MercoPress. South Atlantic News Agency

Inflation and competitiveness, Uruguay's main challenges for next year and a slower growing economy

Economist Schandy, the risk that inflation could become two digits, is not discarded

Inflation and competitiveness are the two main macroeconomic challenges faced by Uruguay and does not anticipate an easy 'soft landing', at 3% growth rates in coming years, according to Deloitte during a conference on “Prospects for 2014 and economic challenges for the next government”.

 “Uruguay is accumulating misbalances in several macroeconomic fronts which expose the country to a more vulnerable situation in the event of a change in the world scenario beginning 2015” said economist Tamara Schandy.

Even when Uruguay has strong indicators, such as a sustained direct foreign investment, high international reserves and a solid profile regarding sovereign debt maturity which should enable it to face without major surprises impacts from the international economy, “a deceleration of the economy can be expected to deepen next year”.

Experts also agree that another signal of alert is the competitiveness situation and point to the money exchange rate mismatch with most of its trade partners including Brazil which is 20% higher taking a reference of the last 30 years.

Deloitte's forecasts don't anticipate an abrupt break for the Uruguayan economy, but indicate that GDP will expand 2% in 2014, if the new pulp mill Montes del Plata is excluded.

In this scenario despite slower economic growth, inflation will continue at high levels which must be said is “worrisome”. Not so long ago this was attributed to the fact that demand was growing faster and the pressure on prices was important. But the economy has cooled and inflation has not yielded“.

”The risk that inflation could become two digits is not a discarded risk“ emphasized Schandy.

Deloitte estimates that the consumer prices' index CPI will be too close to 10% in the first half of 2014 and will only begin to yield in the second half.

”But while it remains at values of 9% to 9.5%, forecast mistakes and sidesteps because of volatile and seasonal factors in the IPC basket could lead easily to an inflation above 10%“.

Even when in the short term the main challenge of the authorities is to contain price increases, in the mid-term, ”the task should be to work to consolidate lower levels of inflation“ plus the fact that the cost of stabilization is higher given inflationary expectations, greater indexing of the economy and a continuous increase of salaries above productivity levels.

If salaries continue growing at two digits rate and with the need to accommodate the nominal money exchange rate so as not to continue accumulating misbalances regarding the real exchange rate, ”it is very difficult to see inflation coming down“.

”There is a serious risk of a greater falling back in competitiveness with Brazil (Uruguay's main trade partner) if the country devalues at a quicker pace and Uruguay does not have space to follow up“ said Schandy who recalled that following the collapse of Lehman Brothers Brazil devalued 50%, but Uruguay only25%. ”Uruguay could be left without sufficient space for a greater devaluation in a short period“

As to the exchange rate, Schandy said Deloitte estimates 24 Pesos to the US dollar by the end of 2014, but warns about ”an inflection point“ if and when the US monetary policy changes. ”This would mean a stronger dollar and lower prices for Uruguay exports“.

”Commodities prices will remain strong but subject to a lower level tendency if a new financial scenario consolidates. The weak dollar and bottom rock interest rates have helped sustain Uruguay, but if this changes the time of reckoning will come for commodities”.

And although interest rates are expected to continue low, governments and corporations should begin adapting to higher rates for their financial costs, concluded economist Schandy.