MercoPress. South Atlantic News Agency

Private consultants coincide Uruguay is experiencing mild recession

Uruguay will suffer a mild recession in 2009 which could extend until 2010, according to the latest report from private Consultants Oikos. Growth is forecasted to be in the range of 0.5% to 1% this year which is associated to at least two running quarters with falling economic activity.

Oikos thus joins other local private consultants, Deloitte, Cinve-CPA/Ferrere and Ceres which anticipate a recession in 2009 although the Uruguayan government insists the economy will expand 2%, and the budget deficit will double to 3% of GDP.

Uruguay’s Central Bank survey of local economists also coincides that the country’s economy will experience a flat no growth period this year.

“Because of a descent in international prices (both for export and import goods) and a drop in demand (overseas and domestic), Oikos anticipates a significant fall in Uruguay’s foreign trade in 2009 and 2010”.

But since imports will experience a major contraction than exports, Uruguay’s negative trade balance “will fall both in absolute and relative values”.

Regarding the exchange rate with the US dollar, Oikos forecasts that the Uruguayan currency will depreciate 6.7% this year which means the greenback will cost 26 Uruguayan pesos at the end of 2009, compared to 24 pesos in the second quarter.

Furthermore 2008 inflationary pressures will ease in 2009 with the overall prices level stabilizing in the range of 3% to 7%, which is the target of the Central Bank. However this being an election year the implementation of “anti inflation measures” such as freezing public utilities rates, tax breaks for consumption goods, “should not come as a surprise”.

Another report, but from the Deutsche Bank and titled “Soft landing before the elections” points out that the Uruguayan economy will undergo a significant slowdown this year, “which has already begun”, but to a lesser extent than in the rest of the region.

The report supports the “soft landing” arguing on Uruguay’s strong showing in 2008 (8.9% expansion), ample private banking sector lending and the effects of sustained investment projects. Nevertheless the budget deficit is expected to soar above 3% of GDP because of a poorer fiscal performance.

Current account deficit is also estimated to fall from 4% of GDP in 2008 to 1% of GDP in 2009 because of lesser imports and a weaker exchange rate. The US dollar is expected to reach 26 pesos by the end of the year.

The Deutsche Bank report anticipates that interest rates should decrease during the rest of the year given a fall in domestic demand and inflationary pressures. “It can be expected that the Central Bank will lower its basic rate” several percentage points.

Finally the report warns that the ratio of public debt to GDP, although significant improvements have been made, remain “relatively high”.