Alphacast Highlight - Uruguay December 2022 Macro Brief
Uruguay suffered its largest recession in decades in 2020, and the recovery has been moderate but stable. Output is expected to continue growing in 2022 and 2023, with a reopening of tourism aiding the economy. 2020 came off the back of a decade of slow and uneven growth, averaging 1.3% over the past decade and 0.6% over the past six. Regarding inflation, it has been higher and more volatile than in comparable peer countries, and remains above target - though the recent deviation is larger and more prolonged than any recent ones. The political sphere is expected to remain stable, with the current government being relatively popular.
The economy continues running at tepid pace. GDP figures for the third quarter of 2022 were released, and they show a major deceleration, with annual growth halving to 3.7% YoY (from 7.9% YoY in Q2-22) and negative quarterly growth, -0.2% QoQ (versus 1.4% in the previous quarter). Worringly, industrial production had negative growth in October, its worst performance since 2020 - with output dropping -4.2% YoY and-7.4% MoM. Output is expected to increase in 2022 and 2023 after a moderate rebound from the pandemic (4.4%), especially considering expectations for economic conditions; however, a slowdown is possible given the current global headwinds to growth.
Inflation eased in October Headline inflation slowed in October, growing 9.1% YoY (vs previous 10% YoY), as well as in monthly terms, with a slowdown to 0.2% MoM from 0.8% . The rate of inflation has diverged somewhat from the Food and Beverages Price Index for a few months, considering food items have grown faster and more erratically than the overall consumer basket. Surveys showed expectations to be flattening somewhat, with annual EoP forecasts remaining at 9% for 2022 and in similar ranges to previous months (7%) for 2023 and 2024 - a stable figure, but uncomfortably high on the 3% to 7% target range.
Uruguayan interest rates remained stable in November and December, at the 10% to 11% range. Rates have risen sharply in the past year and a half, with the policy rate growing from 4.5% in July 2021 to 11.5% in late November. Policy has become extremely contractionary as a result of both high inflation and high global rates, particularly considering the international aspect of the former. Rates, however, remained below YoY inflation until October. Uruguayan inflation, however, spiked especially early compared to other nations, with a peak of 11% YoY in early to mid 2020, following Food and Beverages prices growing just under 20%.
FX & Markets
The Uruguyan peso strengthened throughout 2022, falling from 44.5 UYU/USD at the beginning of the year to just under 40 in November. This is compared to 2021, where the currency remained relatively stable. Regardless, the exchange rate is significantly above pre-pandemic levels, following a sharp and suddden devaluation in March 2020. Meanwhile, equities rallied somewhat in November, returning to their August peak, but still remain significantly below their much higher levels in 2020 - bonds have fallen 13.6% versus 2021 and 15% versus 2020.
Uruguay has maintained fiscal prudence for the past 7 years, with the sole exception of the 2020 stimulus package. The country has seen small primary deficits and larger but relatively stable financial deficits, with the exception of the record high fiscal expansion of 2020 - which was still smaller than in most peer nations. Public finances have gradually normalized in 2021 and 2022, with expert forecasts predicting that the deficit will be 3.1 % of GDP in 2022 and 2.9% in 2023, a rapid consolidation from 2020's 6% and 2021's 4.2%. Part of the consolidation has come from declines in expenditures, but also from increases in tax revenue.
Trade and Balance of Payments
Uruguay's trade balance has worsened in the past two years, with an increasingly overvalued and volatile real exchange rate, following growing global inflation and domestic FX market trends. The real rate, therefore, is 5% lower than pre-pandemic, even though the impact of this has been cushioned by higher global commodity prices.
The balance of payments, meanwhile, has declined significantly, with a worsening current account deficit and a stable but sizable financial account deficit. The current account has turned negative due to a smaller goods trade balance and a large primary income deficit.