Fitch: Uruguay Fiscal Plan Acknowledges Structural Deterioration

NEW YORK--(BUSINESS WIRE)-- A recently proposed package of fiscal measures could improve the prospects for achieving the consolidation goals in Uruguay's five-year budget if approved, according to Fitch Ratings. However, weak growth and spending pressures could render the plan insufficient to fully stabilize the rising public debt burden.

The five-year budget approved last year aims to lower the public sector deficit to 2.5% of GDP by 2019, which involves a reduction in the central government deficit to 1.9% from 2.8% in 2015. Fitch expected this goal to be difficult to achieve in the absence of explicit consolidation measures given persisting spending pressures from past social reforms, new efforts to expand social programs and weakening growth. Fiscal credibility has slipped in the past few years as budget targets have regularly been missed and legal limits on increases in net debt repeatedly relaxed.

This recent proposal acknowledges these fiscal imbalances and could yield up to 1pp of GDP in savings, according to official estimates. The bulk would come from higher tax rates on personal income and pensions, narrower corporate tax exemptions and reduced operational spending and military pensions. The proposal follows other executive actions taken to support revenues in the past year, including utility rate hikes and changes in calculation of corporate income taxes.

It is not yet clear if these measures will be enough to fully achieve the consolidation goal in a weakening economic backdrop. Fitch projects Uruguay's economy will post no growth in 2016 on the weak external environment (including ongoing challenges in Brazil), rising unemployment and decelerating wage growth and the impact of recent storms. The proposed tax increases could weigh further on growth.

Consolidation could face challenges from a rigid spending profile and political resistance to measures perceived to pose risks to employment. Political and social groups aligned with the ruling party have come out against some elements of the proposal. Capital spending fell sharply in 2015, but it is unclear if the new low level can be sustained should the government move ahead with its investment plans.

General government debt has risen to an estimated 60% of GDP in 2016 through March from 50% in 2014 (these figures include around 8pp in bonds issued to recapitalize the central bank). Although peso depreciation explains most of the recent rise in the debt burden, this highlights its relatively high level of dollarization and the fiscal deterioration it masked in prior years of real peso appreciation.

Weak public finances have constrained Uruguay's 'BBB-' rating since its upgrade in March 2013. Fitch has indicated that the rating could be negatively affected by failure to arrest the ongoing deterioration in public finances and growth but has been supported by the economy's orderly external adjustment, low refinancing risks (underpinned by 5% of GDP in liquid assets held for debt service) and strong structural features in terms of institutional quality and social development.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160601006544/en/

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Source: Fitch Ratings

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