VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0558/01 2681931
ZNR UUUUU ZZH
R 251931Z SEP 09
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 9376
INFO RUCNMER/MERCOSUR COLLECTIVE

UNCLAS MONTEVIDEO 000558 
 
STATE PASS TREASURY FOR BLINDQUIST 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV UY
SUBJECT: URUGUAY AVOIDS ECONOMIC RECESSION, GOU THRILLED 
 
REF: Montevideo 388 
 
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SUMMARY 
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¶1.  (SBU) SUMMARY: Uruguay's GDP grew by a mild 0.5 percent in the 
second quarter of 2009, thus avoiding an economic recession.  Growth 
was widespread among sectors, with only agriculture and electrical 
generation declining.  The rise was led by rising public expenditure 
and public investment, which have generated a fiscal deficit of 
about 2 percent of GDP.  While the deficit has been criticized by 
the opposition, the Ministry of Economy believes it poses no threat 
to fiscal sustainability.  Other recent positive economic news are 
the GOU's successful re-entry into the sovereign debt markets (with 
a $500 million issuance) and several improvements concerning 
risk-rating.  Only a month away from presidential and parliamentary 
elections, and caught in a heated political campaign, the Frente 
Amplio government has capitalized on the positive economic news. 
END SUMMARY. 
 
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MILD GROWTH IN Q2: WIDESPREAD AND LED BY PUBLIC EXPENDITURE 
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¶2.  (U) With the resumption of GDP growth in the second quarter, 
Uruguay has avoided an economic recession (defined in Uruguay as 
elsewhere as two consecutive quarters of fall in GDP).  The Central 
Bank announced on September 16 that seasonally-adjusted GDP rose 0.5 
percent in Q2/09 over Q1/09, leaving Q1 as the only quarter with 
negative growth since the onset of the global economic crisis.  All 
economic sectors grew except for agriculture and electricity, which 
suffered the effects of a months-long drought.  The Ministry of 
Economy estimates that growth could have reached 1.0 percent had it 
not been for the drought.  Revised growth Q1/09 figures also show a 
milder decline in GDP than preliminary figures (2.3 percent instead 
of 2.9 percent). 
 
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PUBLIC EXPENDITURE KEY TO GROWTH 
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¶3.  (U) Comparing Q2/09 to Q2/08, GDP grew by a mild 0.2 percent, 
fueled by growing public expenditure and public investment (up 6.5 
percent and 4.7 percent, respectively). Private consumption rose 
slightly (0.8 percent, sustained by rising wages and low rates of 
unemployment), but private investment was down 16 percent.  Measured 
in volume, imports fell 20 percent while exports surprisingly rose 
by 0.9 percent.  Responding to criticism by the opposition that 
positive growth came at the expense of higher public expenditure and 
fiscal deficit, Director of Macroeconomic Planning Mijail Borchardt 
stated that the GOU's fiscal health enabled it to sustain a 
higher-than-expected deficit (of about 2 percent of GDP) and argued 
that such a deficit does not pose a threat to the sustainability of 
fiscal accounts.  Borchardt also rejected the opposition's argument 
that the next government would have to pass a fiscal adjustment 
package. 
 
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GOU CAPITALIZES ON POSITIVE NEWS 
-------------------------------- 
 
¶4.  (U) During a September 18 press conference, Deputy Minister of 
Economy Andres Masoller stated that Uruguay is "one of few countries 
in the region and the world that has weathered the global crisis 
without entering into a recession".  He largely attributed the good 
result to a sound set of economic policies implemented by the Frente 
Amplio administration in times of prosperity, which left the GOU in 
a better position to face adverse international conditions. 
Masoller stated that the preservation of macroeconomic balances and 
reduction of fiscal, financial, productive and social 
vulnerabilities were instrumental in avoiding the recession and 
"differentiating Uruguay's 2009 social and economic outcome from 
other countries'."  NOTE:  Despite Masoller's statements, official 
statistics show that both Brazil and Argentina have also avoided 
falling into economic recession.  END NOTE.  He opined that Uruguay 
is well positioned to profit from the resumption of global economic 
growth and assessed that in CY09 poverty will continue to fall while 
wages and pensions will increase further. 
 
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POSITIVE OUTLOOK FOR 2009 AND 2010 
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¶5.  (U) The positive economic figures took private analysts and even 
GOU authorities by surprise.  During the press conference, the 
Ministry of Economy announced an upward adjustment of its growth 
forecast for 2009, from 0.7 percent to 1.2 percent.  Private 
analysts also swiftly changed their 2009 growth forecast, from a 0.5 
percent decline (in August) to 0.4 percent growth (in September). 
For 2010, the GOU expects 3.5 percent growth and private analysts 
are estimating 2.3 percent growth.  A leading indicator put together 
by a local think-tank (CERES) hints that moderate growth will 
continue in Q3/09 and Q4/09.  Consumer and entrepreneur confidence 
indicators (by Catholic University and KPMG, respectively) are also 
on the rise. 
 
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SUCCESSFUL DEBT ISSUANCE AND IMPROVED SOVEREIGN DEBT RATINGS 
---------------------- ------------------------------------- 
 
¶6.  (U) Uruguay has been the subject of other positive economic news 
in recent days.  After being absent from international capital 
markets since mid-2008, on September 21 the GOU successfully issued 
$500 million in dollar-denominated 16-year (2025) bonds at a 6.875 
percent rate.  The issuance was oversubscribed by five times (there 
were bids for 2,700 million), and 70 percent was purchased by 
investment funds operating in emerging markets.  Meanwhile, country 
risk has gradually fallen since its December 2008 peak of 690 basis 
points to 275 basis points, comparable to pre-September 2008 levels. 
 In this vein, Canadian risk-rating firm DBRS raised Uruguay's trend 
to "positive" based on its "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".  DBRS also viewed "clear evidence of 
positive structural changes" in the economy.  In mid and late July, 
a Japanese risk-rating firm upgraded Uruguay's sovereign rating from 
BB- to BB and Fitch Ratings raised its outlook to positive. 
 
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COMMENT: GOOD AMMUNITION FOR THE POLITICAL CAMPAIGN 
--------------------------------------------- ------ 
 
¶7.  (SBU) COMMENT: Though the timing of data reporting is unrelated 
to the political timetable, positive economic news came at the 
perfect time for the governing Frente Amplio.  Caught in a tough 
political campaign and only a month away from presidential and 
parliamentary elections, the Frente Amplio administration is clearly 
trying to capitalize on the good news.  Its swift adjustment of GDP 
growth forecasts (one day) contrasts with the 42 days it took to 
acknowledge negative news in its Q1 forecast.  While largely 
attributing the avoidance of the recession to the implementation of 
responsible economic policies in the past, the Ministry of Economy 
also shot back at the opposition for past criticism about poor 
economic performance.  At the core of the discussion lies the 
fundamental question of whether a new Frente Amplio government, 
which would be led by Jose Mujica, could continue steering the 
economy in the right direction.  By capitalizing on recent positive 
news the Frente Amplio is trying to build up its good-management 
credentials with a view to the campaign. 
 
MATTHEWMAN