Uruguay: The IMF anchor

Uruguay’s economy should continue to grow strongly, as
momentum from 2004 is likely to spill over into this year. We expect
a new IMF programme to be announced later this month, which
should provide a strong policy anchor. However, we expect the
credit to weaken following the positive IMF-related news and
spreads to widen to Brazil.

IMF programme is key
Uruguay is highly dependent on multilaterals, as more than half of its
external debt is to the IFIs. The government seems well aware of the
dependence on an IMF programme as a seal of approval necessary to
receive IFI financing. In our view, this dependence creates a strong policy
anchor.
Negotiations about a new IMF programme are ongoing but could be
concluded by the time of the Spring Meetings on 16/17 April. Such an
agreement could allow the government to realise its plans to tap the
international capital markets and issue up to $500m with a maturity of up to
20 years.

Continued strong growth performance
The economy grew by an unprecedented 12.3% in 2004, and there
should be sufficient momentum to achieve another good performance
for this year of around 7%. Private consumption is expected to take over
from exports as the main driver of growth, but investment also remains high.
The situation on the external side is robust as we expect just a slight
current account deficit of 0.2% this year. For the time being the country is
also profiting from the strong recovery in Argentina. Continuing high oil
prices may, however, put more pressure on the external accounts.
Uruguay’s external debt has outperformed since our Overweight
recommendation on 18 November 2004. However, we now see the credit
as rich to Brazil and would recommend reducing exposure following
the approval of the new IMF programme expected in May.