Monetary Fund (IMF) Country
Report No. 05/235 released July 18, 2005, indicates
that Uruguay has recovered well from the deep recession
of 1999 - 2002. Growth was over 12 percent in 2004, inflation
fell to single digits, and the fiscal position has been
strengthened considerably. While the external current account
shifted to a moderate deficit, mainly reflecting the recovery
in imports, export performance has been robust, and gross
international reserves are now about three-quarters of their
pre-crisis level (but NIR on program definition remain negative).
Data for early 2005 suggest continued growth, moderate inflation,
and continued strength in exports.
The report further
indicates that notwithstanding the good recent economic
performance, vulnerabilities remain. The public debt is
still high (92 percent of GDP at end-2004), mostly denominated
in foreign currency, with gross financing needs averaging
some 12 percent of GDP over 2005-08. Public spending pressures
are high following the compression of real wages and pensions
in recent years, and the social situation remains difficult.
Weaknesses also remain in the financial system, including
Key achievements under
the Fund-supported program include:
• Economic growth rebounded sharply following the
1999-2002 recession, with real
GDP growth exceeding 12 percent in 2004.
• Inflation was quickly brought under control. After
the float of the currency in 2002,
inflation fell steadily and reached single digits in 2004.
Real wages fell sharply during
the crisis, but have begun to recover since late-2004.
• The external position has strengthened, and the
peso first stabilized and then came under pressures to appreciate.
Since late 2003, the peso has appreciated 15 percent in
real effective terms, although it remains some 25 percent
below its pre-crisis level. The external current account,
after improving strongly in 2002, shifted to small deficits
in 2003-04—despite rapid export growth—reflecting
the sharp recovery in imports. The capital account has also
progressively strengthened, on account of both FDI and portfolio
inflows. Together with large IFI assistance, this contributed
to a buildup of international reserves to US$2.5 billion
at end-2004, some 75 percent of the pre-crisis (2001) level.
• The fiscal primary balance has strengthened significantly,
and the public debt has been set on a downward path. The
primary balance improved from a deficit of 1.2 percent of
GDP in 2001 to a surplus of 3.8 percent of GDP in 2004.
The adjustment mainly reflected expenditure restraint, especially
on wages and pensions, timely increases of public tariffs,
and temporary surcharges on specific taxes. Rebounding growth
and peso appreciation also helped bring down the debt-to-GDP
ratio from its peak of 104 percent in 2003 to 92 percent
• The banking system has been stabilized. Resident
bank deposits of the private sector recovered to about 80
percent of their pre-crisis level by end-2004, although
nonresident deposits (almost exclusively off-shore) have
recovered only modestly. Dollarization remains high (at
about 90 percent of deposits), and real credit growth was
still negative in 2004.
• Good progress was made in restructuring the financial
system. The state commercial bank (BROU) has been implementing
a comprehensive restructuring program and made profits in
2004. The state mortgage bank (BHU) began the transformation
process into a mortgage company (with World Bank support).
The bank created from the good assets of the failed banks
(NBC) is well-capitalized and liquid, with asset recoveries
of the failed banks well underway. Financial system oversight
was strengthened, with a new focus on managing the risks
from dollar lending to clients that earn income in pesos.
Developments in 2005
continue to be favorable:
• Leading indicators
point to a continuing recovery in Q1-2005. Domestic demand
is benefiting from rising real wages and falling unemployment
(12 percent in March, about half the crisis peak).
• Annual inflation has been running at 5½ percent
since the beginning of the year, helped by the appreciation
of the peso. In March, the central bank (BCU) announced
an inflation target of 5–7 percent for March 2006
(½-percentage point lower than the December 2005
target). Domestic short-term interest rates are at their
lowest levels in decades, reflecting stabilized inflationary
expectations and still-high liquidity in the system.
• The external position remains robust. Export growth
in Q1-2005 remained strong (16 percent). Official reserves
dropped somewhat in early 2005, reflecting advanced repayments
to the Fund and buybacks of Brady bonds, but have rebounded
lately with continuing capital inflows. Net international
reserves (program definition) are still negative, however,
mainly reflecting the large Fund credit outstanding.
• Fiscal performance in Q1-2005 was in line with the
program. Real nondiscretionary spending growth was capped
at 1.5 percent (y/y), including the January wage and pension
increases (nominal) of 3.5 percent and 5 percent, respectively.
Revenues were in line with projections, and public tariffs
(petroleum products and energy) were adjusted in April to
reflect increased input costs.
• Banking reforms have proceeded as planned, although
the recent suspension of a small cooperative bank indicates
the still fragile state of the system.
- Cooperative bank
(COFAC). The bank was suspended in March 2005, which touched
off fairly widespread, albeit relatively small, deposit
withdrawals in the banking system. The new government quickly
implemented a resolution strategy that involved the capitalization
of deposits and introduction of a deposit insurance scheme
to protect small depositors. Deposit flows in the banking
system subsequently stabilized, and have been recovering
- State commercial bank, or Banco de la Republica
Oriental del Uruguay (BROU). The bank continued to make
profits in the first quarter of 2005, and a new Board was
appointed in March. The release of reprogrammed deposits
was completed in April, and 93 percent of them were retained.
The bank’s asset management company (AMC) is making
good progress in working out the nonperforming loan (NPL)
portfolio, allowing BROU’s trust fund to continue
making repayments to BROU on the government-guaranteed note
ahead of schedule.
- State mortgage bank or Banco Hipotecario del Uruguay
(BHU). Steps have been taken toward its conversion into
a mortgage company, but vulnerabilities remain, including
a large NPL portfolio (which is being addressed) and high
operating costs (coming down, albeit only slowly). The bank
serviced its government-guaranteed note to BROU in Q1-2005,
but risks remain as scheduled repayments will rise over
the next few years.
- NBC and the liquidated banks. The authorities are moving
forward with the sale of NBC, and potential buyers have
submitted preliminary proposals. The private asset manager
of the liquidation funds has moved forward in the collection
broadly on schedule.
- Financial system oversight. The banking superintendency
(SIIF) published its annual work plan that focuses on bolstering
on- and off-site supervision, improving the bank resolution
process, strengthening accounting and audit standards, and
assessing the adequacy of minimum capital requirements.
Also, the incorporation of information on non-performing
borrowers of the liquidation funds into the credit registry
is to be completed by end-May and will be disseminated to
creditors in June.
A complete copy of
Country Report No. 05/235 is available online.
-- ## --