The Standard & Poor’s report highlights that good inflation control can lead to another improvement in the note. Is it possible if the expectations of the Central Bank are met?
He Central Bank of Uruguay (BCU) updated its inflation projections for the next two years in the Monetary Policy Report (IPoM) corresponding to the first quarter of 2023 and, in addition to presenting a more optimistic scenario regarding the increase in prices in the country, opened the doors to a new possible improvement in the credit rating by Standard & Poor’s (S&P).
Inflation closed 2022 at 8.2%, but it is getting closer and closer to 7%. According to the BCU, this will be the floor at which the year ends but, already in the second half of 2024, the indicator will fall to below 6%. So, In March 2025, inflation is projected at 5.3%. These expectations were adjusted downwards with respect to the previous Report, and differ by up to 3 points from what the financial markets expect according to a survey by the same Central Bank —they expect 7.83% inflation in March 2025.
This new projection of the monetary authority is not only positive by itself —above all, in the event that it is actually fulfilled—; It also opens the possibility that the S&P rating agency, which recently raised the country’s credit rating to its all-time high, improves it again.
Why could Uruguay’s credit rating improve?
“We can raise Uruguay’s ratings in the next two years if we see a successful track record of reducing inflation from the average of 7% of the last two decades and a sustained decrease in inflation expectations”, says the S&P report in which they announced and justified the upgrade of the Uruguayan note from BBB- to BBB+.
So, if the BCU projections occur and manage to be maintained during the next two years —as long as the fiscal deficit is also kept under control after the recent correction—, it is feasible that the agency decides return to support the Uruguayan economy with a new improvement of the credit note.
This is important for the country since it allows keeping financing costs low and interest payments on controlled values; All of which contributes directly to being able to continue working on reducing the fiscal deficit and a better redistribution of State resources towards other priority areas.
In this sense, the economist aldo motto He explained on social networks that “Uruguay should maintain a credit rating at least 2 notches above the minimum investment grade as a means to pay less interest on debt and free up resources for social policies.” Especially in a context that has been hit hard by the historical drought, where more and more people require some type of state assistance while income from the main export agricultural products is reduced by lower levels of placement.
Meanwhile, Uruguay is still awaiting potential credit enhancements from Moody’s and fitch, that they could follow the example of S&P in the medium term, after the Accountability of June.
Source: Ambito
