Country Report Uruguay January 2009

Outlook for 2009-10

• The political scene will increasingly be dominated by the October 2009 presidential and congressional elections, which will be close. The opposition will try to capitalise on divisions in the ruling FA and its economic record.
• A potentially divisive campaign for the FA's presidential nomination (which will go to an open primary in June 2009 even though the FA's congress endorsed the candidacy of Jose Mujica) risks undermining the FA's campaign.
• Economic policy will focus on cushioning the economy from the worst of the global economic crisis. Policymakers will raise investment spending in 2009 to provide a countercyclical boost, leading to a wider fiscal deficit.
• We have revised our forecasts for the fiscal deficit in 2008-10 (from an annual average of 0.7% of GDP to 1% this year, 1.8% in 2009 and 1.6% in 2010) owing to worsening prospects for revenue growth and increased capital expenditure.
• We have made further downward revisions to our global growth forecasts. We expect the US, EU and Japan to fall deeper into recession in 2009, and the risks to our China projections have increased.
• We have revised our forecast for a fall in export volumes in 2009 (to 8.5%), and those for consumption and imports. We now forecast GDP growth of 2% in 2009 (down from 3% last month) and 3.3% in 2010 (down from 3.5%).
• We have raised our forecasts for inflation in 2008-10 as falling producer price inflation is yet to have an impact on consumer price inflation. We now forecast rates of 9.2% in 2008, falling to 5.5% in 2009 and 4.1% in 2010.
• The peso will weaken further over 2009-10, ending 2010 at Ps26.2: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.
• A cut in our forecast for import spending in 2009 (owing to cuts in our forecasts for both volumes and prices) has led us to revise our forecast for the current-account deficit, to 2% of GDP, from 4.7% in our December report.

Monthly review

• A vote to support Mr Mujica's presidential candidacy in 2009, a rebellion over the abortion law and proposed manifesto commitments have all undermined Mr Vazquez's authority over the FA.
• The government has announced a package of measures to stimulate economic growth in 2009.
• Slowing investment growth brought GDP growth down to 13.2% in the third quarter. Early indicators from the fourth quarter point to a fall in economic output in October and November.

Source: Country Report