uruguay economic outlook 1h18 - bbva research · key messages global growth remains robust, but...

BBVA Research - Uruguay Economic Outlook 1H18 / 1

Uruguay Economic

Outlook

1H18

May 2018

Creating Opportunities


Contents

01

02

Global environment: Growth rate holds firm,

but risks of protectionism intensify

Uruguay: growth slows, but

investment expected to pick up

Key messages

Global growth remains robust, but uncertainty is increasing.

US protectionist measures pose a risk

The region’s recovery holds firm amid external turbulence,

but the strengthening of the USD increases the risk for Latin

American assets

Downward revision of growth in Uruguay due to the effect of the drought on the agricultural

and livestock sector and hydroelectric generation. Private consumption slows due to slacker

pace of increase in real wages

No changes in fiscal forecasts, but now more important than ever to rise to the challenge of

reducing non-forecast primary expenditure in order to attain the fiscal target of -2.5% of GDP

in 2019

Despite the good performance of exports, the external accounts will deteriorate, basically due

to increased imports reflecting greater dynamism of investment

The Uruguayan peso remains strong despite higher regional volatility, while inflation will hold

steady at levels close to the upper limit of the central bank’s target range


01Global environment

Growth rate holds firm,

but risks of protectionism intensify


Robust global growth, but greater uncertainty

The pace of global growth

continues...

...thanks to the recovery in

investment and trade

01

Economic policies are extending

the cyclical recovery

The US fiscal stimulus could

provide support to other regions

02

Greater financial volatility

The unusual environment of

low volatility has been left

behind

03

Normalisation of central

banks’ monetary policy,

somewhat faster than

expected in the case of the

US Federal Reserve, while

the ECB has already taken

the first steps

04Uncertain effect of US

protectionist measures

The direct effect of those

already approved is not

significant, but more

aggressive measures may be

in store

05Global risks

Increasing in the short term

due to possible escalation

of protectionism and

toughening of global

financial conditions

06


Revised upwards in the USA and downwards

in South America

Down

Up

Unchanged

2018

3.82019

3.8

World

2018

2.82019

2.8

USA

2018

2.02019

2.2

Mexico

2018

1.22019

2.6

South America

2018

2.32019

1.8

Euro zone

2018

6.32019

6.0

China

Source: BBVA Research


Higher growth in the US could provide support for

progress in other regions

Impact of the US fiscal stimulus on growth (pp) Moderate effect of the new fiscal

stimulus in the short term in an

economy at full employment and in

the absence of measures to

support a significant increase in

potential growth

The most significant effect should

be observed in 2019, especially in

the euro zone

Such support should offset some

headwinds in other areas (political

uncertainty in Latin America and

increasing global volatility)


0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2018 2019 2018 2019 2018 2019

USA Euro zone Latin America


US Federal Reserve rate hikes are picking up pace

in light of greater economic dynamism

USA: Federal Funds Rate(%)


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2017 2018 2019

Nominal Real

The Federal Reserve will raise

rates by 75 bps more this year and

another 50 bps in 2019

Monetary conditions will remain

loose, with real interest rates close

to zero


Financial tensions are starting to reflect a less complacent

environment, as investors grow more cautious

BBVA financial stress indicator(%)

Central banks will reduce their balance sheets, interest rates are gradually rising and volatility shocks may become more

frequent and persistent

Fears of an uptick in inflation (US) and the announcement of protectionist measures have led to an increase in volatility and

a reassessment of emerging market risk which weakens inflows and leads in turn to currency depreciation, increased risk

premiums and falling stock markets

Source: BBVA Research based on Bloomberg

Global financial conditions*(% and change in US$ billions)

(*) Short- and long-term interest rates, average yield of German and US bonds over 3 months

and 10 years. Includes assets on the balance sheets of the Fed, ECB, BoE and the BoJ

Source: BBVA Research, Fed, ECB, BoE and BoJ

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

ma

r.-1

4

jun

.-14

sep.-

14

dic

.-1

4

ma

r.-1

5

jun

.-15

sep.-

15

dic

.-1

5

ma

r.-1

6

jun

.-16

sep.-

16

dic

.-1

6

ma

r.-1

7

jun

.-17

sep.-

17

dic

.-1

7

ma

r.-1

8

Developed Emerging

-1.000

-500

0

500

1.000

1.500

2.000

2.500

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

Jan-0

8

Aug

-08

Ma

r-0

9

Oct-

09

Ma

y-10

Dec-1

0

Jul-1

1

Fe

b-1

2

Sep

-12

Apr-

13

Nov-1

3

Jun-1

4

Jan-1

5

Aug

-15

Ma

r-1

6

Oct-

16

Ma

y-17

Dec-1

7

Jul-1

8

Fe

b-1

9

Sep

-19

Central Bank Assets (right)

Short Term Interest rate (left)

Long Term Interest rate (left)


Particularly affecting the countries most exposed

to external financing, such as Argentina

Source: BBVA Research and Haver

Market indicators (base Oct. 2017 = 100)

Argentina’s current account(% of GDP)

Source: INDEC (National Statistics Institute) and BBVA Research

Country risk, which had fallen by more than 100 bps in 2017, has increased by more than 90 bps so far in 2018, which

together with the increase in the ten-year US Treasury rate makes financing the fiscal deficit significantly more expensive

The rapid deterioration in the current account deficit raises doubts as to the sustainability of external debt, which will

depend crucially on meeting the fiscal targets and boosting FDI to levels similar to those of the region as a whole

90

100

110

120

130

140

150

23-1

0-1

7

07-1

1-1

7

22-1

1-1

7

07-1

2-1

7

22-1

2-1

7

06-0

1-1

8

21-0

1-1

8

05-0

2-1

8

20-0

2-1

8

07-0

3-1

8

22-0

3-1

8

06-0

4-1

8

21-0

4-1

8

06-0

5-1

8

FX rate EMBI+ ARG Merval

Pension reform

Midterm elections

Change in

inf lation targets

DJ sell-off

UST 10y rise

-1,6%

-2,7% -2,7%

-4,8% -5,4% -5,5%-5,5%

-4,5%

-3,5%

-2,5%

-1,5%

-0,5%

0,5%

1,5%

2014 2015 2016 2017 2018e 2019e

Trade balance Real Services Balance Interest and dividends

Transfers Current Account


Confidence continues to improve in Latin America, underpinning

growth, in spite of some negative external shocks

Latin America: GDP growth(% YoY)

(*) Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela.


The increase in growth in 2018

and 2019 will continue to be

supported by two factors:

• The external sector: with

increased world growth and

higher commodity prices

• A boost from investment, both

private and public

Growth will be lower than in other

emerging regions such as Asia or

Eastern Europe

2.8 2.8 1.0 -0.1

-0.9

1.2 1.42.5 2.6

-4

-3

-2

-1

0

1

2

3

4

5

6

2012 2013 2014 2015 2016 2017 2018* 2019* 2020*

Latam** Andeans Brazil México


The expected depreciation of currencies in 2018 and 2019 in the

majority of countries in the region has accelerated

Exchange rates against the dollar(Chg. % from 1 April to now) Depreciation of currencies

going forward, in a context of:

• Federal Reserve interest rate

hikes and end of the cycle of cuts

in Latin America

• Moderation of

commodity prices

The exception is Argentina, where

greater inflationary pressure

and the bigger external deficit will

make depreciation faster than in

the rest of the region

The Mexican peso could

appreciate if the risks associated

with the NAFTA negotiations and

the elections do not materialise


-12 -10 -8 -6 -4 -2 0 2 4 6 8

USDINR

USDCNY

USDARS

USDBRL

USDMXN

USDCLP

USDCOP

USDPEN

USDRUB

USDTRY

Global Idiosyncratic

Depreciation against the USD


Greater external risks, except for China…

Protectionism and impact

on global trade flows

01

Pace of exit from the Fed’s

stimulus measures

(aggressive rate hikes in

response to temporary

increase in inflation)

Leveraging and sharp

slowdown in China

03

Political noise: increased

risk in Peru, Brazil,

Colombia and Mexico;

decreased risk in Chile and

Argentina

04

Delays in private and public

investment Increasing risk in

Peru and Argentina from higher

currency volatility and fiscal

adjustment

Failure to push ahead

with reforms and boost

productivity

06

…while domestic risks remain, with considerable disparities among countries

02

05


02Uruguay

Growth slows, but investment expected to pick up


Uruguay has completed 15 years of uninterrupted growth, and in the

past ten years it has grown by more than the average for Latin America

GDP grew by 2.7% in 2017, driven

by private consumption (+4.4%

YoY) and exports (+7.6% YoY), but

with a poor performance from

investment (-13.8% YoY)

Activity in 2018 (+2.9%) will again

be driven by private consumption,

which will continue to grow, albeit at

a slower pace than in 2017, and we

will start to discern a recovery in

investment in infrastructure

For 2019, we still think growth in

investment will be driven by the

construction of the country’s third

cellulose plant, taking growth to

3.5%

GDP by expenditure component(effects in %)

Source: BBVA Research and Uruguayan Central Bank

4.6%

3.2%

0.4%

1.7%

2.7%

2.9%

3.5%

-4%

-2%

0%

2%

4%

6%

2013 2014 2015 2016 2017 2018 (e) 2019 (e)

Private Consumption Public Consumption

Investment Export

Import GDP

GDP LATAM


What is behind the slowdown in private consumption?

Lower growth in real wages in 2018: given the

(decreasing) nominal growth guidelines for wages and

relatively stable inflation

Nominal Wages, Inflation and Private Consumption(Changes %, YoY)

Consumer Confidence and Exchange Rate(CCI and UYU/ USD)

Source: BBVA Research, Uruguayan Central Bank and INE (National Statistics Institute)

Consumer confidence remains stuck at the ‘moderate

pessimism’ level due to the deterioration in employment

and lower growth in real wages

Confidence in March was at 47.2 (down by -2.7% relative

to February)

Source: BBVA Research, Teams

-2%

0%

2%

4%

6%

8%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

dic-09 dic-11 dic-13 dic-15 dic-17

Private Consumption (right) Nominal Wages (left)

Inflation (left)

0

5

10

15

20

25

30

35

30

35

40

45

50

55

60

65

70

dic.-07 dic.-09 dic.-11 dic.-13 dic.-15 dic.-17

Confidence Index (left) FX (right)

Dependable pesimism

Moderate pesimism

Moderateoptimism

Dependable Optimism

47,2


First signs of slowdown in private consumption

Sales of motor vehicles (including pick-ups, vans and

heavy trucks) have started to slow, both in unit terms

over the past twelve months and in twelve-month year-

on-year terms

Vehicles sales(In units and Changes % YoY)

VAT revenues in real terms(Change % YoY)

Source: BBVA Research and Ascoma (vehicle dealers association)

VAT revenues, which are closely related to the level of

activity and consumption, are starting to stagnate after

several months of significant recovery

Source: BBVA Research, Uruguayan Central Bank and Ministry of Economics and Finance (MEF)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35000

40000

45000

50000

55000

60000

65000

dic

-13

ma

r-1

4

jun

-14

sep-1

4

dic

-14

ma

r-1

5

jun

-15

sep-1

5

dic

-15

ma

r-1

6

jun

-16

sep-1

6

dic

-16

ma

r-1

7

jun

-17

sep-1

7

dic

-17

ma

r-1

8

Vartiation Sales 12m yoy Vartiation Sales 12m yoy

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

59,000

59,500

60,000

60,500

61,000

61,500

62,000

62,500

63,000

en

e-1

5

ab

r-15

jul-

15

oct-

15

en

e-1

6

ab

r-16

jul-

16

oct-

16

en

e-1

7

ab

r-17

jul-

17

oct-

17

en

e-1

8

Real VAT (12 months) (left) Var. % yoy (right)


Improvement in levels of employment requires investment to be

boosted in order to attain sustainable growth

The peaks in investment were reached in the years

when the cellulose plants were built. Following the

sharp fall of 2017, our baseline scenario assumes an

increase in investment in 2019 with the construction of

the third cellulose plant (the second by UPM) and the

related necessary infrastructure

Contribution of investment to GDP (constant)(% of GDP)

Monthly unemployment and 3-month

moving average(Rate in %)

Source: BBVA Research, Uruguayan Central Bank and INE (National Statistics Institute)

In March the unemployment rate was 8.5% of the EAP

(9.3% in February). Although monthly data are highly

volatile, the trend is one of growing unemployment. This

is closely linked to the low level of investment, particularly

in construction, which is very labour-intensive

Source: BBVA Research, INE

22.4%

23.6% 23.6%

19.6%

16.4%

10%

12%

14%

16%

18%

20%

22%

24%

26%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

(e

)

20

19

(e

)

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

mar-13 dic-13 sep-14 jun-15 mar-16 dic-16 sep-17

Unemployment rate Moving average 3m


Balance of indicators for 2018: Mixed signals, with a predominance

of negative ones

After reaching a record in 2017, the

tourist industry continues to perform

well: the number of visitors increased

by 10.7% in 1Q18, although spending

in dollars grew by only 1.1%, with

average spending per person down by

8.3% YoY

01

Industry is bound to show

improvement relative to 2017 due to

the reopening of the refinery after

nine months of technical stoppage

for five-year maintenance

02

The agricultural sector was affected

first by the drought (“la Niña”) and

more recently by excessive rains.

Lower crop yields (mainly soya

beans), but livestock and dairy sectors

also affected

03

The drought also leads to lower

generation of hydroelectric power,

this and wind power being the

highest value added sources. The

need to have recourse to thermal

power generation to meet demand

will affect the level of activity

04

Unemployment data, although highly

volatile in the short term and

markedly seasonal, show a growing

trend. With a given nominal wage

guideline, real wages will not grow as

they did last year thanks to the

decline in inflation

05

After growing by 3.2% in real terms

during 2017, VAT revenues in 1Q18,

also in real terms, fell by 1.1%

relative to the same quarter of 2017

06

Tourists ANCAP (state-owned

oil, alcohol and cement

company)

Climate I

Climate II Labour market VAT in real terms


The external surplus fades while we wait for FDI to arrive

The deterioration in the balance of trade in goods will come from an increase in imports, due not just to increased activity but

also to the capital goods needed to construct the third cellulose plant, leading to a current account deficit of 1.4% of GDP in

2019

Exports will also suffer in 2018 as a result of the water shortages which reduce crop yields and affect the livestock and diary

industries

Current account and components(% of GDP)

Foreign Direct Investment(In US$ millions and as % of GDP)

Source: BBVA Research, Uruguayan Central Bank Source: BBVA Research, Uruguayan Central Bank

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 2016 2017 2018e 2019e

Million USD (left) % GDP (right)

UPM?

-4.0%-3.0% -3.0%

-0.7%

0.8%

1.6%

-0.2%

-1.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2012 2013 2014 2015 2016 2017 2018

(e)

2019

(e)

% G

DP

Balance of Goods Balance of Servicies

Interest and Net Tranfers Current Account (%GDO)


No surprises on the fiscal front: consolidation at a slower pace than

expected by the government

Overall and Primary Fiscal Result(% of GDP)

The result ended 2017 at 0.2 pp

above the budget, but better than

2016, in line with our forecasts.

Revenues improved thanks to the

adjustments made to certain taxes

although this is still not seen in VAT,

which is directly linked to

consumption and activity.

We still see the overall result at the

end of 2019 being a couple of

tenths of a percentage point above

the budgeted deficit

0.0%

-0.5%

-0.2%

0.4%0.5%

-3.5%

-3.9%

-3.5%

-3.1%

-2.7%-3.3%

-2.9%

-2.5%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2015 2016 2017 2018 (f) 2019 (f)

Primary Result Global Result Budget

(f) Forecast.

Source: BBVA Research, MEF


To attain the target for 2019, the government will have to make an

effort that involves not just containment but savings on spending

The government has carried out the fiscal consolidation since 2016 basically on the revenues side (adjustments to business

and personal income tax mainly) but it needs also to contain primary spending, half of which corresponds to pensions and

wages, which are downwardly inflexible.

Only with a fiscal effort involving savings of 1.2% of GDP in spending in 2018/2019 (from the 30% reached in 2017) will it be

able to attain the 2019 fiscal target. In this regard it is important that the system of decreasing nominal wage negotiations be

implemented.

Components of Public Spending(% of GDP)

Tax revenues: 2017 and 1Q 2018(In real terms, chg. YoY)

(f) Forecast.

Source: BBVA Research, Uruguayan Central Bank and Ministry of Economics and Finance (MEF) Source: BBVA Research, MEF and INE

-1.1%

2.2%

4.1%

2.3%

0.6%

3.2%

10.0%

15.8%

5.4%6.1%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

IVA IMESI IRPF IRAE TOTAL

1Q-18 / 1Q17 2017 / 2016

5.0% 5.1% 5.2% 5.1% 5.0%

9.4% 9.5% 10.0% 9.8% 9.7%

14.4% 15.2% 14.7% 14.5% 14.3%

28.8% 29.9% 30.0% 29.5%29.0%

0%

5%

10%

15%

20%

25%

30%

35%

2015 2016 2017 2018 (f) 2019 (f)

Others Expenditures /GDP Social Security /GDP

Wages/GDP Primary Expenditure / GDP


Uruguay managed a successful bond issue maturing in 2055

before the sharp increase in volatility and global uncertainty

Uruguay continues to manage its public debt well and took

the opportunity to issue international bonds in dollars to

finance the fiscal imbalance but also to extend the

maturity profile

Uruguay’s Public Debt by Currency(Changes %, YoY)

Maturity profile of public debt(In US$ millions)

Source: BBVA Research, Uruguayan Central Bank

The US$1.75 billion issue, the biggest in the country’s

history, saw demand amply exceeding supply at a rate of

5.03%.


72.2%

27.3%

85.0%

65.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Public Debt Foreign Currency Total Public Debt

0

5,000

10,000

15,000

20,000

25,000

30,000

2018 2019 2020 2021 2022 2023 más de

2023Principal Interest


Inflation will remain in the upper part of the central

bank’s target range

Core inflation has stabilised at

around

6.8% YoY

Containment of wage momentum,

with agreements extended to three

years with average annual nominal

increases of 7.5%, 7.0% and 6.0%.

Monetary policy is sticking to its

commitment, while still going along

with the preference for pesos of

the past few months

Inflation will reach 6.7% this year

and 6.8% next year

Inflation: headline and core(change % YoY)

Source: BBVA Research, INE

0%

2%

4%

6%

8%

10%

12%

Nov-1

1

Ma

r-1

2

Jul-1

2

Nov-1

2

Ma

r-1

3

Jul-1

3

Nov-1

3

Ma

r-1

4

Jul-1

4

Nov-1

4

Ma

r-1

5

Jul-1

5

Nov-1

5

Ma

r-1

6

Jul-1

6

Nov-1

6

Ma

r-1

7

Jul-1

7

Nov-1

7

Ma

r-1

8

Jul-1

8

Nov-1

8

Ma

r-1

9

Jul-1

9

Nov-1

9

Core (BBVA) CPI


The peso remains attractive despite the Central

Bank’s intervention

So far this year the Uruguayan

Central Bank has bought US$1.6

billion to relieve pressure

on the exchange rate

The accumulation of reserves (29%

of GDP) reinforces expectations of

lesser devaluation

Reduced external vulnerability to

structural changes and policy of pre-

financing are reflected in the

exchange rate

We estimate the exchange rate at

UYU 30.50 to the US dollar at year-

end 2018 and 32.60 at the end of

next year

Reserves and Expectations of devaluation(% of GDP)


-400

-300

-200

-100

0

100

200

300

400

500

600

700

0

5

10

15

20

25

30

35

Jan-1

6

Ma

r-1

6

Ma

y-16

Jul-1

6

Sep

-16

Nov-1

6

Jan-1

7

Ma

r-1

7

Ma

y-17

Jul-1

7

Sep

-17

Nov-1

7

Jan-1

8

Ma

r-1

8

USD million%

Int'l Reserves (% GDP) (right)CB Intervention (right)6m (left)12m (left)24m (left)


Slight deterioration in competitiveness

The strengthening of the dollar against the region’s currencies affected Uruguay’s main trading partners more seriously, due to

Argentina’s external vulnerability and Brazil’s political uncertainty.

The Uruguayan peso’s path of appreciation in real terms in the next two years is determined by the stability of inflation and the

exchange rate

Changes in the Nominal Exchange Rate(%, (-) show depreciation against dollar)


Real Multilateral Exchange Rate(Dec. 2001 = 100)


-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

ARG BRA CHI COL MEX PER URU EUR CHN

30-Sep-17 a 31-Dec-17 31-Dec-17 a 04-May-18 30-Sep-17 a 04-May-18

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

Dec-0

1

Oct-

02

Aug

-03

Jun-0

4

Apr-

05

Fe

b-0

6

Dec-0

6

Oct-

07

Aug

-08

Jun-0

9

Apr-

10

Fe

b-1

1

Dec-1

1

Oct-

12

Aug

-13

Jun-1

4

Apr-

15

Fe

b-1

6

Dec-1

6

Oct-

17

Aug

-18

Jun-1

9

Apr-

20

REER Long Term average

UYU apreciated

UYU depreciated

Long Term avg. = 1,08


Uruguay

(f) Forecast.


2016 2017 2018 (f) 2019 (f)

GDP (% YoY) 1.7 2.7 2.9 3.5

Inflation (% YoY, EOP) 8.1 6.6 6.7 6.8

Inflation (% YoY, average) 9.6 6.2 7.0 5.8

Exchange rate (vs. USD, EOP) 28.8 30.9 30.5 32.6

Exchange rate (vs. US$, average) 30.1 29.4 29.3 31.6

Asset interest rates (%, average) 24.3 22.6 21.8 22.2

Private Consumption (% YoY) 0.1 4.4 3.8 3.0

Public Consumption (% YoY) 2.9 -1.3 2.0 1.5

Investment (% YoY) -3.9 -13.8 3.0 12.5

Fiscal Balance (% GDP) -3.9 -3.6 -3.1 -2.7

Current Account (% GDP) 0.8 1.6 -0.2 -1.4

uruguay economic outlook 1h18 - bbva research · key messages global growth remains robust, but...

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