Five Takeaways from Uruguay's Economic Outlook

IMF News, February 22, 2019

Source details

Over the last decade and a half, Uruguay’s economy has been resilient—helping to reduce poverty and raise incomes to one of the highest levels in the region.
Recent moderation in growth reflects low private investment and net exports turning negative.
Consumption continued to support domestic demand, while private investment has remained sluggish.
A severe drought in the first quarter of 2018 led to lower yields of summer crops (particularly soybeans).
Growth is projected to be close to 2 percent in 2018 and 2019.
Growth is expected to recover in 2020 to 3 percent, reflecting a combination of weakness in demand from regional partners and the expected rebound in agriculture and investment.

Maintaining Uruguay’s strong track record—built on sound institutions and economic policies—will be needed to weather the worsening external environment.
As a small open economy, Uruguay is vulnerable to changes in global market sentiment and regional spillovers.
Elements of strong economic policy cited as helpful include:
- diversifying exports and destinations
- prudent debt management
- pre-financing of external financing needs
- lower banking sector vulnerabilities
- ample reserves

Putting debt on a downward path can help contain fiscal risks.
A reduction in the government’s overall budget deficit, which should come from reducing the elevated level of current expenditures, would help to put debt on a firm downward path.
Utility tariffs should be adjusted in line with the cost structure and investment needs of public enterprises.

Starting in mid-2018, inflation had risen above the target range, reflecting the impact of drought and peso depreciation.
Inflation currently stands at 7.4 percent.
Bringing inflation down closer to the middle of the target range is important to anchor inflation expectations.
The monetary policy stance should continue to be adjusted until inflation and expectations approach the middle of the target range (5 percent).

Structural policies can help to ensure incomes continue to catch up to advanced economy levels.
Policy actions suggested include:
- creating more government budgetary spending room to further invest in infrastructure—for example, the recent railways project
- reforming the education sector to better equip job seekers for the technology-driven labor market
- supporting private investment by improving the overall business environment and access to finance

Source: Five Takeaways from Uruguay's Economic Outlook (February 22, 2019).