Macro Latam< Voltar
For the full report, see enclosed file
• The fiscal deficit reached a new record high of 4% of GDP in 2016, from 3.6% in 2015, adding risk to the evolution of the public debt and credit ratings. Meeting the government’s commitment to reduce the deficit to 2.5% in 2019 seems challenging. We expect tax hikes this year to reduce the deficit to 3.3% of GDP (-3% in our previous forecast).
• The Uruguayan peso appreciated nominally against the dollar at the beginning of the year, in line with other LatAm currencies. The expected appreciation of the Brazilian real and the foreign currency supply led us to revise our YE17 exchange-rate forecast down to 31.5 pesos per dollar, from 33 pesos per dollar in our previous scenario, only a slight depreciation in real terms.
• Inflation in January was affected by the reversal of the temporary reduction in electricity prices last month, as well as increases in other tariffs. We expect the disinflation process to start again in the coming months, taking inflation to 8.5% in December (below our previous forecast of 8.9%). Our 2018 inflation rate forecast remains at 8%.
Fiscal deficit continues to rise
The fiscal deficit came in at 4% of GDP in 2016 (3.6% in 2015), which is a new milestone in the deterioration of public accounts since 2011. The government also posted a primary deficit of 0.7% of GDP, from 0% in 2015. The increase in the deficit surpassed our forecast (-3.7%) and market expectations (-3.56%) according to the latest central bank survey. Although tax collections increased by 11.8% yoy in 2016, marking an increase in real terms, primary expenditures expanded by 13.2%. Higher expenses were due to the government’s payment of a debt to the Bank of Nova Scotia in the insolvency proceedings of the Pluna S.A. airline, larger transfers to the municipalities and the deteriorating results of public companies in recent months.Investments, on the other hand, grew by 14.3% yoy. Salaries and pensions (50% of primary expenditure) increased by 12.6% and 11%, respectively. This year, a fiscal adjustment equivalent to 1% of GDP came into effect. Taxes on personal and corporate income as well as capital gains from companies went up. This increase is partly offset by higher deductions in the value-added tax. In addition, the government plans to cut some expenses. We expect these changes to bring the deficit down to 3.3% of GDP. For 2018, we expect a fiscal deficit of 2.8% of GDP.
The steady deterioration of the fiscal accounts has increased the public debt ratio to 50% of GDP, from 41.3% in 2013. Uruguay has significant buffers (gross international reserves equivalent to 25% of GDP) and the government has liquidity, access to markets, and contingent financing lines with international organizations of 4% of GDP; however, debt dynamics are vulnerable to exchange-rate volatility (40% of the debt is denominated in foreign currency) and the economic cycle, due to the revenue’s sensitivity to the level of economic activity. Uruguay’s credit rating stands two notches above the lowest investment-grade rating, but it has had negative outlook since the middle of last year. The government plans to issue USD 2.05 billion in sovereign bonds in the international credit markets this year.
Temporary rise in inflation
Consumer prices increased by 2.6% mom in January (8.27% annual), mainly reflecting the reversal of the temporary reduction in electricity prices as well as adjustments in other tariffs. Trend inflation (a measure produced by the consulting firm CPA Ferrere that excludes volatile components) rose slightly in January, to 8.6% from 8.4% in December. Therefore, inflation remains above the central bank’s target range (3%-7%). Looking ahead, we expect the disinflation process to resume, helped by a lower nominal depreciation of the peso and higher interest rates. We have lowered our 2017 inflation forecast to 8.5% (8.9% in our previous scenario). Our 2018 inflation forecast stands at 8%.
The peso appreciated nominally against the dollar in January and early February, in line with most LatAm currencies. Against the Brazilian real, the peso remained practically stable at the beginning of the year. We reduced our YE17 exchange-rate forecast to 31.5 pesos per dollar from 33 pesos, as we expect the Brazilian real and the Argentinian peso to strengthen in real terms. For 2018, we see the exchange rate at 34.0 pesos per dollar
Credit performed poorly in 2016. Private-sector loans denominated in foreign currency (54% of the total) increased by a mere 0.4% yoy in December, while loans denominated in pesos expanded by 6.1% yoy. Private-sector deposits in local currency increased by 16.3% yoy at the end of 2016, while deposits denominated in foreign currency fell by 3.5% yoy, chiefly due to a decline in deposits from non-residents. Thus, the dollarization of the economy remains high: 77% of deposits are denominated in foreign currency.
Positive signs in activity
The leading activity index published by Ceres posted a new increase in November (0.3% mom, after gaining 0.4% in October). The diffusion index came in at 77%. Therefore, this indicator shows a first positive signal for 1Q17, after pointing to an economic expansion in 4Q16. Our 2017 GDP-growth forecast stands at 1.2%, following estimated GDP growth of 1.4% last year. For 2018, we expect economic activity to expand by 2%, in line with the higher growth rates anticipated for Brazil and Argentina.
Unemployment increased in 2016. Last year's average unemployment rate reached 7.9%, slightly above our forecast of 7.8% and up from the 2015 average (7.5%). In December, the unemployment rate rose to 7.7% from 7.4% one year earlier. The activity rate fell 1.1 percentage points yoy, while job creation shrank by 1.2%. We forecast an unemployment rate of 8% in 2017 and 2018.
Uruguay’s trade deficit (excluding free-trade zones) came in at USD 600 million in 2016 (Itaú’s estimate was USD 400 million deficit), up from the USD 1.2 billion deficit recorded the previous year. The weakness of the economy during much of 2016 and the lower average oil prices caused the value of imports to fall by 14.2% yoy, mainly due to lower purchases of intermediate goods (-18.3% yoy), capital goods (-14.2% yoy) and consumer goods (-6.8% yoy). Exports decreased by 8.5% in 2016 due to lower exports of primary products (-11% yoy) and manufactured goods (-8.5% yoy). At the margin, both exports and imports recovered dynamism. Exports grew by 2.8% yoy in December after expanding 8.1% in November, while imports increased 2.2% and 12.5% yoy, respectively. The lower trade deficit led to a further improvement of the current-account balance. According to our estimates, the current-account deficit ended 2016 at 0.5% of GDP (-2.3% in 2015 and -5% in 2013). We maintain our 2017 trade-deficit forecast at USD 800 million, in line with the expected increase in oil prices. In 2018, we see a slight deterioration in the trade deficit, to USD 1 billion, because of the higher imports required to ensure the expected economic growth.
Juan Carlos Barboza
For the full report, see enclosed file