The improvement in credit note by Moody’s Investing led to Uruguay ratify the investment grade and the government boasts of having achieved the best rating in history, but in the future a question arises: is it possible to advance a new step in the short term?
Among the positive aspects, the country managed to sustain the grade in the hardest part of the pandemic and fulfilled the tax rule during the last four years, ratifying an economic direction that the risk country to be the lowest in the region.
However, two warning signs also appear on the horizon, both in 2024. On the one hand, it is an election year and the fiscal situation usually worsens in the run-up to the elections. elections; on the other, the plebiscite that drives the PIT-CNT against social security reform It is not well regarded by economic agents and, if it prospers, it could pose a problem in this matter.
Achievements in economic matters
The director of Development Studies Center (CED), Hernán Bonilla, stood out in dialogue with Ambit Uruguayan achievements. “The first was not having lost the investor grade nor did they lower their grade during the pandemic. Then, it was more positive to have managed to improve in all the important qualifiers,” she observed.
Advancing another step is something “viable,” according to Bonilla, pointing out that “it is the country that has the least risk of Latin America and the market “It is recognizing a better position than the one given by the rating agencies.” Along these lines, he compared: “Investors who put up money to buy debt today in the region ask for the least interest rate because they evaluate that it is the country with the lowest risk, despite the fact that others have a better rating.”
For that to happen, the government must focus on three pillars. “The first is the tax rule, “which began operating in 2020 and ordered fiscal management because it evaluates the result of public spending and public income from a structural point of view, beyond the current situation,” said the director of the CED.
As a second and third axis, he spoke of the “top to spent that operates annually and the annual limit of indebtedness”. “This achieved an improvement in the fiscal situation, a reduction in the country risk and a saving of half a point of the GDP in payment of interest,” he highlighted.
The importance of debt de-dollarization
In turn, CPA economist Ferrere, Giuliano Cantisani, He highlighted to this medium the improvement of the grade, which he linked to a “process of strengthening and improving the management of the public debt “which has been bearing fruit,” recalling that the country regained investment grade status in 2012 and has never lost it since then.
“Key to this were the debt exchange at the end of the crisis and the creation of the Debt Management Unit inside of the MEF in 2005, which professionalized and institutionalized debt management,” he analyzed.
Cantisani agrees that “there is room to continue improving” and proposed as a key axis “moving forward with dedollarization of the debt”, stating: “Historically, Uruguayan public debt was concentrated almost entirely in foreign currency (mainly in dollars).”
“This has been gradually reduced over the last 20 years, and today it is practically half. However, it is necessary to continue advancing in this direction to have less exposure to exchange risk”, pointed out and warned: “To achieve this, consolidate a lower inflation “It would be a great contribution.”
At the same time, the economist valued the importance of “improving “fiscal institutionality” and regarding the fiscal rule, he aimed to “explain how the goals are formed and present plans for convergence to them in the event of deviations.” He also referred to “having a fiscal anchor medium-term, such as a target debt level or the estimation of ‘security’ thresholds, to make management transparent.”
Finally, Cantisani pointed out the need to “implement reforms that consolidate a potential growth higher too.”
Uruguay faces two risk situations this year
Besides, Bonilla He recalled the importance of complying with the fiscal rule. “Each election year Historically, it is a year of deterioration in fiscal accounts because the government usually increases spending thinking that this way it can win the elections,” he recalled and asserted: “If the rule is met, it will be key for the rating agencies.”
The other risk has to do with the plebiscite of the PIT-CNT against social security reform. “It would eliminate the structure of the retirement system based on a solidarity pillar and an individual capitalization pillar. Remove our AFAPs, expropriates the pension funds that workers have saved and increases the minimum retirement”, analyzed the measure.
The director of the CED warned that “this would have very heavy fiscal effects that would begin to be applied next year” and anticipated: “If this is approved, it would be very negative for the risk assessment of Uruguay. It would make it difficult to increase the grade and could cause it to go down.”
In any case, regarding the initiative, which he described as “a true populist bomb”, He clarified: “The most likely thing is that this will not happen because first he has to gather the signatures and secondly it is a very radical reform, very far from the Uruguayan vision.”
Source: Ambito
