MercoPress. South Atlantic News Agency

Uruguay completes investment-grade ‘triple crown’ from the three big credit rating agencies

Fitch trusts in Uruguay’s policymakers’ conservative approach to address fiscal policy with prudent salary policy

Uruguay finally managed on Thursday to achieve investment grade debt rating from the three major agencies when Fitch raised the country’s rating to BBB-minus from BB-plus, citing economic resilience as well as the political and social stability of the country, squeezed between Brazil and Argentina.

The outlook is stable Fitch said in a statement praising the conservative nature of Uruguay’s policymakers anticipating it is hopeful of a conservative fiscal policy and prudent salary policy.

Standard & Poor's also rates the country BBB-minus with a stable outlook while Moody's Investors Service rates Uruguay Baa3 with a positive outlook.

“Uruguay's social and political stability, strong institutions and relatively high per capita income are characteristics that are fully in line with investment-grade sovereigns,” Fitch said.

The International Monetary Fund expects Uruguay's economy to grow by 4% this year, slightly faster than that of Brazil, Latin America's biggest economy.

Fitch noted the possible effects Uruguay's larger neighbours and main trade partners (including China) could have on the smaller country's economy.

“Fitch assumes that Argentina's economic difficulties will have only a limited spill-over in Uruguay due to Uruguay's strengthened external buffers and the reduced trade and financial links between the two countries in recent years,” it said.

“In addition, Fitch expects economic growth in Brazil, Uruguay's main trading partner, to recover in 2013”, and a soft landing in China.

In the report Fitch underlined Uruguay’s economic resilience in recent years, most recently reflected by the healthy growth of 3.6% in 2012 despite the economic difficulties confronting its main trading partners. Uruguay's five-year average GDP growth at 5.6% is well above the 'BBB' median and its medium-term prospects remain favourable. Fitch forecasts a 4% average GDP growth for Uruguay in 2013 and 2014.

Likewise “prudent fiscal management has led to a decline in government indebtedness and a significant improvement in debt composition in recent years” while financing flexibility has been enhanced with Uruguay having good access to international markets and multilaterals”.

Further on the reports indicates that Uruguay's public debt profile has improved thanks to well-timed liability management operations that have extended maturities, reduced dollarization, and deepened markets for Uruguayan debt, which means exposure of central government debt has fallen to 45% in 2012 from 74% in 2007.

Uruguay's market-friendly policies have facilitated a strong flow of foreign direct investment, allowing for better financing of current account deficits and a steady diversification of the economy.

As Uruguay’s external balance sheet has strengthened, increasing the country's shock-absorption capacity, international reserves have more than doubled between 2008 and 2012, reaching 13.6 billion dollars last year.

“Fitch estimates that Uruguay could become a net sovereign external creditor in 2013, which will be positive given its high commodity dependence and financial dollarization”.

But constraints include a relatively high government debt burden, high financial dollarization, and challenges posed by the sustained high inflation rate.

Inflationary pressures remain high with inflation hovering close to the double-digit mark. A robust domestic demand, a still expansionary monetary stance, and limited effectiveness of monetary policy due to high financial dollarization and low financial intermediation mean that inflation will recede only gradually over the forecast period, thus “Avoiding a wage-price spiral is important to maintaining inflation on a downward path and maintaining monetary policy credibility”.

Uruguay's fiscal deficits widened in 2012, but Fitch believes the country will continue to proceed gradually with fiscal consolidation, relying mainly on expenditure restraint in the next two years, which coupled with favourable growth should allow for a steady decline in government debt burden over the coming years.

Finally Fitch expects that the conservative nature of Uruguay's policymakers will continue in the future, meaning that high fiscal deficits are unlikely unless there is a large economic shock. Some improvement in the policy mix, whereby a conservative fiscal policy and a prudent wage policy will be supportive of the monetary authorities' objective of reducing inflationary pressures, can be expected.