Rationale
Dagong assigns “BB+” to
both the local and foreign currency long term sovereign credit ratings of the
Oriental Republic of Uruguay (hereinafter referred to as “Uruguay”) based on a comprehensive
analysis of its potential debt demand and realistic solvency risk etc..
With the improvement of
the fiscal deficit, the government debt has been substantially reduced in recent
years. As of the end of 2009, the central government outstanding debt to GDP
ratio had declined to 37.6% from 84.2% in 2003, but the non financial public
sector debt is still at a relatively high level of 59.7%. The recent
debt-managing programs helped to optimize its debt structure. The proportion of
5-year and more than 5-year debt has increased to 68.8% of total, reducing its
short-term debt pressure. However, the fact that the foreign currency debt
accounts for 73.0%, which is a high level, is one of the main negative factors
to its debt solvency. In addition,
the relative big size of contingent debt burden is another risk exposure of
Uruguay government. Considering that
the fiscal condition will be improved in the future, the debt scale would be
further reduced.
Overall, the improving
policy framework and low leverage level of the financial sector cut down the
shock brought by the international financial crisis. The improvement of the
fiscal condition and the decline of the debt rate enhance the government
solvency. However, the absence of driving force behind its long-term economic
growth and still high debt repaying pressure make its debt solvency risk at a
middle level. It can be specified as:
l
The reform after its financial crisis
in 2002 strengthened the compatibility of Uruguay’s
overall economic policy framework, producing a high growth rate. Its capability
against the Latin America shock, especial Argentina economic and financial
crisis, has been improved markedly. However, the high inflation and low size of
private investment restrict its long-term economic growing potential.
l
The strict fiscal discipline made the
fiscal deficit decrease. Though the international financial crisis and the
drought made the deficit increase in 2009, the size is still in a reasonable
scale. The improvement in fiscal condition will help the government realize its
aim of reducing the debt to 40% of its GDP.
l
The abundant international reserve
and the declining external debt improve its external liquidity. Although there
was capital flight in the international crisis, it has been under control all
the time. The strengthening tendency of Uruguay peso is helpful to reduce its
debt repaying pressure.
Outlook
The
reforms in recent years improve the Uruguay capability against the
regional economic shocks. The lower degree of economic opening up, leverage in
the financial sector and the exposure to the toxic assets reduced the shock
extent of international economic crisis. However, its high inflation rate and
small size of private investment limit its economic growth potential in the
medium term. The improvement in fiscal situation in the future will be helpful
for the government to further reduce the debt size, but there is still a long
way before the government realizes its debt-reducing target. Relative low
domestic risks, high short-term growth anticipation and abundant foreign reserve
improve the external liquidity and the government financing ability. The stabilization of peso could also
reduce the debt repaying pressure of the government. As a result, Dagong keeps
the positive outlook for Uruguay government’s local and
foreign currency credit rating in the next 1-2 years