MercoPress. South Atlantic News Agency

Fitch Ratings believes the Lacalle Pou coalition has sufficient political capital to face challenges and much needed reforms

On 27 March, Uruguay voted “no” to overturning 135 of 476 articles of the 2020 “urgent consideration law” (LUC) in a referendum sponsored by the opposition

The ruling coalition of Uruguayan president Luis Lacalle Pou expects to use its political capital following victory in the 27 March referendum which rejected overturning a third of his government's program, enacting reforms in the second half of his five year period, according to the latest Fitch Rating report on Uruguay.

These include addressing key competitiveness issues: fuel costs, slipping education results, labor market rigidities, and narrow trade openness. A post-referendum priority will also be the pension reform, which is crucial for long-term fiscal sustainability.

On 27 March, Uruguayans voted “no” to overturning 135 of 476 articles of the 2020 “urgent consideration law” (LUC) in a popular referendum initiated following a signature campaign last year by the opposition Frente Amplio coalition. Fitch Ratings believes the result shows the government has maintained support among the electorate in its first two years, partly through its effective management of the pandemic, but it remains to be seen how far it can capitalize on this to advance economic reforms.

The vote to uphold the LUC has more symbolic importance than direct policy consequences. But the vote was widely seen as a referendum on the government itself as it approaches the middle of its five-year term. The narrow margin of victory (49.9% to 48.8% of eligible votes) could limit the political capital it confers. But it was similar to Lacalle Pou’s margin in the November 2019 presidential run-off vote (50.0% to 48.4%), indicating his preservation of support despite conservative fiscal policy, real wage losses, and fuel price rises.

Furthermore Lacalle Pou's personal standing and support according to most public opinion polls is well closer to 60% and the midterm highest of any president since the recovery of democracy in Uruguay in 1985, and all three main political forces have rotated in office.

And although the agenda has made limited progress so far, partly due to ideological diversity within the ruling coalition, more substantial progress on structural reforms is important for lifting weak potential growth (estimated at 2.1% by a newly formed fiscal council). Investment/GDP rose to 18.4% in 2021 from a low of 14.6% in 2019, driven by construction of the UPM pulp mill (Uruguay’s largest-ever investment project), but is still low relative to regional and rating peers. Argentine capital fleeing the Kirchner administration is also finding refuge in Uruguay.

The victory could also bolster the government’s ability to maintain prudent macroeconomic policy settings. This was a key driver of Fitch’s revision of the Outlook on Uruguay’s ‘BBB-’ sovereign rating to Stable in December 2021.

In its first two years in office the government has made meaningful progress on fiscal consolidation, reflecting well-targeted pandemic relief measures, resilient revenues, and below-inflation wage increases resulting in savings in public salaries and indexed pension benefits. The government pledges a real wage recovery that could erode some of these savings, but its strong political standing could help it navigate this trade-off prudently.