MercoPress. South Atlantic News Agency

Two possible scenarios for Uruguay’s recovery: 2010 and 2013

Economist Talvi praised the solidity of the Uruguayan banking system.

The Uruguayan economy has two possible scenarios for recovery from the impact of the current world slowdown, in 2010 and in 2013, according to a local economics and social think tank, Ceres and its leading economist Ernesto Talvi.

The two possible scenarios considered are a V shape and an L shape recovery at world level. In the first case global credit is gradually re-established in 2010 and commodities’ prices (which make up most of Uruguay’s exports) return to their 2006 level.

In the second option, the world economy is slower in recovering, bank credit takes longer to return, and therefore it is only towards 2013 that global activity bounces back. It’s then when Uruguay can expect commodities’ prices to return to the 2006 level.

“In the first V shaped hypothesis the Uruguayan economy experiences a mild recession in 2009, (GDP drops 0.3%) and recovers in 2010, with a fiscal deficit of 3.2% of GDP and 4% in 2010, gradually falling back to 2.4% of GDP in 2012” pointed out Talvi.

In the L shape hypothesis, Uruguay is forecasted to suffer a recession in 2009, 2010 and then begins a very gradual recovery, but “will not suffer an economic collapse”, said Talvi. Nevertheless the fiscal situation undergoes a “sustained deterioration” reaching 5.2% of GDP in 2013.

But “in any of the two cases the next government (March 2010) will be forced to apply corrective measures to balance public finances”, warned Talvi.

Regarding the banking system situation in the V shape hypothesis, Talvi estimates delinquency accounts could reach 1.4% from the current 0.9%; while in the L shape situation, delinquency accounts would climb to 3.1%.

However “even in the most unfavourable scenario there will not be a banking crisis”, underlined Talvi, who emphasized this point.

Uruguayan public opinion still has very fresh the near default situation created in 2002 as a consequence of the spill over from the collapse of the Argentine banking system and melting of the neighbouring country’s economy.

Although Uruguay eventually recovered with the help from the US Treasury, GDP contracted almost 25% and unemployment soared to over 20%.

Finally Talvi underlined another very positive side of the current Uruguayan economic situation and that is the “excellent management” of the foreign debt payments schedule. Even in this encouraging scenario Talvi recommended the government to request the flexible credit line from the IMF, “an extra insurance, which can be returned in 12 months time if we don’t need to use it”.