Country Report Uruguay May 2009

Outlook for 2009-10

• The October 2009 presidential and congressional elections will be close. The next government is unlikely to 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 countercyclical 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 69.7% of GDP by end-2010.
• We forecast that global GDP will contract by 1.8% in 2009 (down from a fall of 1.5% in our April report), with world trade volumes falling by 9.7% this year. Global growth will recover only slowly in 2010, to a forecast 1.9%.
• We expect Uruguay's GDP to contract this year by 0.2%, with trade and investment falling 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 narrow to 1.2% of GDP this year, from 3.5% in 2008, owing to a narrowing of the merchandise trade deficit, before widening in 2010 to 1.8% of GDP, as the services surplus narrows.

Monthly review

• Front-runners from both parties with a realistic chance of winning this October's presidential election have consolidated their leads in advance of June's primary elections.
• The ruling centre-left Frente Amplio (FA) coalition has also extended its slender lead over the PN and PC in terms of voting intentions, supporting our view that it is likely to be returned for a second term.
• Policy is increasingly focusing on stimulatory measures, with inflation now trending back to target and economic growth slowing sharply. This will mean the government will need to find fresh financing in 2009-10.
• The global economic downturn has so far had a mixed effect on Uruguay. While economic activity continues to fall, private consumption and employment appear to be holding up well.
• Export earnings fell by 14.2% year on year in the first quarter, according to preliminary data.