MercoPress. South Atlantic News Agency

S&P confirms Uruguay’s positive outlook; anticipates “smooth transition”

Sebastian Briozzo also warns government debt remains high

Standard & Poor's Ratings Services said this week it expects a “smooth transition” regardless of who wins October's presidential election in Uruguay given the country’s track record of prudent economics policies. S&P also confirmed BB- sovereign credit ratings for Uruguay with the outlook “remaining stable”.

“The growing track record of prudent economic policies is expected to continue after the election, irrespective of the result” S&P credit analyst Sebastian Briozzo said in a statement from the office in Buenos Aires.

The elections will “heighten the debate on microeconomic issues” but there's broad consensus on macroeconomic restrictions, as well as on the key role that private investment will play in improving Uruguay's medium-term economic prospects, Briozzo said.

The two main presidential tickets for the October election are incumbents former Agriculture minister Jose Mujica and former Finance minister Danilo Astori, and for the opposition former president Luis Alberto Lacalle and Senator Jorge Larrañaga. All four are known for their orthodox approach to economics in spite of politically intended labels, such as “populist” and “conservative”.

S&P also reiterated its double-B-minus foreign and local currency sovereign credit ratings for Uruguay, but also pointed out that “government debt remains high, the local banking system is still significantly dependent on US dollar deposits, and Uruguay is vulnerable to regional developments”.

The Uruguayan government debt remains highly vulnerable to exchange-rate fluctuations, with 65% of the debt denominated in foreign currency, S&P said. Around 85% of bank deposits are denominated in US dollars, which undermine monetary policy while a rigid government spending framework hinders economic policy implementation.

“While recent economic policies are all directed to address these vulnerabilities, only a gradual improvement could be expected over the medium term,” Briozzo said.

But on the positive side Uruguay has a “growing track record” of prudent macroeconomic management, and it has weathered the severe global financial and economic crisis, and the economic outlook has improved due to significant foreign direct investment.

Recent policies have significantly reduced the level of government debt to an estimated 45% of GDP, according to S&P methodology. This compares most favorably with 2003 when it reached 100% of GDP.

By the end of 2009, the Uruguayan government should have a clear sovereign debt picture for at least the next 18 months, supported with a strong banking system and a systematic process of international reserves accumulation by the Central bank.