The government’s economic team saved with a good note the evaluation of its conduct by the International Monetary Fund (IMF). In the last statement of the technical staff on a consultation mission of the Article IVdisclosed in the last few hours, highlights that “the solid track record of the authorities in the implementation of correct macroeconomic policies -in an uncertain context- has improved the resilience of the country to shocks”.
The document adds that “a solid record of compliance with the objectives of the fiscal rule and the creation of the Fiscal Advisory Councilstrengthened the credibility of the authorities’ commitment to fiscal prudence and helped improve market access”.
The IMF assessment comes at a time when the global economy is reducing its growth and the main central banks are increasing interest rates to combat the inflation. This can have negative consequences, particularly for emerging or developing economies that have financial vulnerabilities.
In this regard, Uruguay stands out in the region for having maintained its investment grade and a level of risk country very low. Prior to the break of the Silicon Valley Bank (SVB) the country risk fluctuated around 90 basis points; now it rose to a range of 110-120 points, still historically very low.
Support for monetary policy
Despite the claims from business unions and the recognition of the president himself Luis Lacalle Pou that him dollar is excessively low (“exchange rate lag”) the IMF supported the decisions of the central bank on the monetary level.
According to the report, “the peso appreciated 20% in real terms, due to interest rate differentials, favorable terms of trade, and greater liquidity in dollars. To support its strategy to improve the monetary policy framework, the BCU has not intervened in the exchange market, which has helped provide clarity on the objectives of monetary policy.” With this approach, the The Fund is backing the BCU to prioritize the fight against inflation, even at the cost of a loss of competitiveness.
He then adds that the BCU “should maintain the current contractive bias until inflation and inflationary expectations have converged in a sustained manner within the target range, which will strengthen the credibility of monetary policy”. Inflation in Uruguay is falling, but the latest annual data places it at 7.5%, one point and a half above the upper limit of the target range (3-6%).
debt warning
In another passage of the report, the agency’s technicians acknowledge that “the efforts of the authorities to reduce debt after the pandemic are commendable, although the debt-to-GDP ratio is at historically high levels.” recommends bring the debt of the Non-Financial Public System to a range of between 50 and 55% of GDP. Today the relationship between the gross debt of the Non-Monetary Public Sector and the GDP is 62%, after the increase in the deficit due to the pandemic (graph).
Currently, the Uruguayan State pays the equivalent of some US$1.7 billion in debt interest, most of which corresponds to the Non-Financial Public Sector. 47% of public debt is in dollars and 94% is at a fixed rate with an average maturity of 12.3 years. This reduces vulnerability to the current rate increase at the international level. The average rate in dollars paid by Uruguay is 5%, according to the MEF.
Banks
Within the framework of the uncertainty generated at a global level by the cases of BLS and Credit Suisse, among others, the IMF report highlights that the liquidity reserves of banks in Uruguay “are more than sufficient to withstand strong financing pressures while contagion risks appear to be limited.” Even so, he advocates continuing to strengthen the sector’s macroprudential framework.
The report adds that “banks’ profitability decreased in 2022 due to exchange rate appreciation and a positive net open position in foreign currency.” According to the agency, the high degree of dollarization reduces the effectiveness of monetary policy and aggravates credit risks in foreign currency and systemic liquidity. In Uruguay, 73% of bank deposits are in dollars, and 91% of them are at sight.
Source: Ambito
