MercoPress. South Atlantic News Agency

Citibank report warns Uruguay about higher inflation risks

Uruguay's fiscal deficit will be double the government's targets for 2008 and 2009 “increasing risks” for the coming year (which happens to be an electoral year). Clearly “expansive” monetary and fiscal policies together with mounting pressure for higher salaries and an “overheated economy” will sustain “strong” inflationary pressures this year and in 2009.

However the report also points out that the impact of the international credit crisis will represent "a very low risk" for Uruguay even if there is "a substantial fall in the international prices for commodities and a significant deceleration of activity". These conclusions are included in a report for investors dated Tuesday September 9 following a visit of Citibank analysts to Uruguay. According to the report Uruguay's GDP is poised to increase by two digits in the second quarter of the year and the economy is forecasted to expand above the 7.5% estimate of the Uruguayan Central Bank monthly poll of local analysts. Citibank forecasts, as most local and foreign economists that the decision of the Uruguayan government not to transfer the higher oil costs to retail prices and the lack of sufficient rainfall for electricity generation will lead to a global fiscal deficit, --after paying interests--, in the range of 1% of GDP in 2008 and possibly higher for 2009. The Uruguayan Economy ministry fiscal deficit estimates are 0.4% of GDP both for 2008 and 2009, while the Central Bank poll of analysts targets 0.6%. For Citibank officials the government decision to lower fuel prices given the huge losses experienced by the country's energy monopoly corporations, Ancap and UTE, are "indicating the Uruguayan government gives priority to administrative decisions to curb inflation". The bank also points out that monetary policy remains "expansive" and an increase in reference interest rates can be expected to help cool the economy. Even when food and fuel prices are decreasing, prices of non transable goods (not exposed to foreign competition) continue to increase at a rate above 9%, which helps sustain inflation.