MercoPress. South Atlantic News Agency

EIU downgrades Uruguay’s 2009 growth to 0.2%

Uruguay will experience a serious deterioration of its exports in 2009 with impacts on the rest of the economy and growth limited to a mere 0.2%, according to The Economist Intelligence Unit, EIU.

Exports are forecasted to drop 33.8% this year following on the depressed global demand. This means exports should reach 4.7 billion US dollars, considerably less that the 7.1 billion of 2008. Imports on the other hand are expected to drop 34.4% to 5.7 billion from 8.7 billion last year.

The diminished foreign trade should however help to shrink the trade deficit from 4.8% of GDP to 3.3% and similarly with the current account deficit, which should drop from 3.5% of GDP in 2008 to 1.7% in 2009. However in 2010 the misbalance should again increase to 2.2%, since the EIU expects a “poor summer season” in 2009/2010 and a drop in services activities.

The fiscal deficit is expected to reach 2.4% of GDP this year (higher than the 2% admitted by the Uruguayan government) mainly because of a weakening in revenue and increase in outlays. Trying to balance such a deficit could take the weight of sovereign foreign debt to 69.2% of GDP say EIU.

International reserves are set to fall 500 million US dollars in 2009 as investment flows weaken and “global financing becomes restrictive”. Private sector investment is anticipated to fall 12%.

As to the Uruguayan peso, it will continue to depreciate “moderately” during 2009 and 2010, possibly ending at somewhere between 26.50 to 27 Uruguayan pesos to the US dollar towards the end of the two year period.

Depreciation during 2009 will be slighter than in the second half of 2008 because of a good position in international reserves and the fall in the trade deficit.

As to prices and inflation, even when the drought had an impact, the international fall in commodities prices should help retail inflation to remain in the range of 5.5% in 2009 and 4.7% in 2010.

On the risks side the EIU points out that the Uruguayan government does have some margin to pursue counter cyclical measures but “there’s a risk the fiscal deficit will grow strongly as well as public debt to unsustainable levels”.

The latest IMF World Economic Outlook forecasts Uruguay will expand 1.3% in 2009, while the government estimate is 2% with a 2% GDP fiscal deficit.

Finally the EIS says that the recessive context of Uruguay’s main export markets should see the country “continue to push Mercosur partners to admit the asymmetries” and open the way for junior members to sign bilateral trade agreements outside the block.

Regarding this issue it was recently revealed that South Korea was interested in negotiating a free trade agreement with Mercosur, which had the support of junior members Paraguay and Uruguay, however “Argentina and Brazil” argued they were not yet prepared for such an agreement.