The International Monetary Fund has raised its projection for Uruguay’s 2016 economic growth to 0.7% from 0.1% in October as financial stability risks are contained and domestic private consumption is recovering, according to the fund's Staff Concluding Statement of the 2016 Article IV Mission published Dec. 8.
In contrast to Argentina and Brazil, Uruguay is "demonstrating resilience in the face of sharp recessions in its large neighbors," the IMF said.
"Uruguay’s projected growth of 0.7% is a marked departure from yesteryears when growth remained close to the average of its two neighbors," the IMF said.
In addition, GDP growth is projected to recover to about 1.1% in 2017 due to a stronger external environment and higher private consumption.
Despite the recent depreciation of the Uruguayan peso, and inflation that persists at levels above the central bank’s target range, financial stability risks are limited, the IMF pointed out.
Although real credit growth has stalled and non-performing loans have more than doubled as a share of gross loans since 2014, stress tests show that credit and liquidity risks "remain contained," and that "the banking system could withstand even a large exchange rate shock that impaired loans to non-hedged borrowers," the IMF noted.
Going forward, a slower-than-expected recovery in Argentina and Brazil could weigh on Uruguay's economy, as could weaker-than-projected growth in China, the IMF warned. Moreover, tighter global financial conditions could weaken growth across the region and raise Uruguay’s cost of financing.
As for domestic risks in 2017, if the recovery is weaker than expected, "authorities could face a difficult trade-off between their fiscal consolidation plan and avoiding a strongly pro-cyclical fiscal stance that would exacerbate the slowdown," the IMF noted.