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