MercoPress. South Atlantic News Agency

Budget days: Uruguay GDP forecasted to expand 30% in five years

Economy minister Fernando Lorenzo estimates based on a favourable regional and world scenario

It’s budget time in Uruguay and the government has presented to Congress its revenue and expenditure estimates (821 articles) based on a five-year forecast for the economy, which private analyst consider too rosy.

To sustain the budget the administration of President Jose Mujica estimates the Uruguayan economy will expand 30.2% from 2010 to 2015, reducing the fiscal budget 0.1% of GDP each of the five years. At the end of the period the US dollar currently exchanged at 20.50 Uruguayan pesos should reach, 23.40 Pesos.

A key issue: investment, of which Uruguay has traditionally lagged and which currently stands at 18% of GDP “should reach a ratio of 25% of GDP by 2015”. Based on these numbers Uruguay’s GDP will jump from 31.5 billion USD to 41.1 billion in 2015.

“In spite of the existence of some uncertainty factors, particularly related to the capacity of different European countries to face their sovereign debt and the speed of recovery from the US and European economies, prospects for the international economy in the coming years are positive”, says the budget bill analyzing the global situation.

Based on this and in a framework “of domestic balanced and consistent policies, the economic and social indexes should keep improving”, supported by significant rates of expansion although not at those of the past five years. While in the 2005/09 period GDP expanded at an annual average of 6.1%, for the coming budget period, the annual average is estimated at 4.6%.

The economic team headed by Minister Fernando Lorenzo forecasts a “balanced expansion of all aggregate demand components”. Exports should expand 5% per year and in “an international and regional favourable context which together with the dynamism of domestic demand helps to understand the increase in jobs creation and the improvement of households’ real incomes”.

Investment will continue to increase with the private sector leading, while government will adopt a more neutral performance.

The budget fiscal deficit is forecasted to contract from 1.2% of GDP this year to 1.1% next year and at that rate for the next periods reaching 2015 with 0.7% of GDP. Regarding inflation, the estimate is that it will continue to fall gradually reaching 5% at the end of the period.

As to employment the team headed by Lorenzo states that in this context “the creation of jobs will continue as well as a better quality of employment”, however since unemployment is close to its “structural point” job-creation will be at a lower rate than in the previous period.

“If the planned necessary efficiency measures are achieved” VAT could be cut by two points; new deductibles introduced to the income tax system and contributions to the health system lowered, indicates the government.

Another goal is reducing the debt/GDP ratio from 69% in 2009 to 40% in 2015, given the sustained growth of the economy, which should help Uruguay recover its Investment Grade rating (lost in 2002 when the Argentine crisis) since this is “a relevant factor to attract investments and to increase margins for domestic policies”.

In the five year period Uruguay faces principal and interest payments to the tune of 8.7 billion US dollars which will be confronted floating 4.95 billion USD in bonds. But the Uruguayan government will insist in trying to change the profile of national debt with a greater percentage of national currency or the Indexed Units, UI linked to inflation.

“The goal is to increase the debt percentage in national currency from 30% at the end of 2009 to 45% by the end of 2014”, giving priority to the domestic money market when floating new debt. Multilateral credit organizations, World Bank, Inter American Development Bank, IMF, Andean Corporation, Mercosur development plans should provide during the five year period an estimated 1.2 billion US dollars in fresh funds.

The Public Works Ministry budget will receive a 30% injection and a bill to promote investments in government contracts and bids in association with the private sector (including foreign companies) in logistic areas, and ports and airports infrastructure.

Finally the Uruguayan government admits that to ensure the sustainability of economic growth it is necessary to continue with investments in infrastructure. “Uruguay has an infrastructure inferior to its rate of development and it is crucial to impede this turns into a bottle neck that becomes an obstacle for economic growth and the necessary improvement of competitiveness”.