Fitch Ratings on April 7 affirmed Uruguay's ratings, noting, however, that the structural erosion in the country's public finances serves as a key credit challenge.
Fitch maintained the country's long-term foreign and local currency issuer default ratings at BBB-, with a stable outlook; country ceiling at BBB+; and short-term foreign and local currency issuer default ratings at F3.
The ratings balance Uruguay's strong structural features in terms of social and institutional development, a strong external balance sheet, and fiscal financing buffers with constraints including a weak track record of compliance with inflation and fiscal targets, weighing on policy credibility, a relatively high and dollarized public debt burden as well as budget rigidity, Fitch said.
The deterioration in Uruguay's public finances accelerated in 2016, Fitch said. "Inertial growth in social spending continues to drive the fiscal slippage, reflecting broadened coverage of the public health insurance fund (FONASA) and pressure on indexed pension benefits."
However, the country raised its revenues despite weak growth due to tariff adjustments and changes in the corporate tax calculation.
Uruguay saw its central government deficit rise to 3.7% of GDP in 2016 from 2.8% in the previous year. Meanwhile, the global public sector deficit increased at a smaller percentage, to 4% in 2016 from 3.6% a year ago. A fiscal adjustment package of 0.9 percentage point of GDP is expected to lower the public sector deficit by 1.5 percentage points of GDP to 2.5% by 2019.
Fitch noted, however, that the government needs additional effort to reach its target given pressures to raise spending.
The rating agency expects the country to post an economic growth of 2.1% in 2017, up from the growth of 1.5% in 2016.