Risk rating agency Standard & Poor’s praised Uruguay’s fiscal moderation in the last eight years since the budget’s fiscal deficit has been below 2% of GDP but criticized the “political limitations” which impede the achievement of a better performance.
“In the last eight years, the Uruguayan government has had a performance of healthy fiscal results”, said S&P in its report on Uruguay and published in the Montevideo press.
“Economic growth undoubtedly helped but the commitment of the government was also important in containing pressures to increase spending”.
However,” while the commitment for the government to contain larger deficits is still strong, political limitations are also preventing Uruguay from exhibiting improved results”, according to the report.
These limitations in recent years have promoted a pro-cyclical fiscal policy and limited the potential benefits that could have further diminished the level of indebtedness of the government”, adds the report from the S&P analyst for Uruguay, Sebastián Briozzo.
Hopefully “given the limitations of monetary policy, the government can make a fiscal adjustment if faced with a negative external shock”.
S&P praised the “successful strategy” of pre-financing maturing debt which it underlined is crucial “to facilitate transition during periods of major international financial instability”.
The report also points out Uruguay has sufficient resources to address the government’s debt service for the “next 18 months”.
Finally the solid relation of the Uruguayan government with multilateral credit organizations considerably increases the chances for Uruguay to obtain additional financial if necessary.
“Although Uruguay has no formal open negotiation with the IMF, we believe that it is one of the countries that could easily qualify for the new IMF ‘flexible’ credit lines which would represent an additional option in a stress situation”.
In related news the Economic activity tendency index, ITAE from the local Centre for Economic Investigations, CINVE, said the “Uruguayan economy continues with an expansionary tendency in the second quarter, just below 1%, but the full twelve months tendency is 4.3%”.
However the report admits “ambiguous signals” because of the negative international indicators based on the volatility and uncertainty about the Euro zone and new financial problems in Spain.
Regionally “indicators continue positive although growth estimates for 2012 are more modest than at the beginning of the year”, and in Uruguay “there is an increase in expectations from the manufacturing sector, even if it remains negative terrain”.
However the ITAE for the second quarter contrasts with that from another local economic research centre, CERES, which said activity in Uruguay in April, was down 0.1% over March, when it also contracted 0.1% following two years and nine consecutive months of expansion.
“April’s data is another signal of a possible contraction of the Uruguayan economy during the second quarter of 2012”, says CERES, which nevertheless points out that three consecutive falls in its index are needed to anticipate a fracture in the economic activity expansion cycle.
Fernando Lorenzo was an analyst at Cinve before taking the post of Economy minister of the current government.