Country Report Uruguay September 2008

Outlook for 2008-09

• The political scene will be increasingly dominated by the 2009 presidential elections. The ruling FA coalition is the early favourite but the two-round electoral system means that the election is open.
• If the main opposition PN comes to power, it would bring a tighter control of public spending and would be likely to result in smoother relations between government and business.
• The fiscal deficit will deteriorate this year, to 1.1% of GDP, and remain at that level in 2009, outside target 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.
• We forecast that GDP growth will reach 6.5% this year and 3.7% in 2009. We have raised our forecast this month (from 6% and 3.6% in our August report) owing to indicators which suggest a fast second-quarter pace of growth.
• We forecast that annual inflation will remain above the ceiling of the target throughout 2008-09 despite the Central Bank’s more restrictive bias.
• The peso will fall back in the remaining months of 2008 in line with a deteriorating trade deficit, and weaken further in 2009, ending the forecast period at Ps23.2:US$1.
• A much wider trade deficit will lead to a widening of the current-account deficit in 2008, to 3.2% of GDP (up from 1.8% in our August report) and to 3% (previously 2.1%) of GDP in 2009.

Monthly review

• A general strike staged on August 20th heralded a likely increase in industrial activity as wage negotiations, which are due to be completed before October 31st, draw to a close.
• The minister of the economy and finance, Danilo Astori, will step down on September 15th to launch his campaign for the FA’s presidential nomination. The incoming minister, Alvaro Garcia, will maintain policy continuity.
• Preliminary indications suggest that economic growth, which outperformed expectations in the first quarter of 2008 (when GDP strengthened by 10.9% year on year) increased its momentum in the second quarter.
• Although it eased in July, above-target inflation continues to threaten the sustainability of such a high pace of economic growth.
• The discovery of an offshore gas deposit could ultimately help Uruguay to become a net gas exporter.

Source: Country Report