RIO DE JANEIRO, BRAZIL – The business climate perceived by most businessmen in Uruguay is “exceptional” because of its positive outlook and the best in more than ten years, said Tamara Schandy, economist and partner of the consulting firm Exante, during a breakfast meeting organized by the firm with clients. There she presented preliminary data from the company’s latest Expectations Survey conducted among some 300 senior executives, in which 89% said that the business climate is good or very good, and where 52% said that their company’s investment would evolve in the next 12 months.
The data are optimistic concerning the company’s most recent studies and mark “a very strong contrast” even compared to the pre-pandemic, said Schandy. The economist recalled that at the beginning of 2019, less than 10% of respondents thought that the business climate was good and that on the axis of 60% considered it “fair”. As for investment, in April 2019, less than 15% of the respondents answered that they expected to increase their company’s investment volumes.
Exante’s partners have been surveying the expectations of Uruguayan business people for 12 years in a survey that has been carried out for 25 editions, the economist explained. “The results we are obtaining in these latest measurements are frankly exceptional for the more than 10-year history of the survey,” said Schandy. Legal security, investment promotion, economic stability, and commodity prices are among the most valued factors.
Despite the positive perspectives of the businessmen, the companies’ profitability expectations are not as encouraging as those of production, and there is a “quite cautious climate” regarding the hiring of personnel”, said the economist. While 67% believe that their company’s production will increase, 40% believe it will also evolve in profitability, and 32% in employment.
Meanwhile, 88% of those surveyed approve of the government’s management.
The growth of the Uruguayan economy was analyzed on April 27 by Florencia Carriquiry, another of Exante’s partners. The consulting firm forecasts a growth of 4.9% of the Gross Domestic Product (GDP) for this year with “an important drag effect” of 2021, and for 2023 of 3.3% of the GDP, said the economist. Uruguay closed 2021 with 4.4% GDP growth.
Carriquiry stated that the international increase in prices, with the rise in meat and grains on the one hand but the import of oil and fertilizers on the other, is positive for Uruguay in terms of exchange.
The economist stated, theoretically, that just because of the increase in prices at record levels, if the same volume of goods shipments is maintained, in 2022, there will be an increase of US$1.1 billion in the value of exports compared to the previous year. As for imports, due to the effect of prices, there would be an increase of US$858 million.
LOANS AND ACQUISITIONS
The flow of foreign direct investment was 2.3% of GDP in 2021 and is “a positive sign,” Schandy said, although the number is still below those surveyed between 2012 and 2014. Meanwhile, credit to companies had a 7% increase last year over 2020 and returned to growth after five years of stagnation. Between February 2021 and January 2022, 68% of that money was destined for large companies, 20% for medium-sized companies, and 12% for micro and small companies.
Another factor surveyed by the consulting firm is a “greater activity in the sale and purchase of companies”. Exante also tracks intercompany deals in Uruguay, which recorded 11 mergers and acquisitions in the first quarter of 2022. That, according to Schandy, positions it as a “busy” year and puts it on track to at least match the 42 recorded the previous year, already above the 31 in 2020 and 19 in 2019. The economist explained that this number does not capture 100% of the movements since it is a proprietary survey from which micro-mergers can escape, but defended that it serves as a thermometer of the activity.
INFLATION, WAGES, AND MONETARY POLICY
The higher inflation associated with the current scenario is one of the points of domestic tension on the horizon of Uruguayan economic policy, in line with what is happening in other countries in the region, the United States, and Europe. That, in turn, may have repercussions on a slowdown in the recovery of the real income of salaried workers.
Economist Pablo Rosselli analyzed the inflation trend and warned about the lack of consistency among macroeconomic policies in the face of the current price shock. According to Exante’s estimates, inflation “will approach” and “may even exceed” 10% in the coming months, he said. The Consumer Price Index stood at 9.38% year-on-year in the 12 months ended March.
“In the economic policy response to inflation, some inconsistent signals appear,” Rosselli said. “That rise in inflation makes us think that its reduction will take us longer, and it also has to make us think that the achievement of other objectives is going to take longer,” he said as he pointed to wage recovery. In 2022 private wages will be 4% lower than before the pandemic and public wages 3%, the economist pointed out.
“It seems to us that it is a signal that does not help contain inflation expectations to reconvene wage negotiations that reindex wages that had accepted a later indexation to the rise in inflation. Nor is it a very good signal in the face of an inflationary peak to increase public spending,” he insisted. The economist explained that his statement is not a question of fiscal sustainability, which he does not see as compromised, but of decisions that may “hinder” the role of monetary policy in lowering inflation.
Resident Luis Lacalle Pou announced on April 18 an increase for pensions and public salaries, while the government will also promote the convening of the Superior Tripartite Council to advance adjustments in the private sector.
Speaking to Bloomberg Línea on April 21, Central Bank president Diego Labat said that the latest measures “should not have material effects on inflation” and affirmed that macroeconomic policies remain consistent.
Uruguay benefits from a current context of high commodity values. Still, commodity prices tend to fall in real terms relative to other consumer products in the medium-term, Exante’s partners said.
Rosselli also raised some of the pending reforms that Uruguay must face, among which he mentioned social security, an advance in international insertion, and more flexible labor legislation. “We need reforms, but the problem Uruguay has is that it is difficult for us to face reforms”, said the economist.
With information from Bloomberg Línea