The rating agency Moody’s Ratings improved the Uruguayan credit note and took it to Baa1, under the argument of three pillars: compliance with the frameworks of the fiscal and monetary policy; the sustained reduction of inflation; and the ability to move forward with projects such as social security reform, which they pointed out as “politically difficult.”
The Minister of Economy and Finance, Azucena Arbeleche, quickly echoed the good news and highlighted that Moody’s He had not improved his rating for 10 years, which he described as “the highest in the history” of the country.
Fiscal policy compliance and credibility
In its report, the rating agency highlighted the reforms to fiscal framework starting in 2020 and compliance in general terms with the objectives. “Adherence to the parameters of the fiscal rule created a track record and increased the credibility of fiscal policy,” he maintained.
Thus, it focused on the structural deficit, an indicator that ended at 2.7% in 2023, with a general public sector fiscal deficit of 3.3%. At the same time, he highlighted that the country’s debt burden decreased from 61% of GDP to around 57% in four years, “supported by compliance with spending limits and relatively solid growth.”
On this matter, the Fiscal Advisory Council (CFA) of the MEF presented weeks ago the “Report on the calculation of the Structural Fiscal Result at the end of 2023”, where it outlined the axes to follow to meet the challenge of maintaining fiscal institutions.
The sustained decline in inflation
Another factor that influenced the improvement in the grade was the reduction of the inflation, which has already been within the target range for nine months and that has led to the expectations of economic agents regarding the CPI beginning to slowly converge.
“Inflation has followed a downward trajectory, falling within the central bank’s target range of 3-6%,” Moody’s highlighted and anticipated that, despite forecasts of a possible rebound in the CPI in the second half, it expects it to remain within of the target range for the rest of the year, “partly thanks to some inflation expectations better anchored.”
“The convergence of inflation rates with policy objectives, the reduction of intervention in the foreign exchange market and the efforts to anchor inflation expectations improve the credibility and effectiveness of the monetary politics”, the agency noted in this regard.
The importance of social security reform
On the other hand, the rating agency valued the government’s “political capacity” to “reach consensus” and move forward with projects such as the social security reform, which he pointed out as a “politically difficult measure that has a long-term economic and social impact.”
In this way, Moody’s launched its support for an issue that will gain centrality this year, due to the plebiscite that drives the PIT-CNT to repeal that law and reverse its guidelines, a scenario that still does not have the support of the main political leaders, with the exception of the presidential candidate of the Frente Amplio, Carolina Cosse.
Finally, the agency highlighted that “the authorities have demonstrated the ability to implement positive credit reforms and offer effective policy responses to shocks in challenging economic circumstances, even through severe drought last year and a strong devaluation of the Argentine peso that negatively affected domestic consumption and tax collection.”
Source: Ambito
