Press Release No. 13/390

Press Release: IMF Concludes 2013 Article IV Mission to Uruguay

October 4, 2013

An International Monetary Fund (IMF) mission visited Uruguay from September 23 to October 4 to conduct the country’s annual Article IV consultation. The mission met with Minister of Finance Fernando Lorenzo, Central Bank President Mario Bergara, other senior officials, academics and representatives of the private sector.

At the end of the visit, Oya Celasun, the chief of the mission, issued the following statement:

“After the decade of strong expansion, the growth of the Uruguayan economy has moderated to a more sustainable pace. External demand has weakened, but domestic demand remains robust. We project growth at 4 percent for 2013 and about 3.5 percent for 2014-15. Inflation persists above the target range. The current account deficit has widened but is expected to narrow as external demand gradually recovers. Foreign direct investment remains strong.

“There are risks surrounding the broadly solid economic outlook, stemming from global, regional and domestic factors. The prospects for regional trading partners could imply some downside risks for Uruguay, with potential spillovers through the trade, tourism and Foreign Direct Investment (FDI) channels. Global downside risk scenarios include a lasting drop in export commodity prices and tighter global financial conditions. As for domestic risks, continued strong increases in labor costs could result in higher inflation and further real appreciation, and the ensuing loss of external competitiveness would eventually hurt exports and growth.

“Macro-financial vulnerabilities are contained. The central government has a resilient liability structure thanks to astute debt management; it also has a comfortable level of foreign assets and contingent credit lines. Uruguay’s financial system is not likely to act as an amplifier or propagator of external shocks given its small size and muted links to the real sector; banks are well regulated and their balance sheets generally appear robust. The central bank and commercial banks have sizable net foreign asset positions.

“Inflation persisting above the ceiling of the BCU’s target band remains an important macroeconomic policy issue. The mission welcomes the tightening of the stance over the last two months that is evidenced by the rise in nominal peso yields.

“At the same time, the recent change in the operational target for monetary policy has raised new practical challenges and put an extra premium on communication. Additional efforts by the central bank to communicate its targeted monetary policy stance and inflation goal would help market participants adapt to a new operational framework and smooth market volatility. Going forward, the effectiveness of the new regime in delivering the inflation targets needs to be closely monitored.

“In the view of the mission, a moderation in real wage growth is critical to support the goal of lowering in inflation. At the same time, reducing the backward-indexation of wages would help safeguard employment in the face of downside risks.

“A tighter fiscal policy stance would also help relieve some of the burden on monetary policy in taming inflation. It would also help keep net public debt on a downward trajectory, which is an appropriate aim given the uncertain global environment expected for the years ahead.

“The mission acknowledges the circumstances that led to the adoption of reserve requirements on foreign purchases of locally-issued government securities, since at the time of the introduction of the policy there was little scope to counteract currency appreciation pressures from portfolio inflows with monetary easing or prompt fiscal tightening. Such capital flow management measures, however, should be temporary. They should be removed once there is clear evidence that the capital inflow surge has abated.

“The medium-term outlook for Uruguay is broadly favorable but will require various policy actions to maintain solid and stable growth. Specifically, boosting public infrastructure and raising the efficiency of labor markets would help sustain high productivity and investment growth, and enhance competitiveness. Improving access to finance and spurring capital market development would increase the financial sector’s contribution to growth.