URUGUAY

Uruguay experienced a period of high growth from 2004 to 2014 (+5.36% on average), but has seen subdued growth since then. Its economy held better than the regional average during the pandemic, and it recovered pretty well in 2021 (+5.3%) and 2022 (+4.9%), thanks to strong exports in agricultural commodities. Last year was marked by the most severe drought in 40 years – which hit the whole Southern Cone – which led to subdued exports, a worse fiscal balance and eventually low growth (estimated at +0.8%) in 2023. The country also suffered directly from the economic crisis in Argentina, and from the slowdown of the whole region, as tourism revenue constitutes a non-negligible part of its economic structure. Still, Uruguay has a healthy economy, with high income per head, stable FDI inflows and a balanced democratic system which makes it one of the most robust democracies in the world. In 2024, we expect GDP growth to pick up to +3.3%, as the weather conditions ease and allow for a rebound in agricultural production and exports, as well as industrial production and exports. On the longer term, growth should stabilize at just under +3% on average, driven by a well led green transition and resilience in exports. Uruguay has had above-regional inflation for several years now, with levels hovering between 7.8% and 9.8% between 2019-2022. However, inflationary pressures have started to ease since September 2022 on, and inflation has continued to decrease, reaching 3.9% y/y in September 2023, owing to lower global commodity prices and easing logistics. Uruguay has an inflation target range of 3-6%, with the Banco Central del Uruguay (BCE) – the Uruguayan central bank – raising its policy rate to a peak of 11.5% in December 2022, and having started an easing cycle since then. The easing cycle should be quite progressive, since lowering the policy rate too quickly could cause peso depreciation, due to a narrowing interest rate differential with the US. The orthodox fiscal policy led by President Lacalle Pou helped tame inflation. We expect a gradual convergence of inflation to below 6% in the 2024- 2025 forecast period.

Uruguay’s business environment is very strong: the country ranks 27th out of 177 in the 2023 Heritage Foundation’s Index of Economic Freedom survey, and 4th in the Americas. Its best scores are obtained in property rights, judicial effectiveness and business freedom, and the country enjoys labor competitiveness. Uruguay appears well protected from corruption, and foreign investments don’t need preliminary approval. Trade freedom is also well assessed, as the tradeweighted average tariff rate is 9.6%. The only bad score Uruguay obtains is in financial freedom, as the government still takes a big role in the financial sector. The 2022 Worldwide Governance Indicators survey ranks the country 19th, over 209 countries, in control of corruption, and in the first quartile for regulatory quality and rule of law. All indicators have improved compared to 2021. Moreover, our proprietary Environmental Sustainability survey of 2023 indicates that the country performs quite well in resistance to water stress, CO2 emissions and renewable electricity output. On the other hand, the recycling rate is poorly rated.

President Luis Lacalle Pou enjoys relatively high levels of popularity, thanks to strong job creation and increasing wages. The government may leverage its political capital to continue efforts towards fiscal consolidation. We expect the government to expand the number of free-trade agreements (FTAs) Uruguay has outside Mercosur, such as advancing on joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – an initiative also back by Argentina’s new President Javier Milei. The government also seeks to increase foreign investment, especially in services. There are still certain risks of increased political tensions as parties seek to differentiate themselves from the current government ahead of 2024 general elections, during which Laacalle Pou cannot run for presidency again. Uruguay remains a strong democracy, and therefore political risk appears contained in the next years.