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Sunday, April 2, 2023

The CFA warned about the risks of an exchange rate adjustment

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In the presentation of the report on the calculation of the Structural Fiscal Result of 2022the member economists of the CFA explained that although in the Uruguayan fiscal rule “there is nothing related to a prudent level of debt” as it is determined by the fiscal rules of other countries, “there is a target ratio of debt to Gross Domestic Product (GDP)”.

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This would happen because the GDP in dollars would be lower than the current one and, therefore, the relationship between debt and GDP would be somewhat higher.

An advice without other intentions

Likewise, the CFA clarified that the warning against an exchange readjustment does not go against the sectors that ask for a rise in the dollar to achieve greater competitiveness, but seeks to point out “the BCU’s finding” and its warning that “the real exchange rate is below its fundamental value.”

This assumes that Uruguay’s GDP in dollars in 2022 “is above the fundamental value of the real exchange rate”, and that “could be cushioning” the relationship between debt and the economy. In this regard, the Council noted that this does not mean the impossibility of correcting the real exchange ratebut the consequent scenario of debt sustainability that may be cushioned by GDP in high dollars must be taken into account.

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In this sense, the risk exhibited in the report “is simply to verify that this can happen”, but it does not affect the fiscal rule, although it is observed by risk rating agencies and by market participants in general at an international level.

Source: Ambito

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