The percentage of debt in local currency in the total debt of the State of Uruguay reached the all-time high of 55.9%in line with the debt management strategy carried out by the Ministry of Economy and Finance (MEF).
The Debt Management Unit (UGD) of the MEF published the Sovereign Debt Reportwhich contains encouraging and historic data for the country: the percentage of debt in local currency reached 55.9%, the highest level recorded so far, driven by a greater financing in pesos both in the domestic and international markets; as well as the effect of relative prices.
As indicated by the UGD in the quarterly report corresponding to November and published yesterday, the government “continued to take significant steps in the dedollarization of the debt structure, reducing vulnerability to volatility of the currency.”
These results are framed within the debt management strategy that the MEF has been carrying out as a pillar of the debt policy, through the special issuance of domestic debt in the form of Treasury Notes in Indexed Units (UI)in nominal pesos (UYU) and in Previsional Units (UP).
In turn, it is part of the recommendations that the board of directors of the International Monetary Fund (IMF) made for the country in its annual evaluation, in terms of moving more quickly towards the de-dollarization of the economy.
After the 2022 crisis, the percentage of debt in local currency did not reach 20%, and it remained this way until 2007, when this proportion remained slightly below 30%. In 2012, 2013, 2014 and 2022, this percentage exceeded 50% of the total.
The importance of this historical data is that the higher the percentage of debt in local currency, the lower the currency mismatch risk. The government receives almost all of its income in pesos, so in the event of a sudden increase in the dollar, If your debt is mostly in pesos, you will have fewer problems making those payments.
Why did the sovereign debt in pesos increase?
The UGD report highlighted three factors as determinants for “the significant increase in the proportion of debt in local currency”, despite the “important amortization schedule” in pesos during 2023.
The first was “the high volume of Treasury Note issuance in it domestic market, with a key role of the instruments in Pension Units (UP)”, these linked to salaries. While the second was about the “significant increase in emissions in the international market denominated in local currency: during the period 2020-2023, 53% of the total volume issued in the international market was denominated in local currency (Indexed Units -UI- and pesos).”
Regarding these two points, we must highlight the recent increase in “appetite” on the part of investors, which had been undermined by the recovery of the dollar and the progressive cuts in the Monetary Policy Rate (MPR) by the Central Bank of Uruguay (BCU); but that in the last placements they once again showed significant interest in instruments in pesos, given the possibility of the end of the cycle of lower rates and the abandonment of the upward trend of the US currency in the local market.
Finally, the UGD pointed out as a third explanatory factor for the increase in debt in local currency the “valuation effectsFor example, the real appreciation of the domestic currency and the increase in wages measured in dollars.”
Of the government’s debt, 29.4% was denominated in UI, 17% in UP and 9.5% in pesos — totaling 55.9% in local currency. At the same time, 40.9% were in dollars1.9% in yen and 1.2% in Swiss francs.
Source: Ambito
