The Uruguayan economy is one of those least badly affected by the economic crisis derived from the coronavirus (Covid-19) pandemic.
But centre-right President Luis Alberto Lacalle Pou, who took office on 1 March just as the pandemic began to sweep through Latin America, faces some big fiscal challenges. There are two ways to assess Uruguay’s economic performance in the first four months of his presidency. One is by comparing it to the rest of the region; the other by holding it up against the country’s immediately prior performance.
In a terrible year for Latin America as a whole, Uruguay is poised to perform reasonably well. The big headline is that the Covid-19 pandemic has been well contained. By the end of June there had been only 27 deaths due to the virus. Lacalle Pou is credited with quickly forming a council of medical experts, moving to close borders and schools, and appealing for voluntary observance of sanitary protocols (a policy known as ‘libertad responsable’ or ‘responsible freedom’). Uruguay has been helped by having a strong public health system and a low poverty rate (8% of the population). Polls show 77% of respondents approve of the new president’s handling of the health emergency.
The economy is now being reopened in a phased fashion. The International Monetary Fund (IMF) is forecasting that Uruguay’s GDP will contract by 3% this year – bad news of course, but much more manageable than the 9.4% drop expected for the region as a whole. Lacalle Pou has been able to take advantage of this relative strength. The government has launched a campaign to attract wealthy individuals and tech companies to relocate to Uruguay, with more than 100 Argentines, Brazilians, and Europeans expressing interest because of the country’s stability and high quality of life. With relatively compressed country risk spreads, in June the government hired banks Citigroup, HSBC, and Itaú Unibanco to advise it on a potential new sovereign bond issue.
While the message to the world is that the economy is doing well at a difficult time, the government’s domestic narrative is rather different. It says that after 15 years of government by the left-wing Frente Amplio (FA) coalition, the economy is in a bit of a mess. In the annual accountability bill (‘rendición de cuentas’), the new government has published a harsh review of the economy in 2019. It says the fiscal deficit was 4.7% of GDP, the “worst result in three decades” (in the first five months of 2020 the deficit widened to 5.1% of GDP). In February unemployment reached 10.5%, the highest level in 13 years. At nearly 8%, inflation had exceeded the 3%-7% official target range (it has since risen further). The economy went into recession in the last quarter of 2019, and GDP was down by 1.6% in the first quarter of 2020.
As with all new governments, Lacalle Pou is set to enjoy a honeymoon period. But his electoral promise to reduce the fiscal deficit while not raising any new taxes will be difficult to deliver. On 8 July, congress approved an omnibus reform bill, the LUC, whose 476 articles aim to reduce government spending and public sector employment, strengthen the police, and reform education and labour laws. But reducing a fiscal deficit in the middle of a recession is always difficult. The path ahead may be tougher than expected.