Itaú BBA - Scenario Review - Uruguay: Sustained economic growth

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Scenario Review - Uruguay: Sustained economic growth

Outubro 11, 2017

Uruguay’s GDP grew in 2Q17 led by private consumption and exports.

For the full report, see enclosed file
 

• Uruguay’s GDP grew in 2Q17, showing its sixth consecutive quarterly increase, led by private consumption and exports. Our 2017 and 2018 GDP forecasts remain at 3% and 2.5%, respectively.

• Inflation remains within the central bank’s target range (3%-7%), but food price growth has accelerated in recent months. Our YE17 inflation forecast remains at 6.5%.

GDP continues to grew

Uruguay’s GDP grew in 2Q17, led by private consumption and exports. GDP grew by 2.8% yoy in 2Q17, compared with 4.4% yoy in 1Q17. In seasonally adjusted terms the economy contracted by 0.8%, down from a 1.5% expansion in the previous quarter. Private consumption rose by 4.4% yoy, fueled by the appreciation of the UYU and climbing real wages, while public consumption fell by 1.4% yoy. Gross fixed capital formation declined by 19.1% yoy. Exports increased by 9.3% yoy, while imports dropped by 0.8% yoy. Economic growth in 2Q17 was led by transportation, storage and communications (9.4% yoy), trade and restaurants (7.2% yoy), the primary sector (4.9% yoy) and the electricity, gas and water sector (4.8% yoy). On the opposite side, construction activity contracted by 5.5% yoy, while manufacturing production fell by 6.4% yoy, affected by the technical stoppage of the Ancap (La Teja) refinery. Excluding this negative effect, manufacturing production expanded by 1.0% yoy. The statistical carryover for this year is 2.5% yoy. 

Consumer confidence picked up in August. The consumer confidence index compiled by Universidad Católica rose by 10.6% mom in August, following a 3.9% decline in July. All the sub-indices that compose the index showed improvement: “willingness to buy durable goods” rose by 13.1% mom, reflecting intentions to buy cars and household goods, while “personal economic situation” and the “economic situation of the country” rose by 6.5% and 5.7%, respectively. The confidence index is now 8.4% above the level recorded in the same month of last year, and it is slightly above the zone of moderate pessimism. The leading activity index published by the think-tank Ceres picked up by 0.3% mom in July, indicating activity growth in 3Q17. Meanwhile, industrial activity contracted by 12% in the first seven months of the year, but the industrial sector will likely contribute positively to economic growth in 4Q17 due to the opening of the La Teja refinery.

The labor market shows an improvement. Uruguay’s unemployment rate fell by 1% in July, to 7.6%, marking the first annual decline since November 2016. The employment rate rose by 0.5% yoy, to 58.3%, while the activity rate decreased by 0.2% yoy, to 63%. Unemployment showed its fourth consecutive monthly decrease since March, when it reached its highest level since September 2007 (9%). Over the last 12 months, the unemployment rate averaged 8%. 

Our 2017 and 2018 GDP growth forecasts remain at 3% and 2.5% respectively, with the latter supported by our expectation of higher growth in Argentina and Brazil.

Inflation inches upward

Vegetable and fruit prices lifted the inflation rate for the second consecutive month. Consumer prices rose by 0.54% mom in September, taking the annual reading to 5.75%, up from 5.47% in August. The September inflation rate was slightly higher than the market expected (0.49%), according to the latest survey by the central bank. The September number reflected increases in prices for food and non-alcoholic beverages (+1.3% mom, with an impact of 0.34%). We highlight the higher prices for fruits, vegetables, legumes, meat and poultry. Other items showed price increases that were lower than the monthly hike for the general index. Annual inflation remained well-behaved and within the central bank’s target range (3%-7%) for the seventh consecutive month. Trend inflation (a measure produced by the consulting firm CPA Ferrere that excludes volatile components) fell to 6.9% (from 7.0% in August). We expect inflation to accelerate due to base effects for the remainder of the year, likely reaching 6.5% by year-end. Our inflation forecast now incorporates a temporary reduction in electricity prices, as the government will implement the UTE premium program again in December. We expect returns from the central bank’s short-term debt instruments to reach 8.5% in December, up from 8.1% in September. Our YE18 inflation forecast remains at 7.5%, reflecting the prospect of a weaker currency next year.

The monetary policy committee maintained its tightening bias on monetary policy. At its October meeting, the committee highlighted its view that while inflation remains within the 3%-7% target range, it is necessary to maintain a tightening bias to firmly establish this trend. In addition, the central bank set an indicative annual growth rate for the M1 aggregate in the 13%-15% range for 4Q18. 

The nominal exchange rate was slightly below 29 UYU/USD in September, having remained broadly stable throughout the month (and this year to date). To avoid further appreciation, the central bank purchased USD 232 million in September (and has now purchased USD 2.8 billion since the beginning of the year). We maintain our exchange-rate forecasts of 29.5 UYU/USD for 2017 and 31.7 UYU/USD for 2018. 

External accounts improve

Stable imports improve external accounts. The FOB trade balance (excluding free-trade zones) showed a USD 7 million surplus in August, up from a USD 65 million deficit in August 2016. Exports grew by 12.0% yoy in August, with exports of primary products (+28% yoy) partly offset by lower manufacturing exports (-5% yoy). Imports, on the other hand, rose by a mere 0.7% yoy, as higher purchases of consumer goods (+16% annually) and intermediate goods (+10% yoy) were partly offset by a sharp drop in purchases of capital goods (-43% yoy, affected by a high comparison base – in August 2016 purchases of capital goods jumped by 75% yoy). Thus, the last-12-month FOB trade deficit fell to USD 80 million in August from USD 600 million in December 2016. We are leaving our trade-deficit forecasts unchanged at USD 300 million for 2017 and USD 700 million for 2018.

Wider trade surplus improves the current account. The current account recorded a USD 531 million surplus in 2Q17, doubling the surplus posted in 2Q16. The improvement was due to a stronger trade surplus for goods and services (USD 1.2 billion, up from USD 879 million in 2Q16). The balance of the financial services account (primary income) showed a USD 736 million deficit in 2Q17, falling by USD 74 million compared with 2Q16, mainly due to higher accrual from foreign earnings by private sector companies. Thus, the rolling four-quarter current account balance reached a surplus of 2.3% of GDP in 2Q17, marking a significant improvement over previous years (-0.7% in 2015 and -4% in 2012). These results correspond to the new presentation of the balance of payments according to the sixth edition of the IMF manual. The current account resulted in a capital outflow recorded in the errors and omissions account (USD 581 million) and an entry in the financial account (USD 50 million, which includes an accumulation of reserves of USD 1,276 million financed with bond issuances).

Drop in investment narrows fiscal deficit

Uruguay’s public-sector nominal deficit fell to 3.3% of GDP in August, down from 3.6% in July. The primary deficit fell to 0.1% of GDP in August from 0.4% in July. Revenue from the non-financial public sector grew by 11.4% yoy, driven by higher DGI revenues (17.0% yoy) and higher foreign-trade-related tax revenues (+19.9% yoy). The performance of public companies declined by 38.8% yoy due to higher expenses associated with the lengthy maintenance process at the La Teja refinery. Primary expenditures fell by 1.5% yoy due to a sharp reduction in investment (-60% yoy), which is attributable to a decline in ANCAP’s crude oil stock and to reduced investment by public companies. Primary expenditures, on the other hand, expanded by 7% yoy. Our 2017 fiscal-deficit forecast remains at 3.3% of GDP. For 2018, we expect the fiscal deficit to reach 3.0% of GDP.

The credit rating agency Fitch affirmed Uruguay’s sovereign debt rating at BBB- (the lowest investment grade rating), with a Stable outlook. The rating agency stressed the strength of the country’s institutions and economic growth, while also warning about its fiscal deficit and high public debt. 
 

Juan Carlos Barboza
Diego Ciongo

 

For the full report, see enclosed file



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