MercoPress. South Atlantic News Agency

Uruguay must address fiscal policy (and inflation) suggests leading private bank

Goldfajn: Uruguay's inflation has been off target for too long

The US dollar is poised to continue consolidating during 2014 in Uruguay, and will most probably by the end of the year reach 24 Pesos from the current 21 Pesos, according to Itaú, one of the leading private banks in the country, which also warned about inflation and the fiscal deficit.

 “We are concerned with inflation in Uruguay which has been out of target for quite some time. It reached 8.67% and we believe will end this year close to 8.9%”, said Ilan Goldfajn who added that the increase of interest rates did not have a positive effect in bringing down prices, on the contrary.
But the Brazilian economist also admitted that Uruguay has “two neighbors with high inflation and this also has a contagion effect” given the sizes of the economies involved.

Goldfajn also recalled that last June the Uruguayan Central bank changed its monetary policy of fixed interest rates and replaced it with one of monetary aggregates. “This generated further volatility to the rates market and inflation sprinted”.

But to counter inflation, Uruguay must address fiscal policy, because “interest rate fixing and monetary aggregates are contained in the larger fiscal policy box”

“Uruguay needs to apply a tougher fiscal policy, address the budget deficit even when this is not easy when faced with low growth periods”, admitted the Brazilian economist.

Nevertheless “Uruguay will have to adjust government accounts and lower the deficit from 2.8% of GDP currently to 1.3% next year. With that reduction Uruguay could end 2014 with an 8% inflation, and I underline monetary policy is innocuous if there is not a tightening of government spending: if not forget it”.

Last November the president of Uruguay's central bank Mario Bergara discarded any possibility of reconsidering the budget deficit: to lower inflation two points by correcting government expenditure “we would then need a fiscal adjustment of five points of GDP, which is equivalent to the country's education budget, no way”.

“When from the private sector and the opposition call on us to fight inflation by being less expansive, what they should also mention is how are we going to cut 2.5 billion dollars from outlays”, Bergara underlines.

The Brazilian bank Itaú forecasts that the Uruguayan economy will expand 3.5% this year and 3% in 2014.

Goldfajn also mentioned that “the strengthening of the US dollar vis-à-vis other currencies in the region in the next twelve months can be explained because of a tighter US monetary policy after years of relaxation while pumping stimuli to the economy. When will this happen is anybody's guess, but it's coming...”

And regarding the exchange rate, “the balanced exchange rate for a country is what forces economists to be humble, because it is constantly on the move and it is very hard to establish what is the right balance. What you have to look at are the country's foreign accounts and if these begin to react, the level is correct”.