Uruguay's vulnerabilities: inflation and budget deficit
As a small open economy that exports mostly agricultural products and has nonresidents holding a relatively high share of its public debt, Uruguay is exposed to the risk of lower global growth and tighter global financial conditions.
At the same time, the recent drop in global crude oil prices will provide a welcome opportunity to improve the overall fiscal and balance of payments positions and reduce inflation.
Uruguay’s strong liquidity buffers would allow an orderly adjustment in the event of adverse external shocks. Public debt maturity is high, reserves comfortably exceed prudential benchmarks, and banks and the public sector have ample U.S. dollar liquidity.
However, above-target inflation would leave little room for a countercyclical monetary policy response, and a primary balance that is insufficient to keep net public debt around its current level would limit the policy space to deploy discretionary stimulus. ■