Country Report Uruguay October 2009

Summary

Jose Mujica, of the ruling centre-left FA coalition, is narrow favourite to win a second-round presidential election on November 29th, which would see him take office for a five-year term in March 2010.
In 2010, and assuming that the economic recovery is maintained, the policy focus will turn from measures to stimulate growth and support employment towards bringing down the fiscal deficit.
After widening to 2.6% of GDP in 2009, owing to countercyclical spending rises, the fiscal deficit will narrow to 0.6% by 2011. Assuming some unwinding of recent currency appreciation, public debt will remain close to 60% of GDP.
Brazil, Uruguay's largest export market, emerged from recession in the second quarter of 2009, and we now expect growth there of 3.8% in 2010 and 4.2% in 2011, prompting an upgrade to our projection for Uruguayan GDP growth.
Uruguay's economy resumed growth in the second quarter, and we expect growth to rise to 2.2% in 2010 (previously 1.5%) and 2.4% in 2011, led by solid domestic demand.
Inflation will remain above or close to the upper end of the 3-7% target throughout the forecast period, with inflationary pressures provided by recovering demand growth and higher commodity prices.
After narrowing to 0.2% of GDP this year, owing to a lower merchandise trade deficit, the current-account deficit will widen again in 2010-11, to 1.7% of GDP as merchandise import growth returns.

Controversial remarks made by Mr Mujica have not eroded his lead in the presidential race, but have increased uncertainty ahead of the first round of the elections on October 25th.
A cut in reserve requirements has raised the prospect of inflationary pressures rising further, with the government struggling to balance inflation control, deficit reduction and encouraging exchange rate competitiveness.
Uruguay has taken advantage of a pick-up in investor appetite for emerging market paper with a successful US$500m bond issue, its first dollar issue in three years and first foreign-currency issue since 2008.
A technical recession has been averted, following a return to growth in the second quarter, with consumption growth and a net positive contribution from the external sector offsetting a continued fall in investment.
All sectors registered positive, albeit mostly very mild, growth in the quarter, except for agriculture and utilities, which have been affected by drought.

Source: Country Report