He Central Bank of Uruguay (BCU) continues to observe the future of the economic situation in Argentina and how this could impact the local scenario, as indicated in the last Monetary Policy Report (IPoM)where it particularly points to the situation in the neighboring country after the ballot that will define who will be the next president and who should take charge of the macroeconomic corrections urgent.
That Uruguay look towards Argentina It is not new, especially considering the proximity of both economies and the impact that measures taken on the other side of the world can have. Silver river —and, in fact, they already have today. In that sense, the BCU dedicated several paragraphs analyzing the international and regional context to the neighboring country.
“Argentina is heading towards the second round of the general elections,” said the monetary authority, and pointed out what the challenges will be for the government that takes office on December 10: “The government that takes office for the new period will face initial conditions with limited room for maneuver and will impose the need to stabilize the macroeconomic variables in the first months of the administration, as a necessary condition prior to the introduction of the agenda of structural reforms that you intend to implement.”
This situation will occur in a scenario of high inflation —the last two months presented double-digit figures—; a fiscal deficit above the goal agreed with the International Monetary Fund (IMF); the devaluation intensified in parallel exchange markets; the consequent impact on the economic activity; and the minors resources to face these challenges.
Why does the BCU warn about the Argentine situation?
Just as the economic crisis in Argentina It is no longer surprising on this side of the border, nor is the impact that the situation in the neighboring country has on the local economy is new news. On the one hand, historically – with the recent memory of the outbreak of 2001 and 2002, although the country’s political and economic authorities insist on the “decoupling” achieved in recent years; and, on the other, by the events that have been observed for months.
The most relevant for the national economy is the drop in tax collectionwhich achieved only two positive months during the year—January and May—and in August it fell again, accumulating a decline of 2.1% in 2023.
The explanation behind the lower collection of the General Tax Directorate (DGI) It is found, mainly, in the fall in consumption taxes: VAT and Imesi. This, in turn, is due to diversion of internal consumption that the country is experiencing, with hundreds of Uruguayans crossing the border to acquire cheaper goods and services in Argentina, from the exchange difference which deepens the structural price gap between both countries.
In turn, the real exchange rate in Uruguay reached its lowest levels in the last 23 years, according to a study by the Catholic University of Uruguay (UCU), which directly harms the country’s business and industrial competitiveness. As to Argentina, The exchange rate was 14% below the official dollar and 58% compared to the Dolar blue. This situation would remain stable, although with less rapid progress than has been observed, as indicated by the Central Bank in the Report.
For these reasons, for the BCU it is not only important to analyze what is currently happening in Argentina, but also consider what the most likely scenario will be once the electoral climate that deepens uncertainty in the neighboring country is overcome. Above all because, depending on how the next Argentine government addresses the problems its economy is going through, Uruguay will suffer more or less the consequent effects.
In the best of cases, the future government will quickly manage to bring the economy back into balance—possibly at the cost of an adjustment for the Argentine population—which would be beneficial for Uruguay in terms of the exchange difference and the lesser deviation of internal consumption towards the neighboring country. In any case, the scenario of devaluation It will not be easy to avoid, and its consequences will be felt on this side of the border.
Source: Ambito
