DBRS Raises Uruguay’s Trend to Positive on Debt Profile and Structural
Improvements
Bloomberg: DBRS Changes Trend on Uruguay to Positive
Industry Group: Public Finance / Sub-Industry: Sovereigns & Related Entities
DBRS has today confirmed the Oriental Republic of Uruguay’s Long-Term Foreign and Local
Currency securities at BB (low), and changed the trends to Positive from Stable on both ratings.
“The Positive trends reflect Uruguay’s improved debt profile, greater resilience to external shocks
and high foreign direct investment, all in the context of its stable political system and sound
macroeconomic management,” says Michael Heydt, Senior Financial Analyst, Sovereigns. “The
economy has a greater ability to rebound from external shocks, as evidenced by Uruguay’s
performance over the last twelve months.”
DBRS sees clear evidence of positive structural changes in the Uruguayan economy. First, the public
debt ratio has been cut in half, from 100.8% of GDP in 2003 to 51.4% in 2008, and liability
management operations have reduced refinancing and exchange rate risk. From 2004 to mid-2009, the
average maturity of central government debt increased from 7.4 years to 12.5 years, and pre-financing
operations have largely covered expected needs through 2010.
Second, a more flexible exchange rate has facilitated adjustments in the balance of payments,
cushioned the impact on the real economy and preserved competitiveness. This is a notable policy
improvement. Furthermore, Uruguay’s export and tourism sectors are more diversified, and
strengthened financial regulation has reduced risks associated with Argentine and other non-resident
participation in the domestic banking system. Regulatory reforms since the 2002 financial crisis,
especially higher reserve and capital requirements and improved management of exchange rate risk,
better prepare Uruguay to withstand external volatility. International reserves have also increased,
bolstering Uruguay’s defenses against future external shocks.
Third, Uruguay’s stable political environment and predictable macroeconomic policies have attracted
unprecedented levels of foreign direct investment (FDI) over the last six years – particularly in the
pulp and paper industry – which has helped diversify the export base, increase productivity and raise
the country’s medium-term growth outlook. In 2008, FDI inflows were among the highest in Latin
America, at 6.8% of GDP. Presidential and congressional elections are scheduled for October 25,
2009. Regardless of outcome, DBRS expects prudent macroeconomic management to continue.
Notwithstanding these improvements, Uruguay will need to address several structural concerns over
the long term. First, Uruguay’s dollarized financial system creates currency mismatches that expose
the economy to balance sheet vulnerabilities. Second, the country remains subject to potential
disruptions in trade, tourism and the banking sector due to volatility in Argentina, albeit to a lesser
extent than in 2002. Third, narrow local capital markets limit domestic financing options for the
public and private sector. Given narrow local markets, debt de-dollarization will take time.
Persistent inflationary pressures are also a concern. Inflation reached 9.2% in January 2009,
approaching the 10% threshold which would trigger automatic adjustments in public sector wages and
pensions. Policymakers effectively reduced inflationary pressures through monetary and fiscal
measures, and by May 2009, inflation had fallen within the Central Bank of Uruguay’s (BCU) target
range for the first time since January 2007. However, the BCU will need to remain vigilant to anchor
expectations within the target range.
Drought-related spending and lower-than-expected revenue growth due to the global financial crisis
led to a higher deficit in 2008 and 2009. However, given the improvements in public finances over
the last five years and the precautionary measures taken to reduce refinancing risk, these deficits are
manageable. Following a smooth transition to the next government, a reinforced commitment to fiscal
discipline and debt reduction in next year’s multi-year budget would improve Uruguay’s
creditworthiness. Should further external shocks impair the recovery, DBRS would look to continued
sound policy management as a prerequisite to an upgrade.
Notes:
The applicable methodology is Rating Sovereign Governments, which can be found on our website
under Methodologies.
This is a Corporate (Public Finance) rating.
Issuer Debt Rated Rating Action Rating Trend
Oriental Republic of Uruguay Long-Term Foreign Currency Confirmed BB (low) Positive
Oriental Republic of Uruguay Long-Term Local Currency Confirmed BB (low) Positive
DBRS will publish a full report shortly that will provide additional analytical detail on this rating
action.
If you are interested in receiving this report, contact us at info@dbrs.com.
www.adiazpropiedades.com
