New York, June 22, 2016 -- Moody's Investors Service has today affirmed the government of Uruguay's
Baa2 issuer and government bond ratings and changed the outlook to negative
from stable. The government's senior unsecured government
bond ratings were affirmed at Baa2, as was the senior unsecured
shelf program rating at (P)Baa2.
Two key drivers underpin the negative outlook:
1) The announced fiscal consolidation measures that seek a 1% of
GDP deficit reduction, primarily through revenue increases,
will be challenged by macroeconomic weakness.
2) Downside risks stemming from larger-than-expected regional
spillovers and structural expenditure rigidities remain.
The affirmation of the Baa2 rating reflects a balance of credit strengths
and weaknesses including moderate government financing needs and a favorable
debt maturity profile, large external and financial buffers,
and a strong institutional framework and a firm commitment to arrest the
deterioration in debt metrics. Alternatively, credit weaknesses
include a relatively high share of foreign currency-denominated
government debt, and a high degree of financial dollarization in
the banking system and persistently high inflation that detracts from
policy credibility.
Uruguay's long-term local currency country risk ceilings
remain unchanged at A2. The foreign currency bond ceiling and the
foreign currency bank deposit ceiling also remain unchanged at A2 and
Baa2, respectively.
RATIONALE FOR THE CHANGE TO NEGATIVE OUTLOOK
-- FIRST DRIVER: MACROECONOMIC WEAKNESSES INTRODUCE
POTENTIAL CHALLENGES TO GOVERNMENT FINANCES
The first driver of Moody's decision to change the outlook to negative
from stable is the potential challenges to reverse the deterioration in
government finances due to the increasingly weak macroeconomic environment
and a rigid expenditure structure. The consolidated central government
deficit reached 2.8% of GDP in 2015 from 2.3%
in 2014. Moody's expects that consolidated central government
deficit will increase to 3.3% of GDP in 2016. Gross
central government debt increased to 47.2% of GDP at the
end of 2015 from 39.3% in 2014, and Moody's
forecasts it will continue to rise reaching more than 50% of GDP
by 2017. Although partly a result of exchange rate weakness,
the increase in Uruguay's debt ratio is likely to continue until
2017-18, when debt metrics are likely to stabilize if the
announced consolidation measures come into effect in full force and no
additional adverse shocks disrupt the adjustment path.
Uruguay's real GDP growth slowed to 1.0% in 2015 from
3.2% in 2014. Moody's forecasts growth will
decelerate further to 0.5% in 2016 before recovering to
1%-2% in 2017. Despite sluggish economic activity,
inflation and inflation expectations are likely to remain entrenched coming
well above the central bank's target. Twelve-month
inflation through May rose to 11%%, the highest level
since November 2003 and four percentage points above the upper limit of
the central bank's target range.
The government announced a series of fiscal measures focused on the revenue
side that target a 1% of GDP deficit reduction. Absent these
measures, the consolidated central government deficit could widen
to nearly 4% of GDP in 2016-17. Considering that
the government's current fiscal adjustment plan incorporates a ratio
of revenue measures to spending cuts of 2:1, there is a risk
that tax revenues may not respond as forcefully as the authorities expect.
-- SECOND DRIVER: DOWNSIDE RISKS STEMMING FROM LARGER-THAN-EXPECTED
REGIONAL SPILLOVERS AND STRUCTURAL EXPENDITURE RIGIDITIES
The second driver of the outlook change is related to the potential for
continued regional, and as a result, domestic economic weakness.
Spillover risks given still-weak economic prospects in Brazil suggest
that material downside risks remain present and could negatively affect
the government's fiscal consolidation efforts. The brunt
of the consolidation program will be enacted in 2017, suggesting
a gradual implementation on the expenditure side that leaves little room
for slippage in the event of unanticipated adverse shocks through the
end of next year. Were these risks to materialize, it is
unlikely Uruguay's debt ratio would peak in 2017. Instead,
it could continue increasing well above the 42% of GDP 'Baa'
category median.
Structural rigidities on government expenditures and the unfeasibility
of pursuing more forceful revenue measures, reflect the constraints
that the authorities face as they attempt to pursue deficit reduction.
Even though the authorities have signaled their commitment to enact further
fiscal consolidation measures in the event of weaker-than-expected
economic growth, Moody's assessment is that, at present,
risks remain firmly skewed to the downside.
AFFIRMATION OF Baa2 RATING SUPPORTED BY STRONG INSTITUTIONAL FRAMEWORK,
FINANCIAL BUFFERS
Uruguay's creditworthiness is supported by the authorities'
commitment to implementation of fiscal consolidation measures that seek
to reduce the central government deficit. These measures,
if approved by congress, should contribute to improve fiscal prospects.
The consolidation program will be complemented by structural measures
that focus on existing expenditure rigidities that should support medium-term
fiscal sustainability. These include fixing wage increases to nominal
targets, effectively abandoning the backward-looking mechanism
of increases set in real terms (adjusting for past and expected inflation),
and a reform of military pension payouts. The new wage-setting
guidelines and reduced military pension outlays will bring about fiscal
savings and reduce wage inertia that contributed to inflation persistence,
in addition to increasing the sustainability of first-pillar pensions.
Moody's believes that the announced fiscal adjustment program seeks to
strike a balance between consolidation and the authorities' intent
to soften the effect of the slowdown on living standards. The fiscal
measures will be submitted to congress by the end of June, where
the ruling political coalition (Frente Amplio) holds a majority,
and the authorities expect them to be approved before November.
Measures that require congressional approval will be implemented in 2017,
but some involving expenditure cuts will likely begin to be implemented
in the second half of 2016. The government has revised down its
growth projections to 0.5% in 2016, 1% in 2017,
2% in 2018 and 3% in 2019. Their revised estimates
match Moody's expectation for 2016, and are even lower than
Moody's in future years. These will be reflected in the government's
upcoming update to their medium-term fiscal framework.
Moreover, Moody's notes that ample government financial buffers
continue to support Uruguay's Baa2 rating. Additionally,
the sovereign's credit profile retains various elements that help
mitigate underlying credit risks, including one of the longest debt
maturity profiles among emerging market sovereigns (approximately 15 years),
two-years of debt service (interest and principal) in cash reserves
and precautionary credit lines that significantly reduce rollover risk
derived from market closure events.
WHAT COULD MOVE THE RATING UP/DOWN
Over the coming 12 to 18 months, Moody's will evaluate the
progress achieved on fiscal consolidation against the backdrop implementation
risks related to weaker-than-anticipated economic growth,
a factor that may diminish the effectiveness of the adjustment measures,
in assessing the possibility of changing the outlook back to stable.
Although unlikely given the negative outlook, upward rating pressure
could result from (1) a significant strengthening of the sovereign's balance
sheet through a reduction of the government debt and interest burden,
(2) a reduction in vulnerabilities through a significant decrease of government
debt dollarization and (3) addressing structural rigidities in the economy
to achieve a higher level of potential growth.
Conversely, downward rating pressure could result from (1) consolidation
measures falling short of achieving the authorities' targets to
arrest a continued increase in debt ratios, (2) a continued deterioration
of structural fiscal balances and a weakening of the government balance
sheet, or (3) a sustained and material erosion of external and financial
buffers.
GDP per capita (PPP basis, US$): 21,507 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1% (2015 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 9.4%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.8%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.6% (2015 Actual)
(also known as External Balance)
External debt/GDP: 58.7% (2015 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 17 June 2016, a rating committee was called to discuss the rating
of the Uruguay, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially decreased. The issuer's
fiscal or financial strength, including its debt profile,
has materially decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Jaime Reusche
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes outlook on Uruguay's rating to negative; affirms government bond rating at Baa2
