MercoPress. South Atlantic News Agency

Uruguay's budget deficit 4% of GDP in 2016, worst performance since 1989

Economy minister Danilo Astori said results were better than expected since “these percentages are below anticipated targets: ”4.3% and 0.9% of GDP deficits”.

Uruguay's budget deficit reached 4% of GDP during 2016, equivalent to US$ 2.043bn, the worst performance since 1989, according to the latest figures released by the government's stats office, INE. The previous year, 2015 ended with a budget deficit of 3.6% of GDP, which also set a record only comparable to 2002 (3.7%), when Uruguay underwent one of its most challenging financial meltdowns in decades.

 The budget primary deficit (which does not include foreign debt capital or interest payments) stood at 0.7% of GDP, equivalent to US$ 357.5 million. However Uruguay's Economy minister Danilo Astori said results were better than expected since “these percentages are below targets anticipated in the annual budget, that is a 4.3% and 0.9% of GDP deficits”.

To face the challenge of a slower economy in 2015 and 2016, in an adverse regional and global environment, the Uruguayan government applied a pro-cycle policy, but has decided that beginning 2017 it will try to bring budget numbers under control, basically the deficit down to 3% of GDP in the twelve months, and 2.5% by 2019 at the end of the current administration.

This is to be achieved by implementing this year a strong hike in income taxes (US$ 375 million), an even greater boost in public utility rates, which in Uruguay are government monopolies, and that during recent years have had a disastrous performance, plus supposedly a significant cut or delay in outlays.

However private analysts, credit rating agencies and market feelings are that the challenge is awesome given the current political, social and economic situation plus the fact it is time to address “fiscal structure consolidation”. In effect already between April 2015 and October 2016, when the current administration took office from ex president Jose Mujica, there was an immediate adjustment of public utilities rates, mainly fuels despite the drop in international oil prices, equivalent to 0.8% of GDP.

Likewise the Uruguay government admits that without this adjustment the budget deficit would have been above 5% of GDP, and it must also address that outlays during 2016 have continued at a faster rate than the growth of the economy.

Government non financial revenue was equivalent to 29.1% of GDP during 2016, which is a 0.1 percentage point increase over the end of 2015. Government corporations which work under a monopoly system, mainly power, fuels and telecommunications experienced a significant poor performance, despite an improvement from previous years when their combined deficit was almost 3% of GDP. On the opposite, primary outlays totaled 27.2% of GDP, an 0.8 percentage point increase over the end of 2015, mainly because of transfers to the old pension scheme, helping the fuels monopoly pay an oil debt to Venezuela, absorbing a US$ 71 million debt with the Scotia Bank arisen from the closure of the flag carrier Pluna, --decided by ex president Mujica--, an extension of the healthcare system to low income pensioners and support for companies that went broke but were converted into non profitable cooperatives by the government of ex president Mujica.

Finally the capital investments chapter was equivalent to 2.4% of GDP, 0.1 percentage point increase over 2015 and debt, capital and interest payments totaled 3.3% of GDP.

Regarding inflation, the twelve-month figure was 8.1%, down from the 10% of the second and third quarters, but above the Central bank range of 3% to 7%. Besides the 8.1% was achieved with the usual end of the year power bonus drop (equivalent to one full percentage point) delivered by the government monopoly, (but quickly recovered in the January 2017 bills), and an exceptional season of abundant vegetables and fruit.

Nevertheless as happened in neighboring Argentina there is a growing feeling in Uruguay public opinion and private agents that the inflation records are not as transparent as they should be. Private agents also are critical of the fact that in twelve years of uninterrupted growth the Uruguayan economy has systematically operated with budget deficits.

Finally as to employment and economically active population, 2016 ended with 7.8%, compared to 7,5% in 2015. In an environment of slower economic growth, in the range of 1% to 1.5% during the last two years, it can be considered an achievement given the ongoing recession in Uruguay's large neighbors, Argentina and Brazil, and prudent demand from its main trade partner, China.

But opposition agents also point out to the fact that in the last ten years, that is since the current Broad Front coalition rules Uruguay, 62.000 employees have been added to the government pay roll. Without this generosity, unemployment would be closer to 10%, and with not much symptoms of intentions to modify the practice. In effect the cement factories of the Uruguayan government have been losing money at an annual rate of US$40 million, and have equipment to renew one of its plants, including a major oven, which have cost over US$ 200 million, abandoned in a port in the same containers they arrived when they shipped.

This situation has forced the government brands to buy cement from their private competitors to try to keep their share of the market, and rather than consider a cost cutting program to make them profitable again, it has agreed --with the unions-- to keep them operational, not necessarily in production, and to fill some forty vacancies in the plants.