15 years of positive growth…

In 2017, at a rate of about 3 percent, Uruguay recorded its fifteenth consecutive year of economic expansion, the longest period in the country’s history.¹ Clearly, the growth rate exhibited last year was below the average of the period (somewhat above 5 percent), but it presents a much better performance compared with the previous two years. A sound reacceleration is ongoing.

Another exceptionality of the process (compared to the past) is the country’s decoupling from its main trade partners in the region. Research papers, including from the IMF², have often mentioned the high correlation that Uruguay used to show with its larger neighbors’ business cycle. However, the very dissimilar paths observed over the past years perfectly attest to the new stage.

How is this performance explained? We can start by underlining Uruguay’s constant efforts to implement prudent policies amidst a process of structural transformation in many areas, some of which we will refer to.

…accompanied with substantial enhancements of social conditions

Explanations would not be complete without reiterating once again the authorities’ comprehensive concept of stability, which embraces its economic, political, and social dimensions; growth can and should go together with improvements of the entire society’s welfare and, especially, with a process of boosting opportunities for everyone.

Social indicators tend to ratify the above-referred notion and reflect some of the country’s efforts: poverty rates exhibit a continuous reduction, from 32.5 percent in 2006 to 9.4 percent in 2016, while inequality (Gini Index measured by Instituto Nacional de Estadística) declined from 0.45 to 0.38 in the same period. As noted on previous occasions, beyond its intrinsic value, social stability entails substantial benefits by synergistically interacting with economic stability.

While considerable progress has been made in this area, the authorities are fully aware that much remains to be done; for instance, in the education system, a critical area that presents substantial challenges and opportunities to continue improving social conditions and reducing inequality.

An unambiguous commitment to openness

The authorities would like to reiterate their commitment to deepen Uruguay’s insertion into the global economy by using different available mechanisms; Mercosur is relevant for Uruguay, and the authorities consider it as a medium to further integrate the bloc’s countries, and particularly Uruguay, into the world. Evidently, these kinds of processes entail complexities and obstacles, and should be assessed from a broad perspective, which includes efforts and results, over an extended period.

In 2017, exports displayed a robust performance; besides its expansion, we highlight the noticeable market diversification Uruguay presents, implying a crucial development for the country. While during the last years of the past century exports of goods to Mercosur countries were about half of Uruguay’s total external sales, currently the percentage is a quarter of the total. It is not only by markets, but also a product expansion: Uruguay is selling a much wider spectrum of goods and services; just as an example, the country has become a major exporter of software products.

Consistency, credibility, and stability…

The sustainability of economic and social achievements is only possible in a context of macroeconomic stability, which requires consistency among policies, mainly fiscal, monetary, and income ones.

The fiscal consolidation process is underway and results are heading towards the authorities’ target for 2019, which is an overall deficit of 2.5 percent of GDP, and aim at maintaining the sustainability of public finances.³ In 2017 public enterprises made an important contribution to the fiscal performance and, as noted by staff, the state oil company Ancap has been brought back to financial soundness. Meanwhile, public revenues will continue with vigorous results, helped by the—already introduced—revenue measures, and sustained on the pillars of the reforms undertaken in the tax system and revenue administration over the past decade. On this note, it is worth stressing that Uruguay, at about 13 percent in 2015, presents the lowest level of VAT evasion in Latin America.

Efforts in the monetary area have been key to combat inflation, which had climbed to 11 percent in May 2016. At that time, the monetary stance became even tighter, which led, along with the contribution from the other policies, to a steep fall in inflation rates which, since March 2017, have been systematically placed in the central bank’s target range, ending the year at 6.55 percent. Perhaps even more important than the former figure is that associated with the critical reduction of inflation expectations, which is well anchored and within the target range, as well as the drop in non-tradable inflation (which once had a stubborn resistance to decline). To buttress these positive developments, the Central Bank of Uruguay has announced the continuation of its tight monetary stance.

The authorities view exchange rate flexibility as a key factor to cushion eventual shocks; evidently, it has served the country well, allowing it to withstand difficult circumstances and volatility observed over the past decade at regional and global levels. Interventions in the exchange rate markets have occurred to soften disproportionate temporary movements that would be far from what the fundamentals would indicate and would have had the potential to generate more permanent distortions.

The last wage round brought about a critical flexibility in the labor market, contributing to a significant reduction of inflation inertia. In an environment where credibility prevails, flexibility does not necessarily mean wage reductions; in fact, consistency among policies has reinforced the virtuous cycle in which wage agreements and the decline of inflation and inflationary expectations led to a considerable increase in real wages. Against the background of the 2018 wage agreements, the authorities have highlighted the importance of maintaining flexibility with the aim of helping to foster employment, for which further efforts to enhance workers’ training programs are critical.

… reinforcing buffers and reducing risks

Credibility emanated from sound policies has allowed Uruguay to create robust buffers. The profile of the public debt is an eloquent illustration: the average time to maturity of the Central Government Debt is about 14 years, most of the debt (94 percent) is at a fixed rate, and 51 percent is denominated in local currency (much more than, for instance, the 12 percent in 2005 or 26 percent a decade ago). Moreover, in June and September, the country launched two issuances of 5-year and 10-year nominal fixed-rate local currency bonds in international markets (both are included in the JP Morgan GBI-EM benchmark), substantially increasing the composition of Uruguay’s public debt in nominal pesos.

Related to the latter, the authorities fully agree with staff on the need to continue promoting de-dollarization in Uruguay (as in Section 2 of the Selected Issues), but the process—always complex—should be assessed from a broader perspective, for instance, considering the above-mentioned progress made in reducing the composition of debt dollarization (once a major vulnerability for the country, especially in the context of a lack of exchange rate flexibility).

Meanwhile, Figure 2 of the staff report shows that international reserves remained well above the Fund’s reserve adequacy metric. In times where fundamentals and potential risks at global levels (identified, for instance, in the report’s Risk Assessment Matrix, where some events are marked with a high or medium likelihood) are perceived to be somewhat disconnected from the current low levels of global market volatility, a high level of international reserves seems to be a critical insurance for the country. Considerable contingent lines from multilateral and regional institutions are also available.

Keeping in mind its relatively low level and its declining trend observed in 2017, the authorities are closely monitoring developments regarding bank credit, an area in which the authorities are working on from different angles. Beyond these concerns, the staff’s assessment that credit has not served as a source of growth would deserve a further elaboration. For more than a decade, Uruguay has waged key structural reforms in the financial system, for instance in the regulatory and supervisory functions, and, needless to say, in the governance, functioning and scope of public banks. Sound policies and reforms have allowed the country to benefit from a critical financial stability amidst a period of robust growth, which is attested by the financial soundness indicators, such as capital adequacy, non-performing loans (remaining at stable low levels after a moderate increase in 2015 and 2016), liquidity, and implicit exchange rate risk.

Based on firm pillars…

As noted on other occasions, institutions are relevant in the explanation of Uruguay’s path, constituting the country’s strong pillars to build its future. Without being an exhaustive list, it is possible to cite certain indicators that may reflect the soundness of the country’s institutions. The Economist Intelligence Unit’s Democracy Index classifies Uruguay in the group of full democracies; Uruguay is ranked in the 21st position (out of 176 countries) by Transparency International’s Corruption Perception Index; 20th position (out of 135 countries) by World Justice Project’s Rule of Law; and 36th position (out of 180 countries) by Heritage Foundation’s Index of Economic Freedom. Meanwhile, in the World Bank’s Governance Indicators, Uruguay occupies the second place in the Americas (after Canada) in the dimensions of Voice and Accountability, as well as Political Stability and Absence of Violence.

… looking at the future

Uruguay faces considerable risks at global levels and many domestic challenges. The country should continue enhancing its potential growth for which, among other things, it is essential to significantly enhance education levels (its quality must be much closer to the level of resources devoted to the area), and increase investment rates (the authorities will soon deploy a number of policies and changes to boost them; furthermore, public-private partnerships (PPPs) should be more active to help addressing the country’s infrastructure gaps); creation of employment has been lagging behind economic activity’s developments, posing another important challenge; there are substantial issues to be addressed regarding productivity; and the fiscal deficit is still relatively high, although it is under full control and exhibits a clear decreasing trend.

The staff report perfectly sums up Uruguay’s performance in 2017 by saying that it was “a good year”. However, there is no room for complacency. Good results simply ratify that policies and continual progress in its modernization are heading in the right direction, and based on them Uruguay is looking to the future: an “e-peso” pilot project (not a cryptocurrency, but a digital bill with the same functioning as a physical one), technology readiness, the substantial shift to renewable sources of energy, excellent progress in terms of financial inclusion, commitment to openness, and efforts to keep attracting investments (and its benign perspectives), among others, provide good hints of the pathway ahead.