Country Report Uruguay April 2009

Summary

The October 2009 presidential and congressional elections will be close. The next government will not enjoy a parliamentary majority, leading to a more challenging policymaking environment.
Economic policy will focus on measures to stimulate growth and stem a rise in unemployment. There is some scope to pursue counter-cyclical measures, but the government will need to balance this with fiscal discipline.
The fiscal deficit will widen to 2.4% this year owing to weakening revenue growth and rising expenditure; despite a moderation to 1.9% of GDP next year, public debt will rise once again, to a forecast 69.2% of GDP by end-2010.
Recent data point to very sharp falls in global trade growth, synchronised across regions, leading us to revise our forecast for the contraction in global GDP this year from 0.8% in our March report to 1.5% now.
We continue to expect Uruguay's GDP to contract this year by 0.2%, with trade and investment falling very sharply, along with a modest retrenchment in private consumption. The 2010 recovery will be mild, raising output by 1.5%.
The peso will weaken gently over 2009-10, ending 2010 at Ps26.7:US$1. The rate of depreciation will be softer in 2009 than in the second half of 2008, owing to strong reserves coverage and a narrowing external deficit.
The current-account deficit will fall to 1.7% of GDP this year, from 3.5% in 2008, owing to a narrowing of the merchandise trade deficit, before widening in 2010 to 2.2% of GDP, as the services surplus narrows.

Public opinion polls show that voting intentions for the ruling centre-left Frente Amplio coalition are broadly level with the aggregate vote of the opposition parties.
The president, Tabare Vazquez, made an official visit to China in March with the purpose of promoting trade, investment and co-operation.
With inflation starting to fall towards the official target of 3-7%, in March the Banco Central del Uruguay (BCU, the Central Bank) reduced its reference interest rate by 100 basis points to 9%.
The government has ordered a reallocation of spending in 2009 to provide a fiscal stimulus to some sectors, while cutting overall operational spending.
GDP growth slowed for the second successive quarter in the final quarter of 2008, bringing full-year growth to 8.9%. The economic slowdown continued into the first quarter of 2009, according to preliminary data.

This report covers the following industry codes:
SIC Code: 1;49
NAICS Code: 11;22