Event

Last week, it was announced that Luis Lacalle Pou narrowly won the presidential election on 24 November. In fact, he won with a razor-thin margin of about 1 percentage point against the governing party’s candidate. His victory shifts the country towards the centre-right after 15 years of rule by the left-wing Broad Front. Lacalle will take office on 1 March 2020 for a five-year term. His multi-party coalition will have a majority in parliament, which will help to push through his agenda of fiscal austerity, pro-business policies and economic reforms. That being said, the Broad Front remains the largest single force in parliament, thereby possibly putting pressure on the stability of Lacalle’s coalition.

Impact

The previous government presided over one of the longest cycles of economic growth in Uruguay’s history. However, that growth has been stalling in the past 5 years. Droughts have hurt the crucial agriculture sector and the economic crisis in Argentina – an important trade partner – has also had an effect. As a result, real GDP growth of barely 0.4% is expected in 2019. The good news is that the construction of a pulp mill is likely to support a modest economic upturn in 2020-21. Nonetheless, Argentina’s deep economic crisis, the trade war between China and the USA and the more frequent and severe droughts due to climate change will add to the economic challenges.

The new government has pledged to rein in the wide fiscal deficit (according to Uruguayan standards), which is expected to reach around 3% of GDP in 2019. This in turn would stabilise or even decrease the rather elevated public debt burden of about 64% of GDP at the end of 2018. Although fiscal consolidation is necessary to keep public debt on a sustainable path in the medium to long term, resistance from unions is likely. On top of that, the risk of unrest has risen in the region since fiscal reforms recently led to violent protests in other Latin American countries such as Ecuador, Chile and Haiti.
 
Based on its political stability and robust macro-economic fundamentals, Uruguay’s MLT political risk has been rated well since 2010 with a classification of 3/7. Furthermore, the ST political risk is in category 3/7 thanks to its strong buffer of foreign exchange reserves (covering about 9.5 months of imports in October 2019). Its main weak points remain the external debt and debt service, which are both rather elevated.

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com