - 2019: 10.1 - Gross external financing need (in percent of GDP): - 2009: 13.3 - 2010: 15.6 - 2011: 16.4 - 2012: 15.4 - 2013: 16.7 - 2014: 17.4 - 2015: 16.5 - 2016: 14.9 - 2017: 16.1 - 2018: 15.5 - 2019: 15.0 ### Scenario with key variables at their historical averages - Scenario label: 10-Year historical averages presented (ten-year) - Scenario summary line (single-line entry shown): 10-Year 44.5 37.7 31.2 26.0 20.8 15.7 -7.6 ### Key Macroeconomic Assumptions Underlying Baseline (selected series) - Real GDP growth (in percent): - Historical: 2.4 - Baseline series by year: 8.4, 7.3, 3.7, 4.4, 5.5, 2.0, 3.3, 2.8, 2.7, 2.9, 3.2, 3.3 - GDP deflator in US dollars (change in percent): - Historical: -2.0 - Baseline series by year: 17.7, 13.2, 2.1, 6.7, 10.6, 7.4, -4.2, 1.1, 1.9, 2.4, 2.2, 2.1 - Nominal external interest rate (in percent): - Historical: 1.2 - Baseline series by year: 0.0, 0.0, 0.0, 1.2, 0.9, 0.7, 3.3, 3.5, 1.6, 0.6, 2.3, 2.1 - Growth of exports (US dollar terms, in percent): - Historical: -7.0 - Baseline series by year: 23.0, 20.0, 4.1, 1.2, 16.9, 14.5, 4.6, 0.5, 4.6, 6.0, 6.3, 6.4 - Growth of imports (US dollar terms, in percent): - Historical: -20.7 - Baseline series by year: 23.2, 26.7, 14.9, 0.7, 20.0, 19.9, 1.5, -3.3, 5.3, 5.5, 5.7, 5.8 - Current account balance, excluding interest payments (percent of GDP): - Historical: -0.6 - Baseline series by year: -1.9, -3.0, -5.1, -5.0, -2.0, 2.6, -3.6, -2.4, -3.4, -3.7, -2.9, -2.8 - Net non-debt creating capital inflows (percent of GDP): - Historical: 4.3 - Baseline series by year: 5.9, 5.5, 4.8, 5.7, 5.4, 1.6, 5.8, 5.3, 4.9, 4.7, 4.4, 4.0 ### Notes and definitions (as presented) - 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/ Contribution from price and exchange rate changes 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/ Key variables for historical-average scenario: real GDP growth; nominal interest rate; dollar deflator growth; non-interest current account and non-debt inflows in percent of GDP. - 7/ Long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year. ### Bound tests and shock outcomes (Figure A4.1 highlights) - Baseline external debt (percent of GDP): 44 - Interest rate shock result (label shown): 45 - Historical (label shown): 16 - Baseline and historical scenarios: Baseline 44; Historical 16 - CA shock (label shown): 50 - Combined shock (label shown): 48 - Real depreciation shock (one-time 30 percent depreciation occurs in 2010) (label shown): 66 - Growth shock (label shown): 46 - Gross financing need under baseline shown on the right scale (no single numeric series extracted beyond earlier gross external financing need values) - Figure notes: - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks. - Ten-year historical average for the variable is shown. - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. *Source: Annex IV. Uruguay: External Debt Sustainability Analysis (DSA), IMF staff report content as provided.* ### 7. Uruguay Integrated Urban ### 7. Uruguay Integrated Urban ### Relations with the Inter-American Development Bank (IDB) - IDB Country Strategy with Uruguay (2010–15) approved August 2011; sovereign-guaranteed lending under the program is expected to reach approximately US$1.8 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 September 30th 2014: - IDB portfolio in Uruguay includes loans for the financing of 45 projects; five are without sovereign guarantee. - The 5 loans earmarked towards the private sector account for US$494 million (22 percent of the approved amounts). - The lending portfolio amounts to US$2,249 million, of which US$1,379.8 million are pending disbursement. - One operation amounting to US$550 million is a contingent line of credit that would only be disbursed in case the government needs it. - Disbursements in 2014 for sovereign loans are expected to total US$176 million. - US$58.8 million has already been disbursed this year for private loans. - Sectoral composition of the current portfolio (percent of the approved amounts): promotion of exports and investments 32.5 percent; water and sanitation 19.2 percent; urban development and citizenship security 12.2 percent; energy 11.4 percent; institutional capacity and finance 8.3 percent; transport 5.7 percent; other sectors (labor training, science and technology, agro-industry and social protection) 10.7 percent. - In 2014, the Bank approved loans to the public sector for approximately US$392.5 million in areas including integration, financial and budget public management, education, water and sanitation, productive infrastructure (mainly in the renewable energy sector), and innovation and productive development. ### Financial relations (IDB loan transactions, summary) - Total outstanding loans: US$1,755.2 (As of September 30, 2014). - Selected annual loan transaction figures (Disbursement / Amortization / Net Loan Flows): - 2005: Disbursement 242.3; Amortization 222.3; Net Loan Flows 20.0 - 2006: Disbursement 114.8; Amortization 520.8; Net Loan Flows -406.0 - 2007: Disbursement 112.9; Amortization 142.1; Net Loan Flows -29.2 - 2008: Disbursement 337.2; Amortization 138.7; Net Loan Flows 198.5 - 2009: Disbursement 477.3; Amortization 162.0; Net Loan Flows 315.3 - 2010: Disbursement 54.3; Amortization 465.1; Net Loan Flows -410.8 - 2011: Disbursement 138.2; Amortization 115.4; Net Loan Flows 22.8 - 2012: Disbursement 121.6; Amortization 120.7; Net Loan Flows 0.9 - 2013: Disbursement 195.9; Amortization 591.7; Net Loan Flows -395.8 - 2014 (preliminary): Disbursement 174.9; Amortization 97.8; Net Loan Flows 77.1 ### Statistical Issues and Data Adequacy (as of January 27, 2014) - Overall assessment: Data provision has some shortcomings, but broadly adequate for surveillance. Most affected area is national accounts. - National Accounts—shortcomings: - 2009 revision updated benchmark year (from 1983 to 1997 and 2005) and adopted SNA 1993, but issues remain: limited coverage of the enterprise survey; partial update of business register; poor quality source data for some GDP components; inadequate information on the informal economy; incomplete quarterly accounts. - About 60 percent of the GDP calculation is based on fixed input-output ratios from 1997. - Household consumption is not independently derived; changes in inventories are obtained as residuals. - Household income and expenditure survey conducted every ten years. - Central bank (BCU) compiles and disseminates annual but not quarterly GDP by the expenditure approach at current prices; does not compile annual integrated economic accounts by institutional sector (income account). - Detailed national accounts data are only available up to 2008; long-time series not available on BCU website. - No regular schedule for updating base year; causes of revisions to quarterly national accounts not explained to users. - Need to plan for adoption of 2008 SNA and updating of base year. - Prices: - CPI base period: December 2010 = 100; CPI has national coverage and includes more than forty thousand price quotations; does not cover implicit rent or net acquisitions of owner-occupied dwellings. - Reselection of CPI sample of detailed products not done for an extended period. - Wholesale price index base updated to 2001. - Producer price indices (March 2010 = 100) for national products recently disseminated; PPI does not cover utilities, construction, business and other services and exported output. - Authorities do not provide trade price and volume indices for publication in IFS. - CPI and PPI statistical outputs/intermediate results are not validated with alternative sources; weight updates would benefit from a more regular and frequent schedule. - Government Finance Statistics: - Official data on central administration, state enterprises and social security system are complete and current; timeliness problems for local governments and financing/debt data reported for Fund publications. - Monthly and quarterly financing and debt data are disseminated on BCU website from 1999 onwards for central government and total public sector, but not reported for IFS publication. - GFS Yearbook data cover consolidated central government revenue and expense; local government revenue and expense not reported since 1994. - Monetary and Financial Statistics: - Prepared in accordance with IMF's 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. - Suggestion: field mission to expand institutional coverage of OFCs and compile SRF for OFCs with full institutional coverage. - Financial Sector Surveillance: - Authorities participate in CDIS, CPIS and FSI databases. - FSIs on non-financial corporations, households, market liquidity and real estate markets are not available. - BCU disseminates FSIs for individual banks monthly; staff estimates FSIs for banking system by weighting individual bank FSIs by asset share. - External Sector Statistics: - Balance of payments compiled and published quarterly following BPM5 recommendations; Uruguay reports quarterly BOP and annual IIP for publication in IFS and BOP Statistics Yearbook. - New surveys improving private sector coverage in the IIP. - Uruguay started disseminating the international reserves and foreign currency liquidity data template in 2005; BCU disseminates quarterly external debt statistics in SDDS format on NSDP. - Data standards: - Uruguay subscribed to the SDDS in February 2004 and is in observance. - Data ROSC published October 1, 2001. - Data reassessment ROSC on CPI, PPI and NA published February 2014. - Reporting to STA: - Annual GFS regularly reported to STA for GFS Yearbook; no high frequency GFS reported for IFS. ### IMF Article IV Consultation—Recent Developments, Outlook, and Executive Board Assessment (Press Release No. 15/77, February 26, 2015) - Recent developments: - Real GDP growth estimated to have softened to 3¼ percent in 2014 from 4½ percent in 2013. - Current account weighed down by weaker external environment, particularly services. - Surge in inflows to local securities market abated; Uruguayan peso depreciated towards levels broadly consistent with fundamentals. - Inflation above central bank target range of 3–7 percent: consumer price inflation receded to 8¼ percent at end-2014 after near 10 percent in early 2014. - Drivers of above-target inflation: shrinking but still positive output gap, upward shocks to food and fuel prices in 2010–13, pervasive backward-looking wage indexation. - Monetary policy tight; fiscal policy slightly expansionary in 2014. - Peso yield curve remained 400–600 basis points above inflation; credit growth slowed markedly. - Public sector spending grew faster than real GDP in 2014; 2015 budget will generate a fiscal withdrawal of about ¾ percentage point of GDP, mostly by slowing spending. - Bank resilience and vulnerabilities: - Bank resilience indicators generally strong but less so than a few years ago. - Foreign currency credit to borrowers in nontradables sector increased as share of total credit. - Banks’ capital buffers declined somewhat; share of nonperforming loans inched up in 2014 from a low level. - Deposit dollarization remains elevated. - Outlook and projections: - Economic activity projected to decelerate further but remain solid. - Growth projected to shift down to about 2¾ percent in 2015. - Inflation projected to decline gradually to within target range over medium term as monetary policy remains tight, output gap closes, and retail gasoline prices decline. - Net public debt projected to crawl up to 43 percent of GDP in 2019 from 36½ percent in 2013, with primary balance remaining below level required to keep debt constant. - Key risks: - Uncertainties regarding global and regional growth and U.S. monetary policy normalization. - Vulnerabilities from high shares of nonresident holdings of public debt and foreign currency denominated bank credit to borrowers in nontradables sector. - Executive Board assessment—main conclusions and recommendations: - Uruguay is decelerating gradually after a decade of strong and inclusive growth; export receipts growing at a markedly lower clip, domestic demand slowing. - Above-target inflation and weakened primary fiscal balance in 2014. - Multi-dimensional disinflation strategy recommended: - Maintain monetary policy stance tight enough to keep inflation on a downward trend. - Move towards tighter fiscal policy. - Reduce backward-looking component of wage setting to temper inflation persistence. - Bolster central bank’s influence on inflation expectations through well-crafted communication efforts. - Enhanced central bank autonomy would be beneficial. - Fiscal recommendations: - Upcoming five-year budget is an opportunity to reinforce fiscal sustainability. - Improving the primary fiscal balance by about 2 percent of GDP over the medium term would help ensure net public debt is put on a firmly declining path. - This improvement could be achieved by keeping spending growth moderately below potential GDP growth over the next five years and modestly increasing revenues. - Financial sector recommendations: - Continue close monitoring of exposures to exchange rate depreciation risks. - Strengthen risk weights for foreign currency loans to unhedged borrowers. - Incorporate greater exchange rate stress into supervisory stress tests. - Require banks facing capital shortfalls in stress tests to submit contingent capital plans for approval by the Superintendency of Financial Services. - Measures to assist financial deepening could enhance growth and social inclusion. - Medium-term growth challenge: - Bolster strong growth in the medium run to continue deepening Uruguay’s social gains. - Incoming government commitments highlighted as welcome: boost infrastructure investments; revamp secondary education and skill formation for youth; foster innovation-friendly business environment. ### Selected Economic Indicators (highlights from Table 4) - Real GDP (percent change): 2010 8.4; 2011 7.3; 2012 3.7; 2013 4.4; 2014 3.3; 2015 (projection) 2.8; 2016 2.7; 2017 2.9; 2018 3.2; 2019 3.3 - GDP (US$ billions): 2010 38.9; 2011 47.2; 2012 50.0; 2013 55.7; 2014 55.1; 2015 57.3; 2016 59.9; 2017 63.1; 2018 66.6; 2019 70.2 - Unemployment (percent, eop): 2010 7.0; 2011 6.3; 2012 6.3; 2013 6.5; 2014 6.5; 2015 6.8; 2016 7.0; 2017 7.0; 2018 7.2; 2019 7.2 - CPI inflation (percent, average): 2010 6.7; 2011 8.1; 2012 8.1; 2013 8.6; 2014 8.9; 2015 7.9; 2016 7.5; 2017 7.1; 2018 6.7; 2019 6.5 - Exchange rate (UY$/US$, average): 2010 20.1; 2011 19.3; 2012 20.3; 2013 20.5; 2014 23.2 - Base money (percent change, end-of-year): 2010 16.2; 2011 17.3; 2012 26.7; 2013 12.9; 2014 2.7 - M2 (percent change): 2010 30.3; 2011 22.0; 2012 12.3; 2013 11.6; 2014 5.4 - Growth of credit to households (in real UY$): 2010 15.8; 2011 2.1; 2012 7.3; 2013 9.9; 2014 6.4 - Growth of credit to firms (in US$): 2010 18.8; 2011 26.5; 2012 17.5; 2013 16.2; 2014 8.4 - Bank assets (percent of GDP): 2010 58.2; 2011 60.2; 2012 58.5; 2013 62.8; 2014 66.6 - Private credit (percent of GDP): 2010 23.1; 2011 23.4; 2012 24.0; 2013 26.9; 2014 26.8 - Foreign bank market share (percent of total loans): 2010 54.1; 2011 56.0; 2012 56.6; 2013 59.3; 2014 62.3 - Revenue (percent of GDP, non-financial public sector excluding local governments): 2010 29.8; 2011 28.5; 2012 28.4; 2013 30.4; 2014 30.3; projections 2015 30.2 to 2019 29.8 - Non-interest expenditure (percent of GDP): 2010 28.5; 2011 26.8; 2012 28.7; 2013 30.1; 2014 30.7; projections 2015 29.9 to 2019 30.1 - Primary balance (percent of GDP, total public sector): 2010 1.6; 2011 2.0; 2012 -0.2; 2013 0.4; 2014 -0.4; projections 2015 0.3 to 2019 -0.3 - Overall balance (percent of GDP): 2010 -1.5; 2011 -0.9; 2012 -2.8; 2013 -2.4; 2014 -3.3; projections 2015 -2.8 to 2019 -2.9 - Gross public sector debt (percent of GDP): 2010 61.6; 2011 59.0; 2012 59.5; 2013 62.1; 2014 63.6; projections 2015 64.3 to 2019 66.9 - Public sector debt net of liquid financial assets (percent of GDP): 2010 40.2; 2011 37.0; 2012 37.2; 2013 36.5; 2014 37.6; projections 2015 38.7 to 2019 43.0 - Merchandise exports, fob (US$ millions): 2010 8,031; 2011 9,274; 2012 9,916; 2013 10,291; 2014 10,934; projections 2015 10,985 to 2019 13,377 - Merchandise imports, fob (US$ millions): 2010 8,558; 2011 10,704; 2012 12,277; 2013 11,593; 2014 11,743; projections 2015 11,245 to 2019 14,223 - Current account balance (percent of GDP): 2010 -1.9; 2011 -2.9; 2012 -5.4; 2013 -5.2; 2014 -4.8; projections 2015 -3.7 to 2019 -3.5 - Foreign direct investment (percent of GDP): 2010 5.9; 2011 5.3; 2012 5.1; 2013 5.4; 2014 5.5; projections 2015 5.0 to 2019 3.8 - Overall balance of payments (US$ millions): 2010 -361; 2011 2,564; 2012 3,287; 2013 2,945; 2014 1,667; projections 2015 666 to 2019 961 - Total external debt + non-resident deposits (percent of GDP): 2010 47.5; 2011 40.0; 2012 40.3; 2013 42.9; 2014 44.5; projections 2015 44.4 to 2019 43.8 - Gross official reserves (US$ millions): 2010 7,655; 2011 10,302; 2012 13,604; 2013 16,279; 2014 17,946; projections 2015 18,612 to 2019 21,669 - In months of imports of goods and services: 2010 9.1; 2011 9.7; 2012 11.1; 2013 13.2; 2014 14.3; projections 2015 15.4 to 2019 14.4 *Source: IMF staff report content as contained in chapter "7. Uruguay Integrated Urban" of the provided IMF document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1581.pdf_