Uruguay Staff Report for the 2013 Article IV Consultation

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  • 2014 International Monetary Fund

    IMF Country Report No. 14/6

    URUGUAY STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION Under Article IV of the IMFs Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2013 Article IV Consultation with Uruguay, the following documents have been released and are included in this package: The Staff Report for the 2013 Article IV Consultation, prepared by a staff team of the IMF for the Executive Boards consideration on November 13, 2013, following discussions that ended on October 4, 2013, with the officials on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 29, 2013. An Informational Annex prepared by the IMF. A Press Release summarizing the views of the Executive Board as expressed during its November 13, 2013 board meeting on the Article IV Consultation Staff Report. A Statement by the Executive Director for Uruguay. The document(s) listed below have been or will be separately released. Selected Issues Papers The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.

    Copies of this report are available to the public from

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    International Monetary Fund Washington, D.C.

    January 2014




    Background: Uruguay has experienced a decade of strong and inclusive expansion since its

    2002 crisis, thanks to important institutional reforms, large-scale FDI projects attracted by

    Uruguays stable macroeconomic environment and business-friendly investment climate, and

    favorable external conditions.

    Current setting: Growth has moderated to a more sustainable pace since 2012, mostly owing

    to weaker external demand from regional trading partners with which Uruguay is highly

    interconnected. Unemployment remains near historical lows, fiscal policy has loosened, and

    inflation persists above the target. Monetary policy, on the other hand, has tightened

    considerably since August. The baseline scenario is for the output gap to close gradually.

    Near-term risks are mostly to the downside, but vulnerabilities are limited given the strong

    liquidity buffers of the public sector.

    Focus: Discussions focused on policies to support a smooth convergence of output to

    potential in the near term; the optimal policy response in case of inward spillovers; and

    requirements to bolster the medium-term outlook.

    Policies: Staff supported the authorities objective of gradually reducing inflation. Additional

    efforts to communicate the targeted monetary policy stance would help smooth the volatility

    in short-term interest rates and enhance the central banks control over inflation expectations.

    A tighter fiscal policy stance and a moderation in wage growth would support monetary

    policy in taming inflation. In case of adverse external shocks, the exchange rate should be the

    main shock absorber and the ample liquidity buffers could be used to smooth out excessive

    volatility. Staff recommended that the reserve requirements on non-residents purchases of

    central bank and government securities be unwound once there is clear evidence that the

    capital inflow surge has subsided. Uruguays medium-term growth would benefit from more

    flexible wage determination and deeper financial markets. It is critical to press on with efforts

    to boost infrastructure.

    Past advice: There is broad agreement between the authorities and staff on the

    macroeconomic policy priorities. In recent consultations the Fund has placed greater

    emphasis on reducing inflation to the mid-point of the target range and called for fiscal

    restraint, in part to help monetary policy. In addition, staff has encouraged prudent wage

    growth to facilitate disinflation, safeguard competitiveness, and promote macroeconomic

    flexibility. Recently, the authorities tightened monetary policy and issued new wage setting

    guidelines aimed at restraining the growth of real wages and reducing the use of backward-


    October 29, 2013




    OVERVIEW _______________________________________________________________________________________ 4

    RECENT DEVELOPMENTS _______________________________________________________________________ 4

    A. Real Developments ____________________________________________________________________________ 4

    B. Policy Actions __________________________________________________________________________________ 7

    OUTLOOK AND RISKS ___________________________________________________________________________ 9

    POLICY DISCUSSIONS _________________________________________________________________________ 12

    STAFF APPRAISAL _____________________________________________________________________________ 19


    1. Social Policies for Inclusive Growth ____________________________________________________________ 22

    2. Capital Flow Management Measures __________________________________________________________ 23

    3. Assessment of Balance of Payments Stability __________________________________________________ 24

    4. Public Debt Management Operations _________________________________________________________ 26

    5. FSAP Update 2012Key Recommendations __________________________________________________ 27

    6. New Legislation on Large-Scale Mining _______________________________________________________ 28


    1. Post-2002 Recovery ___________________________________________________________________________ 30

    2. Economic Activity _____________________________________________________________________________ 31

    3. Inflation _______________________________________________________________________________________ 32

    4. External Accounts _____________________________________________________________________________ 33

    5. Credit and Banking ____________________________________________________________________________ 34

    6. Monetary Developments ______________________________________________________________________ 35

    7. Fiscal Developments and Projections __________________________________________________________ 36

    Approved By Saul Lizondo and

    Vivek Arora

    Discussions took place in Montevideo during September 23October

    4. The staff team comprised Oya Celasun (Head), Camilo E. Tovar,

    Garth Nicholls, (all WHD) and Samar Maziad (MCM). Yulia Ustyugova

    (WHD) took part in the second half of the mission. Viktor Kitange

    (FAD), Jesse Siminitz, Sumiko Ogawa, Juan Yepez, Xiomara Jordan (all

    WHD) provided support in Headquarters. Natalia Melgar and Sandra

    Shaw (Montevideo Office) also supported the mission.




    1. Selected Economic Indicators _________________________________________________________________ 37

    2. Main Fiscal Aggregates ________________________________________________________________________ 38

    3. Public Sector Debt and Assets _________________________________________________________________ 39

    4. Statement of Operations of the Central Government __________________________________________ 40

    5. Central Government Stock Positions __________________________________________________________ 41

    6. Summary Accounts of the Banking System ____________________________________________________ 42

    7. Balance of Payments and External Sector Indicators ___________________________________________ 43


    I. Is the Uruguayan Economy Decoupling from its Neighbors? An Empirical Analysis of Inward

    Spillovers to Uruguay ____________________________________________________________________________ 44

    II. Public Sector Debt Sustainability Analysis (DSA) _______________________________________________ 52

    III. External Debt Sustainability Analysis (DSA) ___________________________________________________ 59




    1. The year 2012 concluded the decade with the strongest average GDP growth on

    record in Uruguay and a remarkable improvement in living standards (Figure 1). Key drivers

    of Uruguays strong rebound from its 2002 crisis included important institutional reforms, large

    FDI projects attracted by Uruguays stable macroeconomic environment and business-friendly

    investment climate, and favorable external conditions.1 The result has been a strong rise in

    employment, real wages, and consumption. Poverty rates have declined sharply thanks to strong

    growth and active social policies (Box 1), and income inequality has also declined further since


    2. The main priority is to safeguard and enhance these gains by ensuring a smooth

    landing of the economy, and to bolster medium-term potential. 2012 saw slower growth and

    widening imbalancesa higher fiscal deficit and inflation, a strong real appreciation (boosted by

    portfolio inflows), and a wider current account deficit. The task ahead is to calibrate the policy

    mix so as to decisively tackle inflation, safeguard competitiveness, and facilitate a smoot