Analysis: Uruguay’s economy is on track to reach pre-pandemic levels by 2022

RIO DE JANEIRO, BRAZIL – After the economy grew faster than expected in the second quarter (+0.9%), the recovery will likely accelerate in the second half of the year. Although the heterogeneity of individual situations remains, the continued improvement in the health situation has led to a significant recovery in the sectors most affected by the mobility restrictions.

With the complete opening of the borders in November, attention is now focused on the extent to which tourism, the country’s primary industry without chimneys, will recover, especially in terms of its impact on employment.

Most leading indicators of economic activity (seasonally adjusted) rose in the third quarter, particularly gasoline sales, are strongly linked to mobility, which increased 10% from the previous quarter and were 1% above pre-pandemic levels in October.

The manufacturing sector grew by 15% year-on-year, influenced by the record performance of the meat processing sector, which grew by 46% in the period. The dollar value of exported goods increased by 48% year-on-year in the third quarter, reaching US$8.7 billion in the first ten months of the year, an increase of 31% compared to the same period of 2020. About a third of this increase is due to the strong growth of beef exports (+56%).

At the same time, DGI (IRS Uruguay) real revenue collection continues to perform well, up 2% from the second quarter and 5% above pre-pandemic levels in October. The labor market, which had stagnated in the first half of the year due to the deteriorating health situation, regained momentum in the second half.

The number of employed people in September was at a similar level to the same month in 2019, 0.5% below the average for the whole of 2019, with more than 20,000 jobs restored in the last two months compared to February to May this year.

On the other hand, around 51,000 people remained unemployed in October, down 36% from May and slightly above the average for 2019 (+5,800).

Against this backdrop, the Uruguayan economy should grow slightly above 3% this year and reach pre-pandemic levels in early 2022. What news from the international arena should the country pay attention to in the coming year?

A REGIONAL CONTEXT WITH DARK CLOUDS

In Argentina, the outcome of the general elections seems to have put any economic reform on hold until the 2023 presidential elections. Before then, neither the government nor the opposition appears to have any incentive to agree on (and bear the corresponding political costs of) an economic plan, which would inevitably involve a drastic adjustment in public spending, a reduction in subsidies for general tariffs, and a devaluation of the official exchange rate.

The most important economic policy development in the coming months will be the IMF agreement (or lack thereof). The country must theoretically pay nearly US$18 billion during 2022. In the absence of funding sources and the scarcity of international reserves, Argentina should reach an agreement with the Fund before March to avoid default.

Although Argentine economic activity continued to recover in the third quarter and was 3.4% above pre-pandemic levels in September, it remains nearly 5% below the peak reached at the beginning of 2018 and levels similar to those seen in 2011.

In Brazil, economic expectations continue to deteriorate due to fiscal uncertainty related to the new election cycle. Inflation reached 10.7% in October, and although it is expected to fall to 5.0% by 2022, expectations have been systematically revised upward in recent months.

While much of the acceleration is due to the global rise in commodity prices, the real (R$) remains weak in the face of fiscal and electoral uncertainties, despite several increases in the domestic basic interest rate (from 2.00% in March to 7.75% today).

Economic activity, which had recovered rapidly in the second half of 2020, has stagnated at pre-pandemic levels since February of this year. Economic growth forecasts are further revised downward in this context, with growth now expected at 4.8% in 2021 (down from 5.2% expected in August) and 0.7% in 2022 (down from 2.0%).

Overall, Uruguay’s regional context will not be positive in the short and medium-term, especially for tourism and trade in border cities.

The exchange rate with Uruguay’s neighbors, which was already bad in the last tourist season before the pandemic, deteriorated by another 25% with Argentina and 15% with Brazil, leaving the country at the most expensive level in the previous 40 years in historical comparison with both countries.