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Montevideo, November 18th 2018 - 18:36 UTC

Moody's upgrades Uruguay's rating to Baa3, based on reduced 'vulnerabilities'

Monday, June 2nd 2014 - 08:21 UTC
Full article 6 comments
Uruguay's ratio of government debt to GDP of 40% is aligned with the Baa median level. Uruguay's ratio of government debt to GDP of 40% is aligned with the Baa median level.
The Uruguayan economy reported GDP growth of around 6% during the last decade The Uruguayan economy reported GDP growth of around 6% during the last decade

Moody's Investors Service last Friday announced it had upgraded Uruguay's government bond rating to Baa2 from Baa3, and assigned a stable outlook to the Baa2 rating. The upgrade was driven by the strengthening of Uruguay's sovereign credit profile, as reflected by the convergence of fiscal and debt metric, an overall government debt profile that is currently associated with moderate credit risks, and the country's reduced vulnerabilities to regional and commodity shocks.

 In supporting the decision Moody's Investors said the key drivers for the rating action includes:

The consolidation of Uruguay's government sovereign credit profile, which incorporates (i) low rollover risks given average debt maturity of more than 10 years; (ii) moderate gross financing needs in absolute and relative terms over the next three to five years; and (iii) large financial buffers that provide cover against an adverse turn of events in global financial markets.

Uruguay's orderly transition towards lower, albeit more stable, growth levels, which Moody's anticipates will be supported by a steady increase in the investment ratio and productivity gains.

A decline in Uruguay's exposure to regional shocks and an increase in its commodity diversification that have enhanced the country's credit resilience materially, thereby reducing the extent to which adverse events can affect the country's sovereign credit outlook.

Likewise with an average debt maturity of 11.9 years as of March 2014, Uruguay is part of a shrinking group of sovereigns with debt maturities in excess of 10 years. Rollover risks are modest given annual principal payments of around 2% of GDP over the next three to five years -- indeed, Moody's expects gross financing needs to remain low in absolute and relative terms, and to amount to less than 5% of GDP annually during the same period.

Uruguay has complemented its precautionary liquidity reserves by a second layer of financial buffers, which comprise contingent credit lines that are available for rapid disbursement and are comparable in size to the government's cash reserves. Combined, the country's total financial buffers are equivalent to nearly 7.5% of GDP and provide cover equivalent to around four years of principal payments or, alternatively, 24 months of debt service (principal plus interest).

In addition, Uruguay's ratio of government debt to GDP of 40% is aligned with the Baa median level. The reduction of the ratio in previous years was supported by high GDP growth and moderate fiscal deficits. Despite lower growth in recent years, the ratio has reported minimal changes and Moody's expects that it will remain in line in the peer group median.

The government's balance sheet reports a significantly lower, although still high, exposure to foreign-currency-denominated debt relative to peers. Proactive liability management operations have allowed the authorities to exceed the target that was set at the start of the current administration: in fact, the share of foreign-currency-denominated debt currently stands at around 45%, half the level reported in 2004-2005.

The Uruguayan economy reported GDP growth of around 6% during the last decade, exceeding the median for the peer group. After a period of above-trend growth, the economy has transitioned towards lower - albeit more sustainable -- annual growth, which Moody's expects to be more closely aligned with Uruguay's estimated potential GDP growth of around 4% annually.

The rating agency views this shift as credit positive and expects that the economy will report a more stable growth pattern in the future.

A robust investment performance in previous years led to a steady increase in Uruguay's investment ratio, which currently stands at around 24% of GDP. With the economy set to operate with higher investment ratios than in the recent past, Moody's expects that Uruguay's growth performance in the coming years will be strongly supported by prospects of robust investment and enhanced productivity gains.

Top Comments

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  • ChrisR

    “Moody's anticipates will be supported by a steady increase in the investment ratio and productivity gains.”

    Productivity gains! Ha, ha, ha, ha!

    What a load of bollocks frankly. These illiterate, innumerate, murdering commie bastards running the country will have no truck with that!

    Out of 3.28M men, women and children 600,000 “work” for the government. And why did Pepe claim there was no money to pay the judiciary and the rest of the teacher’s wage claim from TWO YEARS AGO? A claim that has recently been paid BECAUSE being an election year there can be NO wage increase due to the possibility of the incumbent wankers “bribing” these “workers” with their own money!

    And not a word about the failure to control inflation: the killer for workers and investors alike. But hey, “No Money Pepe” is up there at joint one in the social inclusion stakes! Now I wonder where the inflation acceleration came from, that and his inilateral decision to hike fuel up by 10% early this year. Cupid stunts or what?

    So the raring is irrelevant as far as the actions of the Tupas idiots are concerned.

    Jun 02nd, 2014 - 11:43 am 0
  • Condorito

    I don't know Chris, Uruguay is moving in the right direction which is more than can be said for some countries in the region. Strong and consistent growth, increasing investment, low corruption (now ahead of Chile and only just behind the UK). Low government debt and buffer reserves - all indicate intelligent macro management of the economy.

    It still scores lowly on various “ease of doing business” evaluations, but even those numbers are improving.

    I know these improvements are coming from before Pepe but credit where it is due, at least he has stuck to the programme.

    Jun 02nd, 2014 - 01:10 pm 0
  • JoseAngeldeMonterrey

    If Uruguay were somewhere else besides Argentina. If Uruguay were not a member of Mercosur, the country will be in the Aa3 rating, as Chile and Mexico are today, enjoying much better credit terms and access to capitals. Geography is everything sometimes.

    Jun 03rd, 2014 - 04:20 am 0
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