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ArgentynaGrowth still affected by exceptional climatic conditions
In 2023, GDP growth declined more sharply than expected. Meteorological phenomenon La Niña has caused prolonged periods of drought since 2018, which has particularly affected agricultural production yields (-27.4%), especially soy and beef, and hydroelectric power (-11.8%). As a result, the export sector weighed on growth until the end of 2023, especially as global agricultural commodity prices reversed and economic activity in key trading partners (Brazil, China, Europe) decelerated. In contrast, private consumption grew on back of increasing employment rates, real wages, and pensions, as well as a significant deceleration in inflation to a six-year low in August 2023, thereby paving the way for positive growth. The appreciation of the Uruguayan peso against the dollar since 2022 has kept prices of imported goods artificially low. However, attracted by the favorable price differential, consumers have allocated a significant portion of their spending to Argentine businesses. Growth prospects are on the rise for 2024, driven first by a revitalised export activity, both from increased production and exports of cellulose (start of the UPM paper pulp plant), hydroelectric, and agriculture, with the El Niño phenomenon favoring the return of precipitation. The post-Covid rebound in the tourism sector, representing 16% of GDP and employment in 2019, will also support activity (a 26% increase in incoming tourists in October 2023 vs. 2019). However, the decrease in global agricultural prices and the recession in its large neighbour Argentina could curb export recovery. Meanwhile, the construction sector will contribute negatively to growth. The completion of the UPM paper mill construction will not be offset by the robustness of housing which is supported by the increasing investment of affluent Argentines in Uruguayan residences. However, the easing of credit conditions by the Uruguayan central bank is expected to favour other types of investment. This would also support private consumption, whose positive contribution to growth will persist, especially as commercial tourism to Argentina may decrease. The incoming Argentine administration following the October 2023 elections could lead to price and exchange rate liberalisation, thus eliminating the price differential between the two countries. Nevertheless, peso depreciation against the dollar since September 2023 will no longer allow inflation to decrease.
Sensitivity of the accounts to climatic conditions and agricultural product prices
The current account deficit widened in 2023 mainly due to the reduction of the traditional, but still substantial, trade surplus. The decrease in agricultural production and prices diminished export revenues, while the impact of lower energy prices on the import bill was mitigated by increased purchases of electricity from Brazil. With the return of more favorable weather conditions, which will revitalise agricultural exports and hydroelectric production, the current account is expected to see its deficit decrease in 2024. In 2023, service trade is expected to regain its modest pre-Covid surplus. While inbound tourism has grown less rapidly than outbound tourism, boosted by the attractiveness of Argentine prices (130% more outgoing tourist flows in the second quarter compared to 2019), it involves much larger sums. The service surplus is expected to continue improving in 2024. The price differential with Argentina could evaporate with the new government in Buenos Aires, while the number of foreign visitors is expected to continue growing. Freight expenses will continue to exceed the revenues generated by the sale of IT services. Last, dividends repatriated by foreign investors, which increased after the completion of the pulp mill, will continue to generate a significant primary income deficit. Foreign direct investments and, secondarily, borrowing easily finance the current account deficit. Foreign exchange reserves (USD 16.3 billion in July 2023, covering 11 months of imports) are sufficient to withstand any external shock. External debt represents 74% of GDP but is 60% private and 40% related to foreign direct investments or intragroup loans.
On the public accounts side, the budget deficit increased in 2023. Tax revenues were limited, especially due to the more moderate economic growth, consumers fleeing to neighbouring Argentina, pension reform, and more generous transfers to those most affected by the drought. With the reversal or disappearance of these negative factors, and despite sustained spending due to electoral prospects, the deficit is expected to decrease in 2024. Furthermore, borrowing conditions, which benefit from both the lowest borrowing costs in Latin America and a historically tight sovereign spread, have never been more favorable for Uruguay. Moreover, the government has extended the maturity of its debt, thereby reducing its vulnerability. Last, while the weight of public debt will stabilise to around 60% of GDP between 2023 and 2024, the authorities have increased the share denominated in local currency (60% in 2023). Equally held by residents and non-residents, public debt remains under the control of bondholders (70%) and multilateral creditors (10%).
General elections looming in 2024
Uruguay is a robust democracy with a low level of corruption and political polarisation. However, the approaching end to the Presidency of Luis Lacalle Pou, leader of the Partido Nacional (PN, center-right) and his inability to seek a further term of office, is stirring up the Uruguayan political landscape. Tensions are escalating between Cabildo Abierto (CA, right wing) and other parties in Lacalle's government coalition as the October 2024 general elections approach. CA does not hesitate to vote with left-wing opposition parties of Frente Amplio (FA), to the detriment of its coalition partners. Although CA's anti-usury reform, facilitating the restructuring of private debt, has very little chance of collecting the required number of signatures for a referendum (at least 10% of electoral lists), the initiative could boost its popularity in polls. This might encourage CA to leave Lacalle's coalition, leaving the government without a legislative majority in 2024. So far, FA is leading the polls with 41% of the votes, followed by PN (28%), and Partido Colorado (PC, 7%). Simultaneously, FA aims to amend the retirement reform of April 2023, raising the retirement age from 60 to 65, through a referendum (54% of Uruguayans in favor). Political debates in the first half of 2024 will revolve around the primary elections scheduled for June 2024, leading to the presidential election. On the left, in FA, the choice between the two potential candidates will be highly competitive, with Carolina Cosse, Mayor of Montevideo, and the favorite, Yamandú Orsi. On the right, in PN, the challenge is to find a successor to the president. While Alvaro Delgado's candidacy is yet to be confirmed, Laura Raffo has already sought to consolidate her national alliances. According to current polls, Yamandu Orsi is likely to win the election (22%), followed by Alvaro Delgado (PN, 13%), and Carolina Cosse (FA, 10%).
Regarding foreign relations, President Lacalle has primarily focused on reforming Mercosur, allowing member countries to sign independent free trade agreements (FTAs) outside the bloc. Significant bilateral progress toward concluding an FTA with China faces resistance from Brazil and Argentina. However, Brazil and Uruguay agree on prioritising the completion of the EU-Mercosur FTA. Similarly, the USA-Uruguay dynamic would strengthen with the proposed Partnership Agreement between the two countries presented in September 2023 to the US Senate. If ratified, most tariff barriers would be lifted, ensuring preferential access to the American market. Finally, Uruguay has applied for membership in the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), but given the membership criteria (structural reforms and approval from all members), it is unlikely to join before 2027.
