Uruguay

Uruguay experienced a period of high economic growth from 2004 to 2014 (+5.4% on average). Its economy held up better than the regional average during the pandemic, and it returned to past levels of growth 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 – leading to subdued exports, a decrease of -4.4% in manufacturing production and eventually lower growth (+0.8%). The country also suffered directly from the economic crisis in Argentina, and from the slowdown of the whole region, as tourism revenue from neighboring countries constitutes a non-negligible part of its economic structure. Nevertheless, Uruguay has a healthy economy, with the highest per capita income in the region, stable FDI inflows and a balanced democratic system. In 2024, GDP growth is to accelerate to +3.2%, thanks to a good 2023-24 harvest, which allowed for a rebound of agricultural and industrial production and exports. In the longer term, growth should stabilize at just under +3% on average, driven by a well-led green transition and resilience in exports.

Following nearly two decades of inflation at around +7-8%, the central bank has prioritized anchoring inflation expectations by way of increased communication and transparency with market participants and business chambers. Such efforts have helped lower inflation expectations, which are currently around the top of the target range (3-6%). Uruguay's monetary policy flexibility is still limited by its history of high inflation and still elevated dollarization, with over 50% of resident loans and 70% of deposits denominated in USD. Data for the first five months of 2023 show an expansion of consumer prices within +4% annually, which is the lowest level since 2005, while that of input costs is negative. This trend may not last for long, though, due to a slight foreign exchange depreciation expected in the second half of 2024, higher local demand thanks to a recovery in real wages and a reduction of price distortions with Argentina. Alongside a prudent monetary policy (8.5% as of June 2024), the orthodox fiscal policy led by President Luis Lacalle Pou may also help tame inflation.

Uruguay’s business environment is very strong: the country ranks 27th out of 177 in the 2024 Index of Economic Freedom, 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 has little corruption (16th in the CPI 2023), and foreign investments do not need preliminary approval. Trade freedom is also well assessed as the trade-weighted average tariff rate is 9.4%. The only bad score Uruguay obtains is in financial freedom as the government maintains a strong presence 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 indicates that the country performs quite well in CO2 emissions and renewable electricity output. On the other hand, the recycling rate is poor and water stresses have had a significant impact on growth.

Conservative President Lacalle Pou retains a relatively high approval rate among Uruguayans, thanks to job creation and increasing wages. The government continues its efforts to increase the flexibility of Mercosur to be able to expand its number of FTAs (free-trade agreements) outside of the trading bloc, notably with China. The ongoing accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is another factor that may drive additional exports towards regional and Asian members.

General elections are scheduled for October and the president cannot be re-elected. The left-wing Broad Front, which governed the country between 2005-2020, is leading the polls. Uruguay remains a strong democracy, where alternation is well established, and therefore political risk appears contained in the coming years.