The Japanese Rating and Investment agency has upgraded Uruguay’s debt rating from BB- to BB with a stable outlook according to the latest release this week. This is two slots below investment grade and recognized among other factors the light public debt service burden until 2011.
In its decision support rationale R&I says that the Uruguayan economy continued to expand steadily until 2008, with a stabilized fiscal position and bolstered management foundation of its banks.
Enhancement of the trade structure through diversification of export destinations, combined with an inflow of foreign direct investment, have improved the balance of international payments, and enabled Uruguay to accumulate ample foreign reserves. Although Uruguay appears unlikely to avoid a fiscal deficit in 2009 because of an economic slowdown, the size of the deficit is expected not likely to exceed 3% of GDP.
The report indicates that over a six-year period until 2008, Uruguay achieved average annual economic growth in excess of 7% with large-scale investment projects funded by foreign capital with ample room for future economic growth.
Unemployment rate dropped from 17% to the 7% range, and per capita GDP rose above 9.000 US dollars.
The fiscal deficit in 2008, when Uruguay was buffeted by drought and a sharp rise in crude oil prices, was held to within 2% of GDP, and public debt as a percentage of GDP was reduced to 51.4%.
The government has worked to improve its debt structure, through measures such as lengthening debt maturities and increasing the weighting of peso-denominated securities, which has helped to eliminate concerns with regard to the refinancing of foreign currency-denominated debt.
Under the impact of falling prices for primary commodities such as grain and beef, exports have stalled since September 2008. With prices for exports still at historically high levels, however, and import prices falling as a result of the large decline in crude oil prices, Uruguay is among Latinamerican countries that have been able to maintain their terms of trade.
Although the current account deficit in 2008 rose to 1.2 billion US dollars, direct investment by foreign enterprises was substantially higher, totalling 2.2 billion. Uruguay also is benefiting from inflows of deposits from non-residents. As of June 30, 2009, foreign reserves stood at 7.4 billion USD, a record high level.
Based on the lessons of the financial crisis in 2002, Uruguay's financial authorities have imposed high reserve requirements on banks for dollar-denominated deposits. Consolidation within the banking industry that involved foreign-affiliated banks were completed, and the operational base and financial position of banks have been strengthened.
The capital adequacy ratio under the Basel II criterion on average is 15.2%, while allowances for doubtful accounts are six times the level of delinquent loans (two-month arrears standard), both high levels.
Claims against Argentina as a percentage of total loans outstanding have fallen sharply, from 20% in 2002 to 1% today. Deposits from Argentina as a percentage of total foreign currency deposits have declined as well, from 40% to 18%. The risk that banks will be hit by a surge of deposit withdrawals sparked by concerns about the future of Argentina's economy has receded significantly.
Even if foreign currency deposits equivalent to 40% of all foreign currency deposits are withdrawn, as they were in 2002, the remaining foreign reserves balance is calculated to be 3 to 3.5 billion USD.