VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0388/01 1831318
ZNR UUUUU ZZH
R 021318Z JUL 09
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 9173
INFO RUCNMER/MERCOSUR COLLECTIVE

UNCLAS MONTEVIDEO 000388 
 
STATE PASS TREASURY FOR BLINDQUIST 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN UY
SUBJECT: Uruguay:  Macroeconomic Roundup 
 
Ref: Montevideo 0074 
 
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SUMMARY 
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¶1.  Uruguay's economy grew 2.3 percent in QI/09 over QI/2008. 
Despite the year-over-year increase, the economy is now shrinking, 
and seasonally-adjusted GDP dropped 2.9 percent in QI/2009 from 
QIV/08.  Analysts expect GDP to continue falling in the second 
quarter and zero to slightly negative growth for the rest of the 
year.  The cooling of the economy, combined with lower commodity 
prices, has brought inflation back down to manageable levels from 
recent peaks approaching ten percent.  Both lower inflation and a 
stronger dollar have resulted in a recovery of competitiveness, 
which had fallen in January and February.  Furthermore, lower 
inflation enabled the GOU to cut its reference interest rate by 100 
basis points to stimulate aggregate demand, and it gives the GOU 
potential leeway to increase the prices of government-provided 
utilities as necessary to balance its rapidly-deteriorating fiscal 
accounts.  Nevertheless, given the large stock of international 
reserves and the credit lines it has secured with international 
financial institutions, the GOU should have no problem in financing 
its deficit or accumulated debt.  While the global crisis has taken 
a big toll on foreign trade, the local banking system remains 
unaffected.  END SUMMARY. 
 
--------------------------------------------- ------ 
GDP FELL IN QI/09; EXPECTED TO FALL AGAIN IN QII/09 
--------------------------------------------- ------ 
 
¶2.  Uruguay's GDP rose 2.3 percent in the first quarter of 2009 over 
the same period of 2008.  Central Bank President Mario Bergara 
stressed the news, saying that Uruguay was "one of the few countries 
internationally that continues showing positive growth figures." 
NOTE: Argentina was the only other country in the Southern Cone with 
higher year-over-year GDP growth.  END NOTE.  However, despite this 
increase, the economy slowed in the first quarter of 2009 over the 
fourth quarter of 2008 by 2.9 per cent on a seasonally-adjusted 
basis.  This drop in GDP was the first since mid-2004 and exceeded 
earlier GOU predictions of a 1.3 percent drop.  The downturn was 
widespread and all sectors contracted (except for electricity, gas 
and water, and construction).  On top of the global economic crisis, 
Uruguay has suffered from a drought that has taken a toll on cattle 
and electricity production.  The GOU estimates that at least 0.5 
percent of the 2.9 percent drop is due to the drought.  In a June 16 
radio interview Bergara tried to play down the decline, arguing that 
the fourth quarter of 2008 was a very high basis of comparison but 
at the same time acknowledging that the economy is "decelerating 
significantly."  Private analysts expect the GDP to continue falling 
in the second quarter at a lower rate, followed by zero or slightly 
negative growth for the rest of 2009. 
 
------------------------------------- 
INFLATION IS DOWN, COMPETITIVENESS UP 
------------------------------------- 
 
¶3.  In January, with inflation dangerously close to a 10 percent 
threshold that would trigger automatic salary adjustments, the 
Central Bank increased its reference interest rate from 7.75 percent 
to 10.0 percent (reftel).  The implementation of a tighter monetary 
policy, together with significantly lower export prices, brought 
inflation down to 6.6 percent in May (year on year).  A cooler 
economy and weaker domestic demand stemming from slightly higher 
unemployment also helped alleviate inflation.  Given the drop in 
inflation, and in order to try to pump up the economy, on June 22 
the Central Bank cut its reference rate back to 8.0 percent. 
Analysts expect the drop the reference rate will increase the price 
of the dollar and help exporters, whose competitiveness has in fact 
risen from March to May, especially compared to major trade partners 
Brazil and Mexico. 
 
-------------------------------------- 
LIMITED IMPACT ON WAGES AND EMPLOYMENT 
-------------------------------------- 
 
¶4.  The economic downturn has had a limited impact on Uruguay's 
labor market.  Employment, which despite the global recession had 
risen robustly in the last quarter of 2008, fell between January and 
April 2009.  In turn, the unemployment rate rose to 8.3 percent in 
April 2009, which is above April 2008 (7.6 percent), but still low 
by Uruguayan standards.  The first four months of 2009 have been 
better from the labor standpoint (higher employment and lower 
unemployment) than the first fourth months of 2008.  Despite higher 
unemployment, real wages continue growing, particularly in the 
public sector (9.2 percent growth accumulated from January to May 
2009 over January to May 2008).  Private sector wages rose 4.4 
percent in the same period. 
 
----------------------------- 
BOTH EXPORTS AND IMPORTS DROP 
----------------------------- 
 
¶5.  Exports of goods and services increased 1.5 percent in real 
terms in the first quarter of 2009 (YOY), but dropped seven percent 
in dollar terms.  Exports of goods fell 14 percent due to the plunge 
in commodity prices, but exports of services rose 7 percent due to a 
good tourist season.  Falling commodity prices appear for the moment 
to have stabilized (e.g. wood and cattle) or even rebounded (e.g. 
milk and soybeans).  Overall imports fell by 7.1 percent in QI/2009 
(YOY) following the weaker demand and 20 percent in dollar terms. 
Imports from the U.S. fell 3.6 per cent and exports to U.S. have 
risen by 2.7 per cent (both in dollar terms, comparing January - May 
2009 over the same period in 2008).  Foreign Direct Investment also 
fell 34 percent in QI/2009 compared to QI/2008. 
 
--------------------------------------------- ---- 
FISCAL ACCOUNTS DETERIORATING BUT STILL MANAGABLE 
--------------------------------------------- ---- 
 
¶6.  The GOU aims to implement a mildly counter-cyclical fiscal 
policy and has passed a set of measures to help companies, 
especially small and medium firms, weather the global crisis. 
However, the GOU also recognizes it has little room for fiscal 
stimulus.  Fiscal accounts have been deteriorating since the first 
quarter of 2008.  On a 12-months basis, Uruguay's consolidated 
fiscal balance changed from a surplus equivalent to 0.9 percent of 
GDP in March 2008 (USD 295 million) to a deficit equivalent to 2.1 
percent of GDP in March 2009 (USD 603 million).  In April, a 
reduction of oil purchases by the government-owned oil company ANCAP 
slashed the deficit to 1.6 percent of GDP, but this is a temporary 
phenomenon.  With inflation lower, the GOU may try to increase 
utility prices to help fiscal accounts, although such a step would 
be politically problematic with elections only four months away. 
NOTE: In recent months the GOU has refrained from raising rates in 
order to avoid pushing up inflation.  END NOTE.  Private analysts 
expect the 2009 budget deficit to be about 2.6 percent of GDP, 
significantly up from the 1.4 percent deficit in 2008. 
 
----------------------------------------- 
GOU FORSEES NO PROBLEM FINANCING ITS DEBT 
----------------------------------------- 
 
¶7.  Despite the deterioration, the fiscal deficit should remain 
manageable in 2009.  The Central Bank has a good cushion of 
international reserves and, in order to ensure sufficient financing, 
the GOU has proactively secured credit lines from IFIs for almost 
$900 million ($400 million from the WB, $285 million from the IADB 
and $400 million from the CAF).  In this respect, Minister of 
Economy Alvaro Garcia recently told the press that the GOU's 
"fishing nets are loaded."  Moreover, the GOU thinks that, should it 
become necessary, it would qualify for the IMF's Flexible Credit 
Line.  The price of Uruguayan sovereign bonds followed the same 
pattern as the EMBI+ and, after almost hitting 700 basis points, is 
currently at 330 basis points.  Government officials recently told 
us the GOU has been informed that it could issue debt at an interest 
rate of about eight per cent.  However, it can not issue any new 
debt before Parliament passes a bill that raises the national debt 
cap.  The Gross Debt/GDP ratio, which had steadily declined in the 
past five years, rose from 51% of GDP in December 2008 to 54% of GDP 
in March 2009. 
 
--------------------------------- 
BANKING SYSTEM REMAINS UNAFFECTED 
--------------------------------- 
 
¶8.  Uruguay's banking system remains unscathed by the global 
financial crisis.  Local banks are in a solid position, with high 
liquidity and solvency ratios.  Deposits are at USD 14 billion and 
keep growing (although at somewhat lower rates than in the recent 
past --16% in May 09 YOY vs. 20% in Dec. 08 YOY).  There has also 
been a significant increase in non-resident deposits, mainly from 
neighboring Argentina, which rose 32 percent from September 2008 
through May 2009.  At USD 7.9 billion, credits rose six percent from 
May 2008 through May 2009.  There has been, however, a decline in 
new credits granted to families and small and medium firms.  On one 
hand, banks are imposing stricter requirements to grant credits, and 
on the other, demand for credit is falling following the economic 
downturn and uncertainty about the timing of the recovery. 
 
----------------------------------- 
SUMMARY OF KEY INDICATORS DISCUSSED 
----------------------------------- 
 
¶9.  (figures in percentages unless otherwise stated) 
 
REAL SECTOR AND INFLATION 
------------------------- 
GDP growth (QI/09-QI/08)............................... +2.3 
GDP growth (seasonally-adjusted I/09-IV/08)............ -2.9 
FDI (QI/09-QI/08)........................... ......... -34.0 
Inflation (CPI, in May 09 over May 08) ................. +6.6 
Inflation (CPI, accumulated in Jan-May 09) ............. +1.7 
 
LABOR MARKET 
------------ 
Unemployment rate (April 2009).........................   8.3 (up 
from April 2008, but whole QI/09 better than whole QI/08) 
Real wages growth (Jan-May 09 over Jan-May 08).......... +9.2 
    of which private sector ...........................  +4.4 
 
BALANCE OF PAYMENTS 
------------------- 
Exports of goods and services growth (QI/09-QI/08) 
       .................................  +1.5 in real terms 
       .................................  -7.0 in dollar terms 
Imports of goods and services growth (QI/09-QI/08) 
       ................................  - 7.1 in real terms 
       ................................  -19.7 in dollar terms 
 
FISCAL ACCOUNTS 
--------------- 
Fiscal Deficit/GDP (April 09) ..........................  1.6 
Gross Debt/GDP (March 09) .............................. 54 
 
MONETARY SECTOR 
--------------- 
Central Bank's reference interest rate .................   8.0 
Exchange Rate (Pesos per dollar) .......................  23.7 
Total Deposits growth (May 09 over May 08) ............. +16 
Non-resident deposits growth (Sept. 08-May 09) ........  +32 
Credits (growth, May 09 over May 08) ...................  +6 
Country risk (basis points)  ........................... 330 
 
MATTHEWMAN