Uruguay Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Despite the unprecedented volatility and uncertainty of recent years, the last decade has been a very good one for Uruguay. Driven by a strong institutional framework and macroeconomic policies oriented towards macroeconomic and financial stability, Uruguay has enjoyed high economic growth (3.5% a year on average over the last 10 years). This performance has allowed a major reduction in poverty and a generalised improvement in human development indicators.

The resilience of the Uruguayan economy was proven during the 2008-09 global financial crisis, when it was one of the few countries with positive growth (4.2% in 2009). Last year's performance, even though below the long-term potential GDP trend, stands out given the global and regional context. The increasing openness of the economy, the search for new markets and in particular, the recently signed trade agreement between Mercosur and the EU will help to maintain this record.

Despite mounting pressures from anaemic regional growth, prudent management remains the cornerstone of Uruguayan macroeconomic policy. At the same time, a sound debt policy has increased average maturities of public debt and the participation of market debt in total public debt, while decreasing the share of dollar-denominated debt from almost 100% in 2002 to 54% by 2018. All these efforts resulted in the Uruguay's public debt being categorised as investment grade in 2012, a credit rating that has been recently confirmed by the major international credit rating agencies and the market. The Central Bank of Uruguay (BCU) has been a big contributor to this successful landscape, on the monetary policy and the financial stability fronts.

Inflation remains one of the BCU's main concerns, despite it falling to 7.96% by end-2018, just above the ceiling of the 3-7% target range. In response to mounting inflation, mainly driven by commodity and regional price shocks, and in an effort to keep inflation expectations anchored, in 2013 the BCU shifted to managing monetary aggregates. Consistent with concerns over inflation, M1 yearly growth slowed from 11.5% in Q2 2018 to under 10.0% in Q2 2019. The evolution of monetary aggregates and the term structure of interest rates are both a reflection of the monetary policy stance in the current phase of the cycle.

Systemic risk is relatively low in the Uruguayan financial system due to the large reduction of liability and deposit dollarization, as well as enhanced regulations and supervision of the financial system that followed the 2002 crisis. Nowadays, the banking sector is consolidated, with an average capital adequacy ratio of over 13%, short-term liquidity excess above 42%, and non-performing loans of 3.7%.

To reduce risks embedded in the banking system, a Financial Stability Committee started to operate in 2011. At the same time, the BCU concentrated its efforts to enhancing financial literacy to help domestic agents' financial decision-making. Indeed, financial inclusion and education and the development of the domestic market continue to be among the BCU's top priorities.

Consistent with the Financial Inclusion Law of 2013, which aims to improve the efficiency of the payments system, the Bank launched a digital currency pilot programme between November 2017 and April 2018. Evaluated positively, the experience of the e-Peso has put the BCU on a pro-active footing for its mandate in the digital era.