Uruguay macro outlook gic may 12 2016 kamil

Meeting with the GLOBAL INTERDEPENDENCE CENTER delegation MAY 12th , 2016

Uruguay: Macroeconomic Outlook, Trade Flows and Financing Strategies

Debt Management Unit M Ministry of Economy and Finance, Uruguay

Uruguay at a Glance

2

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 3

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 4

Uruguay enjoyed a decade of high and inclusive growth Real GDP Growth Rate (in %)

GDP per Capita (US$, 2015)

8.0

15,000

7.0

12,500

6.0

Average 2005-2015: 5.1% 5.0

10,000

4.0

7,500 3.0

5,000 2.0

2,500

1.0

0

0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

___________________________

Source: Central Bank of Uruguay and IMF (WEO April 2016)

5

9

Significant decrease in poverty and healthier income distribution Poverty (in % of total population)

Gini Coefficient Values between 0 and 1

47

45

More equitable distribution of income

Significant fall in the proverty rate

46

40

40

45

35 43

30 25

41

20 39

15

38

10 10 37 5

___________________________ Source: National Bureau of Statistics

Source: National Energy Division, Ministry of Industry and Energy

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

2014

2011

2008

2005

2002

1999

1996

1993

1990

1990

35

0

Decoupling from the regional downturn became more visible in the last few years Real GDP Growth (Average 2012-2015, in %) 3.5

3,0 3.0

2.5

2.0

1.6 1.5

1.0

0.5 0.5

0.0 Uruguay

Argentina

Brazil

Uruguay continued to grow faster than its neighbours ___________________________

Source: IMF (WEO April 2016)

7

Export market diversification tempered the regional shock Exports of Goods, by Market of Destination

2015

1995

Others 25%

Brazil 33%

China 23%

Others 36%

Spain 3% Netherlands 3% Italy 3% UK 4% Germany 6%

Argentina 13% USA 6%

Brazil 14%

Italy 3% Germany 3% Mexico 4%

China 6%

Argentina 5%

USA 6% Netherlands 6%

___________________________ Source: Central Bank of Uruguay

8

Uruguay remains a bastion of stability in a volatile region (Ranking position in LATAM and Worldwide, respectively)

LATAM

Corruption Perception Index

Democracy Index (The EIU 2015)

(Transparency International 2015)

1st

1st WORLD

Rule of Law

1st

(World Justice Project 2015)

Worldwide Governance Indicators

18th

21st

1st

(Legatum Institute 2015)

30th

22nd

Prosperity Index

43th

2nd

44th

23rd

3rd

Economic Freedom Index (Heritage Foundation 2015)

(World Bank 2015)

3rd

2nd

Global Peace Index

Press Freedom Index

(Institute for Economics & Peace 2015)

(Reporters Without Frontier 2015)

9

Lowest level of corruption in Latin American, and also lower than Poland, South Korea, France and Taiwan

10

“Full democratic” country in LATAM

11

Structural increase in investment driven by FDI inflows Total Investment (% of GDP) 25.0

Av. 2005-2015: 20.0% Av. 1985-2004: 14.6%

20.0 15.0 10.0 5.0 0.0 1985

1989

1993

1997

2001

2005

2009

2013

FDI (% of GDP) 8.0 7.0 6.0

Average: 5.4%

5.0 4.0 3.0

Average: 0.8%

2.0 1.0 0.0 -1.0 1985

1989

1993

1997

2001

12 ___________________________ Source: Central Bank of Uruguay

2005

2009

2013

…and standing out in the regional comparison FDI in South America

Reinvested Earnings

(in % GDP, 2005-2014)

(in %of total earnings, 2005 - 2014)

Chile

Uruguay

65%

Uruguay

5.6%

Chile

Peru

Peru

Colombia

Argentina

Brazil

Colombia

Argentina

Mexico

Mexico

Brazil

Paraguay

Paraguay

0

Source: ECLAC, Uruguay XXI

13

25

50

75

100

Uruguay is now generating 95% of its electricity from renewable energy Global Primary Energy Matrix

Wind Power; 5%

Sources of Electric Generation

Solar; 1%

Oil; 1% Wind Power; 25%

Natural Gas; 5%

Oil; 40% Biomass; 27%

Bioheat; 12%

Hydroelectric; 51% Biomass; 18%

Hydroelectric; 10% Natural Gas5%

RENEWABLE ENERGY MAKES UP 55% OF ENERGY MIX

In less than 10 years, Uruguay has slashed its carbon footprint without government subsidies or higher consumer costs

Source: National Energy Division, Ministry of Industry and Energy

9

FDI inflows from a broad group of countries‌

15

Converging to balanced trade flows with United States Uruguay`s Trade in Goods with United States (millions of dollars) 600

900 Exports

Imports

Trade Balance

600

400

300

200

0

0

-300

-200

-600

-400

-600

-900 2003

2006

2009

___________________________ Source: Central Bank of Uruguay

16

2012

2015

A more balance export basket with the US

___________________________ Source: Uruguay XXI

17

US is the main destination of Uruguay´s IT exports services

___________________________ Source: Uruguay XXI

18

Uruguay’s recent market performance has been in line with better rated peers Latam EMBI (in bps)

Latam EMBI Pick-up (in bps) – (2015 – 2016)

250

700

600

Brazil (Ba2)

Colombia (Baa2)

Mexico (A3)

Peru (A3)

200

Uruguay (Baa2)

194

500

150 120

400

113

100 76

300

58 50

200

0

Mar-16

Jan-16

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

100

___________________________ Source: JP Morgan

19

Sustained improvement of sovereign credit rating

BBB / Baa2 RETURN TO INVESTMENT GRADE

BBB- / Baa2

BBB- / Baa3

BBB- / Baa3

2012

2013

BB+ / Ba1

MAY 2003: VOLUNTARY DEBT EXCHANGE

BB / Ba1 B+ / Ba3 B+ / B1

B+ / B1 B- / B3

2003

2006

2007

2009

2010

2011

Source: S&P / Moody’s/ Debt Management Unit, Ministry of Economy and Finance

2014

2015

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 21

External shocks, deceleration and relative prices

 Political and economic situation in Brazil has deteriorated more than expected.  Deep adjustment of the Argentine economy.  General fall in commodities impacted in several Latin American economies, in particular in oil and mineral exporters.  Generalized slowdown in most developed economies.

22

Uruguay’s economy is facing several external shocks and is cooling-off, although is expected to keep growing in 2016 Exports of Goods of Uruguay (annual % change) 30

Value in millions (right axis)

Real GDP Growth (2016E, in %) 10,000

1.4 1.0

20 8,000

10

-1.0

-1.0

6,000 0 -3.0

Price

-10

4,000

Volume

-3.8 -16%

-20 2009

2010

2011

2012

2013

2014

2,000

-5.0 Uruguay

2015

Argentina

External demand and lower soft commodity prices are weighing on growth prospects ___________________________

Source: Central Bank of Uruguay and MF (WEO April 2016)

23

Brazil

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 24

The government is committed to fiscal consolidation and ensuring the sustainability of public finances Overall Public Sector Balance (% of GDP)

5-Year Budget Plan: Fiscal Targets (% of GDP)

4 2

Central Government 3

Central Bank 1

Public Enterprises

2

Consolidated Fiscal Result 1

0

0

-1

-1 -2 -2

-2.5%

-3 -3 -4

-4

-3.6%

Primary Balance of Central Government

-3.6 % -5 2010

2011

2012

2013

2014

Overall Public Sector Balance

-5

2015

2015

___________________________ Source: Ministry of Economy and Finance; projections included in the 5-Year budget law passed in 2015

25

2016*

2017*

2018*

2019*

Towards fiscal consolidation

 Fiscal effort is focused on enhancing the efficiency of public enterprises and increasing reliance on the private sector for infrastructure investment.  CB open market operations during 2015 will reduce the quasi-fiscal deficit in 0.6% of GDP in 2016.  Utilities bill increases will contribute with the fiscal revenues in 2016.  Authorities emphasized the possibility of revising the budget to meet the main goal of achieving a 2.5% of GDP global deficit by end 2019.

___________________________ Source: Ministry of Economy and Finance and Central Bank

26

Inflation remains above target and is a key challenge to be addressed Consumer Prices Evolution (in %)

12%

12%

10%

10%

8%

8%

6%

6%

4%

4%

2%

CBU Inflation Target

Tradable Sector

Source: Central Bank of Uruguay and National Bureau of Statistics

27

May-16

Jan-16

Mar-16

Nov-15

Jul-15

Sep-15

May-15

Jul-14

Sep-14

May-14

Jan-14

Mar-14

Nov-13

Jul-13

Sep-13

May-13

Jan-13

___________________________

Mar-13

Mar-16

0%

May-16

Jan-16

Nov-15

Jul-15

Sep-15

May-15

Jan-15

Mar-15

Nov-14

Jul-14

Sep-14

May-14

Jan-14

Mar-14

Nov-13

Jul-13

Sep-13

Mar-13

May-13

Jan-13

0%

Non Tradable Sector

Jan-15

Observed Inflation

Mar-15

Inflation Expectations

Nov-14

2%

Nominal exchange rate depreciation led to improvement in exchange rate competitiveness with some trade partners Nominal and Real Exchange Rates (December 2012 =100)

130 120

United States

Brazil

China

Multilateral

32 30

Nominal FX (Pesos per USD, right axis)

28

110

26 100 24 90

22

80

20

70

18

___________________________ Source: Central Bank of Uruguay

28

As an exporter of soft commodities and oil importer, Uruguay has a natural hedge to its terms of trade Terms of Trade for Goods ( Base 100 = Average 2011)

120

110

100

90

80

70

60 2011

Colombia

Brazil

Chile

Mexico

Peru

Uruguay

2012

2013

2014

During 2015 the terms of trade of Uruguay continued improving

___________________________ Source: International Monetary Fund

29

2015

Uruguay's commodity exports prices have remained quite resilient Changes in Commodity Export Prices and Foregone Income Effect 0

0

-2 -10 -4 -6 -20 -8 -10

-30

-12 -40 -14 -16 -50 Price changes weighted by share of each commodity in total commodity exports - RHS

-18

Price changes weighted by share of commodity exports in GDP - LHS

-60

-20 URU

ECU

ARG

CHL

PER

___________________________ Source: IMF Managing Transition and Risks Presentation 04/2016

30

BRA

MEX

COL

VEN

Significant adjustment in external accounts Trade and Current Account Deficit ( rolling 12-months, % of GDP)

6.4%

7

Smaller Current Account Deficit

6 5

3.6%

4 3 2 1 0

Trade Deficit

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q2

2014Q1

2013Q4

2013Q3

2013Q2

2013Q1

2012Q4

2012Q3

2012Q2

2012Q1

-1

Current Account Deficit

Trade in goods and services was almost balanced by end-2015

___________________________ Source: Central Bank of Uruguay

31

Turnaround into Trade Surplus

FDI comfortably financed the CAD in the last decade Gross FDI and Current Account Balance (% of GDP) 8 6 4 2 0 -2 -4 -6

Current account

___________________________ Source: Central Bank of Uruguay / Economic Commission for Latin America and Caribbean FDI: Foreign Direct Investment - CAD: Current Account Deficit

32

FDI

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

-8

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 33

Public debt management has reduced financial vulnerabilities Debt in Foreign 100

16

Average Time to Maturity (in years)

Currency

(% of total)

90

14

80

12

70

10

60

8

50

6 4

40 2004

2006

2008

2010

2012

80

2015

Debt due in 12 months (% of GDP)

Debt at Fix Rate (% of total) 94

100

2014

6 Foreign Currency

78

Local Currency 4

60

3.1 40 2

0.9

20 0

0 2005

2015

2005 34

Source: Debt Management Unit, Ministry of Economy and Finance

2015

Despite steep depreciation of Peso, Debt/GDP remained relatively stable due to healthy debt structure

Central Government Debt

Debt/GDP (in %)

Cumulative Peso Depreciation (in %)

51

50

44 40

30

20

10

0 2012Q4

2013Q4

2014Q4

___________________________

Source: Central Bank of Uruguay and Debt Management Unit

35

2015Q4

2016Q1

Active pre-funding policy and precautionary liquidity reserves Government’s Financial Buffers and Debt Service coming due next 12 months (in USD billion, as of end-March 2016)

5

4

PRECAUTIONARY CREDIT LINES

2.2

3

2

LIQUID ASSETS DEBT SERVICE

1

2.6

2.3

0

Precautionary Credit Lines:

USD 600M

USD 520M

USD 550M

USD 500M

36 Source: Debt Management Unit, Ministry of Economy and Finance

Asset-Liability position of the Central Government Central Government Debt (in % of GDP)

100

Central Government Assets and Credit Lines (in % of GDP)

12

Gross Debt Net Debt

Contingent Credit Lines

10 75

Liquid Assets

70 8

4.1

65 50

44

6

38

4

25 2

5.6

4.9

Source: Ministry of Economy and Finance

37

2015

2014

2013

2012

2011

2010

2009

2008

2007

2005

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

___________________________

2006

0

0

Comfortable external liquidity position International Reserves(1)

USD Million

20,000 16,000 12,000 8,000 4,000 0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

International Reserve Buffers (in % of GDP)

35

2006

30

2010

25

2015

20 15 10 5 0 Uruguay

Peru

Brazil

___________________________ Source: Central Bank and Moody’s

38

Mexico

Colombia

Well capitalized and supervised banking system Non financial sector credits in foreign currency

Currency structure of gross credit

(% of total Credits)

Gross Credit L/C

80 75 70 65 60 55 50 45 40

Services Industry

29% 5%

Families

95%

Construction

25%

2015

2014

2013

2012

19% 1%

0%

20%

40%

60%

80%

Delinquency and provisions

Non residents deposits in foreign currency

(% of total credits)

(% of total deposits in FC)

Non-performing loans

20

2011

Cred

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Commerce Agro

Gross Credit F/C

100%

50

Provisions

40

15

30

10

20

5

19.5%

10

___________________________ Source: Central Bank of Uruguay

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

0

0

39

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 40

Risks and opportunities from the international and regional environment

• Gradual increase in interest rates in the U.S. and strengthening of U.S. Dollar.

• Divergent monetary policies in advanced economies.

• Global volatility and unstable appetite for emerging markets assets.

• Falling commodity prices and regional instability.

41 ___________________________ S

Main challenges to sovereign debt management

• Inertial pressures for re-dollarization of public debt.

• Changes in investor preferences: less demand for local currency and duration.

• Changes in global bonds market structure and liquidity.

• Behavior of non-residents in the local market.

42 ___________________________ S

Debt and risk-management strategies going forward 1. Increase connectivity of local markets to foreign investors.

3. Continue to develop local market in coordination with the Central Bank.

3. Improve liquidity of global bond issuances.

4.Diversify currency risk and investor base within hard currency debt portfolio (e.g., issuance/exposure in Euros or Yens).

5. Use of financial instruments to mitigate fiscal exposure to oil price shocks.

43

Widening in interest rate differential and basis in cross-currency swaps favors Yen exposure Government Bond Yields

10-Year USDJPY Cross Currency Basis Swap 3.0%

0.6% 10 year JGB 10 year UST (right axis)

May-15 -55

2.5% -65

0.4% 2.0%

-75

1.5%

0.2%

-85

1.0% 0.0% 0.5%

-0.2% May-15

Jul-15

Sep-15

Nov-15

Jan-16

0.0% Mar-16 May-16

___________________________

Source: Bloomberg

44

-95

-105

Jul-15

Sep-15

Nov-15

Jan-16

Mar-16

May-16

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 45

Budget Plan 2015 -19 includes a broader initiative to boost infrastructure investment

46

PPP Programme Sector

Amount PPP In million US$

Roadworks

640

Social Infrastructure

550

Railways

120

Prison Complex

100

TOTAL

1,410

47

Infrastructure Fund

      

Approximately USD 300 million 25-year horizon Senior debt fund Two types of currency returns Mainly aimed at institutional investors Retail market CAF will be the professional manager

___________________________ Source: Ministry of Economy and Finance and Central Bank

48

Organization of the Presentation

I. Snapshot of growth and inclusion over the last decade

II. External shocks, deceleration and relative prices III. Macroeconomic challenges and policy responses IV. Strengthening Public and Private Sector’s balance sheets V. Market conditions and debt management strategies VI. Infrastructure Agenda and PPP Programme VII. Concluding Remarks 49

Main take-aways  Uruguay has a solid reputation for having strong institutions, social stability and a predictable policy framework. This is a key asset of the country and an anchor to Uruguay`s credit.  While Uruguay enjoyed a decade of high and inclusive growth, the country is now facing strong headwinds from political and financial instability in Brazil, sharp policy adjustments in Argentina and falling commodity export prices.  Economic activity has weakened significantly, yet GDP is expected to keep growing this year.  Policy priorities are aimed at fiscal consolidation and reducing inflationary pressures.  Despite deterioration in key macro indicators, underlying trends point to economic resilience and continued political stability, and the economy is well-positioned to better weather the regional downturn.

50

“The 2002 Uruguayan Financial Crisis: Five Years Later”

“…So, for the entire weekend of July 27-28 (2002)we met with the Uruguayan finance experts in my Treasury office. You might ask why they were in my office and not over at the IMF. Well, the reason is that the IMF staff had told the Uruguayans that the IMF could not help them unless Uruguay agreed to default on its debt and convert their bank deposits into bonds.

The Uruguayans did no think this was necessary. Indeed, they thought that such actions would disrupt they payments system and severely harm Uruguay´s reputation, so important for a financial center. They therefore came to the U.S. Treasury to ask for help. We agreed to work with them to find a solution. We had the complete support and strong encouragement from the White House.

As is so often in my experience, good relations between the presidents of two countries, led to good cooperative relations between the experts…”

John B. Taylor May, 2007 - Montevideo 2012

http://web.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/2007/The_2002_Uruguay_Financial_Crisis_Five_Years_Later.pdf 51