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Uruguay Country Risk Report Q2 2016

Uruguay Country Risk Report Q2 2016

Core Views Uruguay is set to experience a period of structurally lower growth in the coming years, as investment into expanding agricultural production and re-export capacity is tempered and foreign capital begins to flow into Argentina as the new Argentine government liberalises its investment environment. Nonetheless, Uruguay will continue to outpace Latin America's average real GDP expansion as the country's middle class supports private consumption growth. Inflation will remain elevated over the coming years as the Banco Central del Uruguay will not implement significant policy measures to stymie price increases. The bank will instead focus on attempts to spur growth and encourage consumption with low borrowing costs as tempered investment weighs on economic growth. There will be significant headwinds to the country's balance of payments as Argentines begin to repatriate assets stored in Uruguayan banks and Chinese demand growth for agricultural goods is tempered over the coming years as compared to the previous decade. This will have a negative impact on both the current and financial accounts. As well, it will lead to a continued depreciation of the Uruguayan peso. Major Forecast Changes We have revised our growth forecast for 2016 downward, to 0.8% from 0.9% as headwinds to the country's net exports balance will weigh on real economic expansion.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Trade Partner Weakness Will Cause Growth Slowdown In 2016
Uruguay's real GDP growth will slow in 2016 on the back of tempered fixed investment and a widening net export deficit. Private
consumption will be a bright spot in the economy, as wages continue to rise, bolstering retail spending.
GDP By Expenditure Outlook
TABLE: GDP FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS
TABLE: NET EXPORT FORECASTS
Fiscal Policy And Public Debt Outlook
Countercyclical Policy Will Widen Deficit In 2016
Uruguay's budget shortfall will widen in 2016 on the back of rising government spending and decelerating revenue growth. The
expanding deficit will not significantly erode the country's sovereign credentials as investors acknowledge this is a temporary shift to
countercyclical fiscal policy rather than structural change.
External Trade And Investment Outlook
Weakness In Neighbours Will Deteriorate External Accounts
Uruguay's balance of payments dynamics will deteriorate in 2016 due to slowing growth in key trade partners, weighing on exports and
investment. Over a multiyear time frame, stronger growth in Argentina will feed through to rising investment in Uruguay's port and road
infrastructure.
Outlook On External Position
TABLE: TOP FIVE GOODS EXPORTS IN 2014
TABLE: TOP FIVE GOODS IMPORTS IN 2014
Monetary Policy
Monetary Policy Will Have Little Impact On Growth
Banco Central del Uruguay will enact monetary tightening in 2016 as a currency sell-off drives import costs higher. Traditional measures
of monetary policy will have little impact on growth as external account deterioration will be the main driver of decelerating economic
activity.
Monetary Policy Framework
Currency Forecast
UYU: Persistent Weakness Through 2017
The Uruguayan peso will depreciate modestly in 2016, on the back of slowing investment and deteriorating trade dynamics. Over a
longer time horizon, the peso will gradually appreciate as investments from Argentina ramp up beginning in 2017.
TABLE: BMI CURRENCY FORECAST
Regional Economic Outlook
FX Weakness Will Drive Rising Inflation Throughout Region
Inflation will rise throughout Latin America in H116, as regional currencies weaken further on low commodities prices and a strong US
dollar. These dynamics will be exacerbated in some economies by elevated government spending and adverse weather conditions.
Chapter 2: 10-Year Forecast
The Uruguayan Economy To 2025
Exposure To Trade Presents Headwinds To Growth
Over a multiyear time horizon, Uruguay will face significant headwinds to headline growth as investment into its large agricultural and
re-export industries declines. Consumption will become an increasingly key driver of growth as Uruguay's large middle class continues
to see disposable incomes rise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Ties With Argentina Will Improve Dramatically
Uruguay's relationship with Argentina will improve significantly in the years ahead. Stronger ties will bolster the prospect of new bilateral
trade agreements, and also supporting the Mercosur trade bloc's unity.
TABLE: POLITICAL OVERVIEW
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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