Country Report Uruguay August 2008

Outlook for 2008-09

• The political scene will be increasingly dominated by electoral considerations, as potential presidential candidates prepare to campaign for the primary elections due to take place in June 2009.
• Although the ruling FA coalition is currently favourite to win the presidential election, the two-round electoral system means that victory for the FA’s eventual candidate is far from assured.
• We have raised our forecast for the fiscal deficit in 2008-09 from 0.6% of GDP and 0.8% of GDP to 1.1% and 1% of GDP, owing to the fiscal cost of measures to shield consumers from the full costs of high international fuel prices.
• Efforts to bring down inflation have so far failed, and the Central Bank looks likely to raise rates, which it has avoided doing since November 2007.
• GDP growth will remain firm in 2008, at 6%, before falling to 3.6% in 2009. This is down from our forecast last month of growth of 4% in 2009, owing to a deteriorating outlook for both domestic and global demand.
• High global commodity prices and fiscal expansion will mean that the government’s inflation target range of 3-7% will be missed in 2008 and 2009.
• A wider trade deficit will lead to a widening of the current-account deficit in 2008, to 1.8% of GDP (up from 1.6% in our July report) and to 2.1% (previously 1.9%) of GDP in 2009.

Monthly review

• The government has increased its lead in voting intention polls, although if replicated in the actual election, at 46%, this would not bring a first-round victory in the presidential election.
• Following a tour of Argentina and statements from members of his MPP, signs are increasing that Mr Mujica is preparing to stand as a presidential candidate.
• Energy costs and rising spending on wages and social security led to a deterioration in the public finances in the second quarter, bringing fears that the fiscal targets will not be met.
• The government has made changes to the unpopular personal income tax (which it introduced in 2007) to benefit lower paid workers.
• Currency intervention led to a rise in gross public debt in the first quarter.
• Very strong import spending growth in April and May lead to a sharp widening of the trade deficit.
• The balance of payments strengthened in the first quarter, owing to surpluses on the current and capital accounts.

Source: Country Report