Fitch ratifies Uruguay at BBB- but points out electoral pressure for more spending

RIO DE JANEIRO, BRAZIL – The risk rating agency Fitch Ratings ratified Uruguay’s debt rating at BBB- with a stable outlook, according to a communication issued on Wednesday, June 29.

The company highlighted the reduction of the fiscal deficit, even though in different passages of its analysis, it pointed out that progress may be limited by political pressures that drive higher social spending as the 2024 election campaign approaches.

Fitch expects inflation to end 2022 at 8.5% and moderate to 7.3% in 2023, given the effects of wage indexation. The government’s target range will be between 3% and 6% as of September.

In this regard, the rating agency pointed out that the Central Bank of Uruguay “continues to face difficulties in anchoring inflation expectations” over a longer time horizon.

The rating agency highlighted the fiscal deficit reduction, which reached 5.8% of GDP at the end of 2020, closed 2021 at 4.3% of GDP, and stood at 3.6% of GDP in the 12 months ended April.

In analyzing the trajectory, he pointed out that there were improvements in revenues but also falls in the real salary of public employees, pensions, and public investment.

Meanwhile, it highlighted the compliance with the new fiscal rule enshrined in the Urgent Consideration Law.

The agency forecasts that the deficit will fall to 3.1% in 2022 and 2.7% in 2023, as pandemic spending and the extraordinary revenues from financing it are mostly eliminated. The estimate is in line with the Executive Branch projection.

The scope for improvement “could be limited” by pre-election “political pressure” for tax cuts and increased social spending, Fitch Ratings said about the fiscal deficit.

It also pointed out that the government must reach a consensus within the ruling coalition to advance the promised reforms. That under the warning, according to Fitch, that some of them may be unpopular.

The agency mentioned the changes announced in the social security system, the fuel market, and education.

However, the firm said that the window of opportunity to push through the reforms would become narrower as the campaign process for the presidential elections approaches.

GROWTH AND CHALLENGES

The report highlighted the country’s institutional strength and “robust” finances but warned about different factors that limit the advance in the rating agency’s scale.

Among the reasons, it mentioned weak medium-term economic growth prospects, competitiveness problems, a public debt higher than that of other countries, sensitivity to exchange rate variations, and “persistently” high inflation.

Fitch expects economic growth in Uruguay to reach 4.7% of GDP in 2022, 3.1% in 2023, and then begin to converge to a rate of 2%.

“Potential growth remains constrained by adverse demographic trends and key competitiveness issues,” it said, pointing to rigid labor regulations, energy costs, and educational challenges.

The government intends to pass reforms that address these issues, but it remains to be seen how much progress it can make before the 2024 elections,” the rating agency said. It also highlighted as another relevant point the need for progress in trade liberalization.

With information from Bloomberg