URUGUAY

Uruguay is a small, open economy with higher income per capita and stronger governance and institutions than its regional peers, as well as a track record of political stability and consensus, remaining one of the world’s most robust democracies. However, its dependence on food exports and the tourism sector makes it vulnerable to volatility in commodity prices and economic slowdowns in Brazil and Argentina, which remain key trade partners. Inflation tended to rise above the central bank’s target range of 3%-6% even before the global economic slowdown and unemployment has been high at around 8%-9% in the past five years. However, this is expected to improve with pro-market reforms to boost investment-led growth.

Uruguay has been able to recover from the Covid-19 pandemic with strong exports in agricultural commodities over 2021. Over the medium term, its growth will be stronger than the pre-pandemic average. However, we expect GDP growth to slow down to +3.6% in 2023 as the sharp slowdown in global growth reduces export demand and results in lower investments. We expect inflation to decline to 7.2% at the end of 2023 and 5% in 2024-2026. Uruguay's central bank is implementing fiscal consolidation and aggressive monetary tightening to combat inflation, which is not easy as collective bargaining is winning against government wage guidelines. For desired disinflation, the economy needs structural reforms to boost competition and loosen labor regulations.  

Uruguay ranks 101 out of 190 in the 2020 World Bank Doing Business index, with major shortcomings in dealing with construction permits (151), protecting minority investors (153), trading across borders (150) and registering property (119). However, Uruguay benefits from political stability and a sound business environment, which could boost investment.

The president Luis Lacalle Pou enjoys relatively high levels of popularity. The government may leverage its political capital to continue efforts towards fiscal consolidation and press ahead with the social security reform, which might increase the risks of social unrest.  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). The government also seeks to increase foreign investment, especially in services.

There are certain risks of increased political tensions as parties seek to differentiate themselves from the current government ahead of 2024 presidential elections.