New York, August 06, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Uruguay's Baa2 foreign-currency and local-currency
long-term issuer and senior unsecured ratings. The senior
unsecured shelf ratings were also affirmed at (P)Baa2. Concurrently,
Moody's has maintained the stable outlook.
Moody's decision to affirm Uruguay's Baa2 ratings is underpinned by the
following drivers:
1. Uruguay's moderate economic strength, with the expected
recovery in economic growth in the coming two years, mainly relating
to investment in a new large pulp mill plant, countering a structural
decline in growth potential;
2. The country's low fiscal strength that, while slowly
eroding, remains for now broadly in line with that of its Baa2-rated
peers;
3. Moody's expectation that Uruguay's history of policy-consensus
building will support the adoption of measures to confront its structural
economic and fiscal challenges in the coming years.
The stable outlook balances negative underlying fiscal and economic pressures
against Moody's assumption that the next administration will implement
structural economic and fiscal reforms which will counter the ongoing
erosion in Uruguay's economy and fiscal strength.
Uruguay's long-term foreign currency bond and deposit ceilings
remain unchanged at A2 and Baa2, respectively. The local
currency bond and deposit ceilings remain unchanged at A2. The
short-term foreign currency bond ceiling and short-term
foreign currency deposit ceiling remain at Prime-2 (P-2).
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Baa2 RATING
URUGUAY'S MODERATE ECONOMIC STRENGTH, WITH THE EXPECTED RECOVERY
IN ECONOMIC GROWTH IN THE COMING TWO YEARS, MAINLY RELATING TO INVESTMENT
IN A NEW LARGE PULP MILL PLANT, COUNTERING A STRUCTURAL DECLINE
IN GROWTH POTENTIAL
Moody's expects that economic growth will decelerate to about 0.5%
in 2019 from 1.6% in 2018. Growth will average 1.8%
in 2017-20, compared to a Baa median of 3.5%.
Structural issues have afflicted investment, labor markets,
and competitiveness, in turn weighing on the potential growth of
the economy. Private sector gross fixed capital formation has declined
to 13% of GDP from a peak of 18% in 2012-13.
Concurrently, labor market participation rates have also declined
during that period, with a rise in unemployment, and the economy's
international competitiveness has also eroded negatively affecting companies'
profitability and limiting their ability and appetite to invest.
Nonetheless, a series of cyclical factors will support higher level
of economic activity during the 2020-22 period. First and
foremost, Moody's believes that economic growth will be boosted
by the development of the country's third large pulp mill plant
by Finnish company UPM-Kymmene (Baa2 positive). The project,
whose contractual agreement with the government was signed on 23 July,
will represent an investment of $2.7 billion to build the
pulp plant and an additional $350 million in port operations and
local facilities (together equal to about 5.1% of GDP).
An additional railroad project to connect the plant, located in
the center of the country, with the port of Montevideo will add
another $0.8 billion in investment. Moody's
forecasts growth will recover to about 2.5% in 2020-22
supported by this project, while balancing the potential negative
effect of a fiscal adjustment on growth.
Moody's growth forecast for the next two to three years is also
informed by the expected recovery in Argentina and an acceleration of
growth in Brazil, combined with looser international financial conditions
as central banks in developed markets adopt more accommodative stances.
THE COUNTRY'S LOW FISCAL STRENGTH THAT, WHILE SLOWLY ERODING,
REMAINS FOR NOW BROADLY IN LINE WITH OF ITS BAA2-RATED PEERS
Uruguay's fiscal strength deteriorated in previous years in the
context of weak economic activity as debt metrics worsened. Moody's
considers that fiscal adjustment in Uruguay is constrained by a relatively
inflexible spending structure because a large share of expenditures are
indexed and/or mandated by the constitution. Overall, about
two thirds of total spending, including pensions (31% of
total spending), transfers (28%) and interest payments (9%),
is generally considered difficult to adjust unless large efficiency gains
or reforms are pursued.
The fiscal deficit for the consolidated central government rose to 3.4%
of GDP in 2018 (excluding revenue from so-called "cincuentones"
transfers of pension assets) from 3.0% in 2017, and
Moody's estimates that the deficit widened to about 3.9%
by June 2019. These relatively large imbalances, combined
with the impact of the exchange rate shocks on the government's
balance sheet due to its still significant foreign currency debt
exposure, have caused Uruguay's debt burden to rise to 52%
of GDP in 2018, up from 41% in 2014.
Still, Moody's notes that Uruguay's debt metrics remain
broadly aligned with those of its Baa2-rated peers. At 53%
of GDP in 2019, Uruguay's debt burden will be in line with
the Baa median while moderately above the 46% median for Baa2 peers
but below the median for Baa3-rated peers, which stands at
58%. In terms of debt affordability, Uruguay's
interest burden on budgetary revenues of 9.6% remains below
the Baa2 median of 12.5%.
MOODY'S EXPECTATION THAT URUGUAY'S HISTORY OF POLICY-CONSENSUS
BUILDING WILL SUPPORT THE ADOPTION OF MEASURES TO CONFRONT ITS STRUCTURAL
ECONOMIC AND FISCAL CHALLENGES IN THE COMING YEARS
Political risk is very low in Uruguay given the country's mature
and consensus-building political system. This has contributed
to the development of strong institutions, particularly with regards
to rule of law, control of corruption and government effectiveness.
In the context of general elections taking place in October 2019,
these features of Uruguay's credit profile support Moody's
view that policy measures and reforms focusing on the country's
structural challenges are likely to be implemented in the coming years.
Moody's notes that most political forces have identified Uruguay's
fiscal weaknesses as one of the most urgent macroeconomic challenges that
the next administration, set to take office in March 2020,
will face. In that sense, there is broad consensus among
political parties that a pension reform has to be pursued by the next
government. Additionally, Moody's believes that the
next government will likely enact measures to bolster competitiveness
and support economic dynamism by supporting investment and labor markets.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances risks against opportunities. On the
one hand, Uruguay's economic strength is gradually eroding
as, in consequence, is its fiscal strength. Should
that trend continue, the country's credit profile will erode
relative to peers and its rating will come under downward pressure in
the relatively near future. Set against that, the structural
challenges appear to be recognized by all the principal political actors,
and there seems to be broad political support for structural reforms that
counter the erosion in economic and fiscal strength. The stable
outlook reflects Moody's assumption that the next administration
will indeed implement economic and fiscal reforms, including some
focused on the labor market and the pension system, which counter
the ongoing erosion in Uruguay's economy and fiscal strength.
WHAT COULD CHANGE THE RATING UP/DOWN:
Upward credit pressure could result from (1) a reduction in structural
rigidities of Uruguay's credit profile including those associated
to low and declining productivity which affect potential growth as well
as relatively rigid government spending structure; (2) a material
strengthening of the government balance sheet through a reduction in the
sovereign's debt and interest burdens; and (3) a reduction in vulnerability
through a significant decrease in the share of foreign-currency
government debt.
Downward credit pressure would emerge were Moody's to conclude that structural
fiscal and economic challenges were not likely to be addressed,
denoting a weakening in policy responsiveness, and likely leading
to economic growth underperforming and fiscal strength deteriorating further
in the medium term, with a continued increase in debt ratios and/or
a sustained, material erosion in external and financial buffers.
GDP per capita (PPP basis, US$): 23,274 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.6% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8% (2018
Actual)
Gen. Gov. Financial Balance/GDP: -3.4%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.6% (2018 Actual)
(also known as External Balance)
External debt/GDP: 70.5% (2018 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 01 August 2019, a rating committee was called to discuss the
rating of the Government of Uruguay. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have decreased. The issuer's fiscal
or financial strength, including its debt profile, has not
materially changed. The issuer has become less susceptible to event
risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Renzo Merino
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
