Fitch Ratings revised Uruguay's rating outlook to positive from stable on Tuesday, citing the country's ability to cut external and budget vulnerabilities. However Fitch warns about the deteriorating situation in neighbouring Argentina and inflation.
The agency noted Uruguay's sustained growth momentum and ongoing diversification of the economy with growth that ”continues to outperform peers and higher rated sovereigns reaching a five-year average of 6.1% in 2011”
In addition Fitch affirms the following ratings: Foreign Currency IDR at 'BB+'; Local Currency IDR at 'BBB'; Short-term IDR at 'B'; Country Ceiling at 'BBB'. The Rating Outlook is Positive.
The outlook revision reflects Uruguay's continued reduction in external and fiscal vulnerabilities underpinned by its strengthening international liquidity position and improved currency composition of government debt.
Uruguay's sustained growth momentum and on-going diversification of the economy buttressed by robust foreign direct investment flows also support this rating action.
Further progress in reducing government indebtedness, as well as strengthening of external credit metrics, given commodity dependence and relatively high financial dollarization, will be supportive of an upgrade to investment grade.
International reserves increased by over 30% in 2011 alone, reaching an historical high of 10.3 billion dollars.
“Large inflows of foreign direct investment (FDI) and the government's pre-financing strategy in 2011 have resulted in strong foreign reserve accumulation, increasing the resilience of the country to external shocks”, said Santiago Mosquera, Director in Fitch's Sovereign Group.
Uruguay, though, remains a net external debtor at 22% of CXR. Partly balancing this credit weakness, the government has continued to accumulate foreign liquid assets to cover future debt amortization, thus mitigating government debt's foreign exposure and rollover risks.
Moreover, Uruguay has secured contingency credit lines with multilaterals for an estimated 3% of GDP in case conditions in global markets deteriorate.
Uruguay's fiscal position has improved in recent years, with relatively low government deficits in comparison to the 'BB' median. Nevertheless, central government debt levels, both in gross and net terms, still remain higher than peers.
Proactive and adept liability management has led to a noticeable improvement in government debt composition. At the same time, the share of public debt denominated in foreign currency has fallen from 66% in 2010 to 51% in 2011, reducing currency risk.
'Government debt has a manageable repayment schedule, with the third-longest debt duration among sovereigns rated by Fitch,' added Mosquera.
However the weak fundamentals of the Argentine economy as well as increased risk aversion resulting from its government policy actions could weigh on Uruguay's growth performance, but these factors are unlikely to result in significant balance of payments or financial pressures.
But inflation which averaged 8.1% in 2011remains higher than peers. This reflects both vigorous domestic demand momentum and limited monetary policy tools given the high levels of financial dollarization, early development of local markets and relatively low levels of financial intermediation.
Standard & Poor's upgraded Uruguay's ratings to BBB-minus from BB-plus earlier this month, based on the country's sound economic growth prospects and improving fiscal and external indicators.
In addition, a Moody's senior officer said last month that Uruguay is likely to be the next Latin American country to win an investment grade rating from Moody's Investors Service, with a review likely late this year.