MercoPress. South Atlantic News Agency

EIU expects higher inflation in Uruguay as government tries to spur growth

Vice-president Danilo Astori says inflation will be on target…at the end of 2012

The Uruguayan government will concentrate efforts in promoting economic growth, (debilitated in the second quarter), plus reducing domestic debt, even to the expense of “weakening the credibility of the inflation target”, according to the Economist Intelligence Unit, EIU, from The Economist magazine.

“Inflation is going to remain above the official target (4% to 6%) most of the next twelve months and will only return to the 6% range at the end of 2012”, says the EIU adding that this will take place basically because of lower prices for commodities and a less dynamic domestic demand.

However, EIU points out some risks to this forecast given the recent “rise in inflationary expectations and the weakening of the inflation target credibility”.

According to EIU the Uruguayan central bank is balancing the risk of spurring economic growth that started to slow down in the second quarter, with the objective of the official policy of adjusting inflation to the pre-established target.

And even when the Central bank retains its independence, “it works very closely with the government” in policies implementations, which partially modifies the bank’s priorities.

“Signals show that the authorities will allow the Central bank to set inflation back on track, gradually, giving priority to growth dynamism and reducing domestic debt”.

In spite of the fact domestic demand remains sustained in the second half of the year, “the global economy’s greater uncertainty makes it improbable that the central bank adopts a more restrictive course in the coming quarters” affirms EIU. This in practical terms means the monetary authorities will not be increasing the reference interest rate in the coming meetings of the Monetary Policy Committee.

Last week Vice-president Danilo Astori and former economy minister said that inflation was under control “and the evolution is to fall and therefore we expect that by the end the year it will be closer to the higher end of target”, but “we are convinced that inflation in 2012 will be on target”.

EIU also pruned growth estimates for the Uruguayan economy this year and warned that if the Euro crisis consequences aggravate, forecasts for the following year will also have to be lowered.

“Prospects for Uruguay’s main trade partners contain a high degree of uncertainty and given the weaker GDP growth, the expansion estimate for 2011 has been cut from 6% to 5.7%”, reads the EIU report.

International trade will remain stalled in the third and fourth quarters of the year because the economies of the US and Europe remain on the threshold of a major recession that will impact on Uruguayan exports”, adds EIU.

But the global climate is not only influencing future expectations. According to the latest data released in September there are strong indications that Uruguayan companies are becoming “less inclined to expand their capacity” following on the prevailing global uncertainty.

For 2012 and 2013 EIU estimates an average growth for the Uruguayan economy ranking 3.9%.

Regarding foreign policy Uruguay is expected to increase its links with Mercosur, a customs union described by EIU as ‘imperfect’.

But the integration process “will be made difficult because of the unreliable policies of its member countries, particularly Argentina, plus the strong tendency both from Argentina and Brazil to advance with protectionist practices.

As to domestic policy, EIU analysts expect the government to face growing pressure from the most radical groups of the ruling coalition, together with the unions, “demanding a greater focus on reducing poverty and redistribution of national income”.

In this scenario the Uruguayan government will be forced to face greater demands of public expenditure and will see “its efforts to reduce the debt ratio and combating inflation” highly challenged.

EIU finally warns of the ‘risks’ of new legislation, in coming months, which will “limit landholdings by foreigners”.