The terrorist attack of Hamas in Israel has generated a significant global commotion, which adds to the conflict scenario in Ukraine and other latent problems in other parts of the world, with a significant impact on the global economy.
Beyond these serious problems, the financial conditions World Cups have entered a new scenario, which has not been known for many years. Due to the impact of the thrust of inflation After the pandemic – accentuated by the conflict in Ukraine and the rise in several international prices – the main developed countries and also many developing countries had complicated episodes of inflationwhich were fought with increases in interest rates.
In USA -main world economy- the fight against inflation continues and everything indicates that, due to the recent dynamics of prices and a better than expected economic performance, the interest rate will remain high for longer than expected. Specifically, the 10-year US bond rate, which is the global benchmark in terms of financial performance, has approached 5%, something that has not happened since 2006.
Shortly after that year the mortgage crisis, from which the US emerged with a great monetary expansion with an interest rate at zero. It began to emerge from that scenario around 2018, but the outbreak of the pandemic led to a new episode of monetary expansion and a drop in the interest rate to zero, to overcome the health crisis and its impact on global activity. Only now the USA face a firm restrictive monetary policy to lower the inflation, with the margin provided by an economy that – at least until now – has been firmer than expected. American finances are far from being in a robust situation: the expansion of spending has led the fiscal deficit at worrying levels, such that the US recently lost its highest rating investor grade by the rating agencies, with warnings about the aforementioned fiscal situation.
How is Uruguay standing in the new global financial scenario?
In this context, it is key to ask how Uruguay enters this new scenario of higher interest rates globally. In the tour of the main debt indicators of the Uruguayan State (table), the figures are positive and consistent with the investment grade that the country has, which has even had recent improvements in the grades of the main rating agencies. After spending several years on the first step of the investment grade, Uruguay has risen one more step or two, depending on the rating agency considered.
Firstly, 95% of Uruguayan debt is in fixed rate securities. This means that the recent rise in the global interest rate does not have an immediate impact on the interest account. Of course, the average rate will rise as debt matures and is renewed, but that is a gradual process and manageable by the good offices of the Debt Management Unit of the Ministry of Economy and Finance (MEF), which has stood out for its good management. The average dollar rate you pay Uruguay For titles in that currency they are today around 5% and will surely go up, but with the risk country At historic lows the rise should not be large.
Secondly, the Uruguayan debt has a long-term maturity profile, which also allows for orderly management without pressure (day and night compared to Argentina). The average maturity period is 12.6 years, and although it has been reduced a couple of years in recent times, this is mainly due to the fact that more debt has been placed in pesos at terms that are the highest in history for debt. in national currency. And there is another factor of strength in the structure of Uruguayan debt: the percentage in foreign currency does not exceed 45%, an indicator that has continued to improve in recent years, as seen in the attached table. We must remember that – since the pandemic broke out – Uruguay It has entered the global market with debt securities on four occasions, in three of which the issuance was in national currency.
yellow lights
This entire panorama does nothing other than highlight the good foundations of the Uruguay regarding debt management. However, not all are glories: due to the effect of the pandemic and previous and current growth problems, the Uruguayan debt had significant growth in relation to the GDP. He fiscal deficit close to 6% in 2020, and subsequent years that continued to accumulate deficits led to a significant increase, both in the indebtedness gross and net.
This increases the debt interest burden on the State budget. Measured as a percentage of GDP, this burden has been decreasing (it is at 2.6% of GDP) because -precisely- there has been a gradual process of debt renewal at lower rates in recent years, consistent with the investment grade. But the aforementioned increase in the global interest rate with which we began this analysis will begin to have an impact and interest costs (expenses) will increase “automatically”, which will imply greater pressure on the future resources that the State can count on. If we add to that a fiscal situation that has become increasingly uncomfortable (the deficit is at 4% of GDP), a logical concern arises.
In the coming months, Uruguay It will have to go out again to the global markets and will have to “compete” with US securities that now pay much more. Those who know the financial markets and structure issues also know that -beyond the ratios and ratings of the rating agencies- there is a question of volume: if the renewal and debt needs become greater because the debt is larger, that may imply (at least on the margin) accept more interest rate. The expertise of those who manage debt will become increasingly relevant.
Beyond this, what is essential is the fiscal level: the global context has become more difficult and political decision-makers must incorporate it and rise to the occasion. Because in the long run, the country’s investment grade and financial stability are based on responsible policies, even if they are not nice. If we are concerned about Social situation current and particularly that of future generations, the sustainability of public finances and debt are key.
Source: Ambito
