MercoPress. South Atlantic News Agency

Uruguay lowers growth estimate for 2014 to 3% of GDP; inflation still a challenge

Minister Bergara is on a bandwagon tour of US to attract investments to Uruguay

Uruguay's GDP this year is expected to expand by 3%, below the original estimate of 4%, according to Economy minister Mario Bergara currently in the United States on a tour to promote investments in the country and who was interviewed by Bloomberg.

  Bergara also admitted that following three years of full employment inflation has jumped to 9.1% which is above the Central bank's upper target of 7%.

“We are having more constraints from the supply side” pointed out Bergara, who was president of Uruguay’s central bank from 2008 to 2013, said. “We don’t export more beef, more soy, more rice because there’s not more to export. We have a very strong and firm domestic demand. That makes it more difficult to fight inflation”, Bergara told Bloomberg.

Nevertheless Bergara, who widened Uruguay’s inflation target by two percentage points to a range of 3% to 7% in June, said price increases were under control. The economy probably grew 4% last year and the 15% depreciation in the peso in the past year is in line with other emerging markets.

Under the original estimates sent to the Uruguayan Parliament in the annual update of the five-year budget, the economy was expected to grow 4% in 2014, with a budget fiscal deficit of 2.4% of GDP and an exchange rate of 23.80 Pesos to the US dollar.

According to the latest economic expectations survey (among banks and economists) from Uruguay's Central bank, on average it indicated that growth would be in the range of 3.2% and the budget fiscal deficit, 2.7% of GDP.

Bergara admitted that living next to South America's largest economies is not an easy task, even when it also has benefits.

Argentina devalued its currency 23% in January to help make exports more competitive and stem the biggest plunge in foreign reserves since 2002. Argentina’s default 12 years ago and contagion triggered an economic crisis in Uruguay that led to the country’s own devaluation and debt restructuring.

Contrary to Argentina, Uruguay's debt restructuring was highly successful and is praised as a model to follow by countries in similar situations. Following the restructuring Uruguay's economy has not ceased to expand uninterruptedly.

Argentina currently buys about 5% of Uruguay’s total exports, compared with about 25% before the last debt crisis, said Bergara. He added that deposits from Argentine residents in Uruguay's reliable banking system have fallen below 9% from 40% in the period, while loans to Argentines have dropped to near zero from about 20%.

“We learned how to navigate this issue by diversifying and trying to reduce vulnerabilities” Bergara told Bloomberg. “The concentration of regional risk proved to be a vulnerability for Uruguay and we explicitly designed policies in order to diversify our risks and opportunities in a global world.”

However Uruguayan economists also point out to the fact that 2014 is election year which is always a temptation for extra budget outlays. Besides with an economy forecasted to grow less and an extremely rainy January, which threatens crops, fruits and vegetables, (and thus inflation), the budget fiscal deficit is expected to climb closer to 3% of GDP. In 2013 the gap was 2.3% of GDP, above the target of 2.1%.

But economists describe 2014 as a transition year since what 'is really concerning is 2015', since the region is complicated: Argentina in a still undetermined course; Brazil suffering from a technical recession; oil at 101 dollars a barrel; climate change and an irregular rain pattern as in the last twelve months, could all amount to non comforting surprises.

Economists Alfonso Capurro and Marcelo Sibille agree that if with no changes in the pattern of budget expenditure, and less revenue, because of a slower economy, the budget will necessarily increase.

“They could slow outlays, delaying investments or even admitting higher deficits from government owned utilities”, but it will also add to the deficit, said Capurro.

“With less activity it's only natural that fiscal revenue becomes less dynamic. The 4% growth was too optimistic, taking into account some preliminary data such a slower summer season because of the weather and Argentina”, pointed out Sibille

A one percent drop in growth 'inevitably means domestic demand will feel the effects”, even when the slower growth has yet to be determined if it is caused by a contracting foreign or domestic demand. Finally economists agree that the government is now more in line with the private sector forecasts.