Alphacast Highlight - Uruguay (October 2022 Macro Brief)

Uruguay's economy had been growing very slowly and unevenly over the past decade, especially in the last 7 years - with growth averaging 1.3% over the past decade and 0.6% over the past six. The Uruguayan economy is expected to continue growing in 2022 and 2023, particularly due to a reopening of tourism. Inflation has stayed above target for most of the decade, although the recent deviation is both larger and more prolonged than previous ones. Politics are expected to remain stable, with the current government being relatively popular, and elections not being scheduled for another two years.

Activity

GDP is expected to grow 5.2% in 2022 and 3% in 2023. After a moderate recovery in 2021 (4.4%), output is expected to increase in the current year and during the next one, both due to a rebound after the pandemic, but also due to better expectations for economic conditions. Industrial production grew 5.4% MoM and 9.3% YoY in August, following a disappointing performance in July (-1% YoY, -1.8% MoM). The fastest growing sectors have been Rubber and Plastics (+31.5% YoY), Chemicals (+20% YoY), and Food (+11.9% YoY).

Inflation

Headline inflation accelerated in September, with prices growing 10% YoY and 0.8% MoM - faster than the previous 9.8% YoY. These increases have generally tracked the rapid acceleration of Food and Beverages prices (+13.3% YoY), with large increases in consumer services (Restaurants and Hotels, Transportation, and Healthcare). Surveys showed that inflation is expected to remain high in 2022, with annual EoP expectations reaching 9% in October for the current year, and 7.3% for the next - above the Central Bank's 3% to 7% target range.

Monetary Policy

Interest rates have risen sharply since 2021, with the average interest rate increasing from 4.5% in July 2021 to 10.8% in October. This aggressively contractionary policy comes in response to high inflation, although Uruguay suffered from spikes in the price level before - especially in early to mid 2020, when inflation peaked at 11% YoY and Food and Beverages inflation reached 19.3% YoY. Nevertheless, interest rates haved remained below the inflation rate until October.

FX & Markets

The Uruguayan peso has appreciated in 2022, with the nominal exchange rate falling by 8% by September. This comes after a relatively stable 2021, but following a sharp devaluation in 2020. Coupled with record-high inflation, the real exchange rate has fallen 9.9% this year. Uruguayan equities have fared poorly, decreasing by 15% since the start of the year and by 11.3% versus 2020, although they had. grown significantly over the previous six years.

Fiscal

Uruguayan fiscal policy had been fairly responsible from the mid 2010s until the 2020 pandemic, with small primary budget deficits and larger but stable (around the 2% of GDP range) financial deficits. In 2020, Uruguay disbursed a fiscal package that was larger than any other in decades, but not as large as other nations like Chile, and consolidated it somewhat steadily and gradually over 2021. This has been due to both declines in spending, but also increases in revenue. Expert forecasts claim 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%.

Trade and Balance of Payments

Given the recent developments in inflation and the exchange rate, it's clear that Uruguayan trade conditions have worsened in the past two years - with the real exchange rate hitting its lowest levels in years. However, high global prices for commodities have also advantaged Uruguay, with the trade deficit improving in recent months.

However, Uruguay's balance of payments has significantly worsened over 2022, with a growing deficit in both current and financial accounts over the past eight quarters. The current account in partircular has had a small but increasing negative balance, with a positive trade result in some quarters being offset by a large primary income deficit.