Highlights and Key Issues We expect s GDP growth to slow moderately to 4% in 212 from 5.7% last year. Growth had started to ease towards the end of 211, with GDP up only 3.5% on the year in Q4. And growth of 4.2% in Q1 this year suggests that, although still respectable, 212 will not be as strong as in the recent past. This reflects the global slowdown and, in particular, slower growth in Brazil and Argentina. Inflation is taking time to fall within the 4% target range despite last year s tightening in monetary policy. The inflation rate was still 8% in June this year and we expect inflation to remain fairly persistent, averaging 7.7% in 212 as a whole, before falling back more noticeably to about 5.5% next year. Recent data point to a widening current account deficit. In 211 the shortfall rose to US$1.4bn, over 3, reflecting a 25% increase in imports while exports gained more modestly. We expect export growth of close to 1% in 212, and are forecasting a broadly similar current account deficit to last year, at around US$1.4bn or 2.8. President Mujica plans to implement wideranging reforms before the next election (in 214) providing a consensus is reached between the ruling Frente Amplio (FA) and the opposition. However, a recent cabinet change by Mujica potentially undermines the coherence of the FA and risks alienating vice-president Danilo Astori. (Annual percentage changes unless specified) 211 212 213 214 215 216 Real GDP growth (% year) 5.7 4. 4.9 4.7 4. 3.4 CPI inflation (%) 8.1 7.7 5.4 4.6 4.2 4.1 Exports of goods ($ bn) 9.31 1.23 11.23 12.32 12.98 13.58 Exports of services ($ bn) 3.39 3.43 3.65 3.97 4.32 4.71 Imports of goods ($ bn) 1.69 11.36 12.29 13.3 14.1 14.64 Imports of services ($ bn) 2.1 2.18 2.36 2.56 2.78 3.2 Exports of goods (% year) 15.9 9.9 9.8 9.8 5.3 4.6 Imports of goods (% year) 24.9 6.3 8.2 8.2 5.3 4.5 Current account ($ bn) -1.44-1.37-1.33-1.2-1.19-1.16 Current account balance () -3.1-2.8-2.5-2.1-2. -1.9 Exchange rate per USD (year average) 19.3 2.5 21.1 21.8 22.6 23.2 External debt total ($bn) 12.5 13.59 14.66 15.62 16.58 17.51 Government balance () -1.1-1.1 -.9 -.7 -.7 -.7 Population (millions) 3.38 3.39 3.4 3.42 3.43 3.44 Nominal GDP ($bn) 46.71 49.41 53.4 56.18 58.79 61.63 GDP per capita ($ current prices) 13,816 14,565 15,58 16,445 17,15 17,91 Country Economic Forecast: 11 July 212 Forecast for For further information contact Clare Howarth (chowarth@oxfordeconomics.com)
Overview Q1 GDP growth was 4.2%... s economy proved fairly resilient in 211 with GDP growth of 5.7%. The robust performance was achieved despite more difficult regional and global conditions, although it represented a significant slowdown from the 8.9% expansion in 21. Growth had started to slow by the end of 211, however, with GDP up only 3.5% year-on-year in Q4. And GDP growth of 4.2% in Q1 this year suggests that, although still respectable, 212 will not be as strong as in the recent past. but expected to slow to 4% in 212 We expect GDP growth of around 4% for 212 as a whole, reflecting the slowdown in the global economy and, in particular, in Brazil and Argentina, both major trading partners. Tighter monetary conditions during 211 (when the central bank steadily raised its key policy rate from 6.5% to 8.75%) have also contributed to cooling growth. The central bank also expects GDP to grow by around 4% this year, while the IMF is less optimistic, forecasting 3.5% growth. Activity in Q1 benefited from an expanding construction sector (up 12.9% year-on-year) and transport (up 9.4%), while manufacturing shrank (by 1.2%). The important agriculture sector, which contributes over 1% to GDP, rose by just 1.3%. Consumption remained strong, up 6.3% in Q1 although slowing slightly from its 7.6% growth in 211, while fixed investment was up 7.3%, with increases in the private sector more than making up for a reduction in public sector investment ( has encouraged private businesses through the creation of 12 free-trade zones). Inflation still well above 5% target High world oil and food prices and rising domestic demand undermined hopes of keeping inflation within the central bank s 4% target range in 211. The MPC increased its benchmark TPM rate three times over the course of 211 as prices continued to rise. Although it looked like the inflation rate had begun to ease in early 212, it then picked up again to 8% in May and June. Inflation should fall back slightly over : Real GDP growth % year 12 9 6 3-3 Latin America & Caribbean -9 199 1993 1996 1999 22 25 28 211 214 Source: Oxford Economics / World Bank : Inflation % year 45 4 35 3 25 2 15 1 5 Western Hemisphere 1995 1997 1999 21 23 25 27 29 211 213 215.5. -.5-1. -1.5 Source: Oxford Economics / Haver Analytics : Current account balance 1. (RHS) (LHS) -2. 199 1993 1996 1999 22 25 28 211 214 Source: Oxford Economics 4 2-2 -4-8 Country Economic Forecast: 11 July 212
the second half of this year as lower oil prices begin to feed through, and we expect it to average 7.7% for the year as a whole. After a volatile start to the year, the UYU steadied at about UYU19.5 to the US$ by the end of March but has since depreciated further. : Government budget balance.2. -.2 (RHS) 1-1 Current account gap now 3 The current account shortfall of US$171m in Q1 was twice the size of the deficit in the same period last year. Last year, the current account posted a deficit of US$1.4bn (3.1), up from a shortfall of US$863m in 21 (2.2). This reflected a 25% rise in imports, while exports increased more modestly. We expect exports to grow by around 1% this year, while imports may lose some momentum on account of falling oil prices. As a result, we are forecasting a similar-sized current account deficit to last year, around US$1.4bn (or 2.8) in 212. Mujica alienates some key allies President Jose Mujica, veteran politician of the ruling leftist Frente Amplio (FA), has completed over two years in office since taking over from Tabare Vazquez in March 21. Mujica s term runs to March 215 with elections due in late 214. When opening the new legislative session on 1 March 212, Mujica outlined plans for major reforms in key areas especially education, infrastructure, the civil service and state agencies between now and the next election campaign. -.4 -.6 -.8-1. (LHS) -1.2 199 1993 1996 1999 22 25 28 211 214 Source: Oxford Economics : GDP per capita* (US$) US = 1 35 3 25 2 15 1 5 *calculated using market exchange rates Western Hemisphere All low & middle income economies 1975 198 1985 199 1995 Source: Oxford Economics / World Bank 2 25 21-2 -3-4 -5 But in recent months, these plans for reform have been somewhat overshadowed by mounting disquiet about the rise in violent crime and the apparent failure of the interior ministry headed by Eduardo Bonomi to improve security. Mujica has retained Bonomi but last month dismissed the respected long-serving minister for tourism, Hector Lescano, who is close to vicepresident Danilo Astori (the key player overseeing economic policy, along with finance minister Fernando Lorenzo). This may exacerbate divisions within the ruling FA coalition. : GDP per capita $ PPP 15 12 9 6 3 Western Hemisphere Emergers Source: Oxford Economics / IMF 21 Country Economic Forecast: 11 July 212
Background Bordered by Argentina to the west and Brazil to the east, s affairs in recent decades have become increasingly interlinked with its neighbours not least in the Mercosur trade bloc. Its restoration of democracy in 1984, after a decade of military rule, was assisted by the long democratic phase that preceded this. Educational standards are generally high. While agriculture remains an important source of employment and exports, its contribution to GDP has declined to around 12%. Farming is relatively mechanised and operates with low subsidies, enabling membership of the Cairns Group of nations campaigning for freer agricultural trade. Exports are traditionally concentrated on Argentina and Brazil, making s small and open economy vulnerable to downturns in these economies, as in 1991-22 and in 29. The US is the largest export market, mainly due to the expansion of high quality beef sales. Efforts are in hand to promote trade and bilateral relations with China. Comparative social stability is linked to a relatively low level of income inequality in the regional context. This was initially underpinned by relatively equal distribution of land, and reinforced by a long tradition of stateadministered social welfare. The taxes necessitated by this, especially on industry, led to efforts at reform during the 199s, with the National (Blanco) Party administration of President Luis Alberto Lacalle (199-95) and its Colorado Party successor under President Alberto Sanguinetti (1995-2) pursuing policies of privatisation, deregulation, external trade integration through Mercosur, and public spending cuts to fund tax reduction. Public opinion turned against liberalisation after economic slowdown deteriorated into outright recession, with real GDP contracting by more than 3% in 22 and 11% in 23. This sudden slowdown caused the collapse of the banking system in 22, compounded by withdrawal of funds in the wake of Argentina s financial crisis. Previously moderate inflation reached double figures in 22 and peaked at over 2% in 23. Political strains undermined congressional cooperation between the Colorado and National (Blanco) parties and the government was forced to turn to the IMF for financial support. Disillusionment with market reform, already evident when privatisation of the state phone company was rejected in a 1992 referendum, was intensified by the downturn even though this had its origins in adverse external conditions. The October 24 elections delivered a majority for the first time to a leftist party, the Broad Front (FA) coalition, whose candidate Tabare Vazquez became president in March 25. Vasquez s term expired in March 21 and he was succeeded by veteran politician Jose Mujica, also of FA, who won after two rounds of voting in October and November 29. FA also retained a congressional majority in the elections with 5 of 99 seats in the lower chamber and 16 of 31 in the Senate. A tax reform plan that won approval in Congress in December 26 proposed a progressive personal income tax at rates rising from 1% to 25%, plus a flat-rate 1% tax on personal income from capital. Corporate income tax would be unified at 25% and VAT reduced to 21% (from 23%) at the standard rate, or 1% (from 14%) for the concessionary rate. The plan, which came into effect from July 27, also unified employers pension fund contributions at 7.5% of salary and enabled abolition of present payroll, salary and financial assets taxes. By removing certain inefficiencies and disincentives from the tax system, it is aiding the consolidation of public finances into the longer term. In August 211, Mujica proposed a land tax on holdings of over 2, hectares, which could raise US$6m for infrastructure projects. The economy has performed fairly well in recent years with real GDP growth accelerating to 8.9% in 28, prior to a sharp slowdown in 29 linked to the US-led global crisis, rebounding to 8.9% in 21. Fiscal tightening and real appreciation of the peso (UYU) helped to rein in inflation, which finished 25 below the official 5.5-7.5% target but then rose to 9.2% by end-28 before easing again in 29. Currency stability has been helped by the return of flight capital, prompted by monetary tightening and rising exports to offset the energy import bill. Improved external accounts and reserves enabled the banks to rebuild their capital bases, underpinning the UYU. After running primary surpluses, which reached 3.9 in 25 and 26, the government was able to pay down debt and refinance the rest on more favourable terms. Improvements in macroeconomic policy during Vazquez s term in office have since been built upon by Mujica s economy czar Danilo Astori, and Mujica is pursuing an extensive agenda of state reform. The broadly positive economic backdrop saw the country regain a low investment grade rating (BBB-) from S&P in April 212. Country Economic Forecast: 11 July 212
Key Facts Politics Head of state: President Jose MUJICA Head of government: President Jose MUJICA Political system: Presidential democracy Date of next presidential election: October 214 Date of next legislative election: October 214 Currency: an peso (UYU) Long-term economic & social development 198 199 2 211* GDP per capita (US$) 3488 2994 6914 13816 Inflation (%) 63.5 112.5 4.8 8.1 Population (mn) 2.92 3.11 3.32 3.38 Urban population (% of total) 85.4 89. 91.3 92.4 Life expectancy (years) 7.4 72.6 74.9 76. Source : Oxford Economics & World Bank Structure of GDP by output * 211 or latest 29 available year Agriculture 9.8% Source : CIA Factbook Industry 25.8% Location: Southern South America, bordering the South Atlantic Services 64.4% Ocean, between Argentina and Brazil Source : World Bank (CIA Factbook) Long-term sovereign credit ratings & outlook Corruption perceptions index 211 Foreign currency Local currency Score Fitch BB+ (Positive) BBB- (Positive) Developed economies (average) 7.7 Moody's Ba1 (Positive) Ba1 (Positive) Emerging economies (average) 3.44 S&P BBB- (Stable) BBB- (Stable) 7.4 Western Hemisphere 3.8 Structural economic indicators 199 1995 2 211* Current account (US$ million) 186-213 -566-1442 Trade balance (US$ million) 426-563 -927-1384 FDI (US$ million) 41.5 157 269 1627 Debt service (US$ million) 987 862 121 137 Debt service (% of exports) 4.8 22.1 27.2 12.4 External debt () 47.5 27.6 36.8 26.8 Oil production ( bpd) Oil consumption ( bpd) 31.2 31. 43.2 52. Source : Oxford Economics / World Bank / EIA Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Composition of goods & services exports, 21 Fuels and mining products 2.2% Manufactures 17.3% Other goods exports 1.1% Transportation 4.9% Destination of goods' exports (21) Brazil 2.4% European Union (27) 15.4% Argentina 6.4% China 4.3% Russian Federation 4.% Source : WTO Source : WTO Agricultural products 52.6% Other commercial services 5.6% Travel 16.3% Country Economic Forecast: 11 July 212