MercoPress. South Atlantic News Agency

Moody's improves Uruguay's rating but vulnerabilities remain

Moody's Investors Service upgraded the foreign- and local-currency bond ratings of Uruguay to B1 from B3 following a steady improvement in fiscal performance, a reduction in external and government debt ratios, and a significant reduction of refinancing risks.

Additionally Moody's upgraded the foreign-currency country ceiling for bonds and notes to Ba2 from B1. "The upgrade reflects the continued strengthening of Uruguay's fiscal indicators in recent years, a condition that reflects, first and foremost, a strong commitment of the government to fiscal restraint" said Moody's Vice President-Senior Credit Officer Mauro Leos. "Of particular significance has been the willingness and ability to preserve primary surpluses that, to date, have been large enough to support a declining trend in government debt ratios." Leos said the government's multi-year budget framework will likely help to reinforce progress made on the fiscal front and underlined that the 2006-2010 multi-year framework introduces medium-term targets that are likely to help support fiscal continuity and consistency over time. "Proactive liability management on the part of the authorities in the form of prepayments to multilaterals and debt swaps has been effective in extending the maturity profile of government debt" said Leos adding that "as a result, the government faces significantly reduced amortization payments in the next three years, a condition that has lowered refinancing risks." However the risk rating agency also points out that even when government debt ratios have reported a substantial reduction in recent years, relative to similarly rated countries, "Uruguay's government debt indicators remain high". Furthermore with the bulk of the government debt denominated in foreign currency, "debt sustainability remains highly sensitive to exchange rate shocks, a condition that represents a latent vulnerability". "Uruguay continues to face substantial credit vulnerabilities of a structural nature, which are incorporated into the rating," said Leos. "An inflexible spending structure, dominated by pension and wage payments, limits the government's ability to further adjust the fiscal accounts." Strong economic growth with low one digit inflation and a dynamic export sector are elements that characterize Uruguay's economic performance in recent years boosted by a strong world demand for agriculture commodities. But economic activity is expected to converge to a more moderate pace in the near future as admitted by government officials and IMF data.