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DBRS confirms Uruguay ratings on strong institutions, continued growth

DBRS on May 26 confirmed Uruguay's BBB(low) long-term foreign and local currency issuer ratings and R-2 (middle) short-term foreign and local currency issuer ratings, with a stable trend on all ratings.

The ratings balance the country's strong public institutions, conservative debt management and ample external buffers with its limited fiscal flexibility, above target inflation expectations and exposure to external developments, according to the rating agency.

DBRS noted that Uruguay posted 1.5% GDP growth in 2016, while expectations from the IMF see growth hitting 1.6% in 2017 and 2.6% in 2018. The country's favorable terms of trade and strengthening demand from Argentina counter potential headwinds, including uncertainty from Brazil and tighter fiscal policy domestically. Uruguay's growth prospects are also bolstered by big investment potential in the pulp and paper sector.

However, the country's fiscal deficit serve as a key credit weakness, rising to 3.9% of GDP in 2016 from 0.9% in 2011. Responding to the rising current spending, the administration of President Tabaré Vázquez is implementing a gradual consolidation plan to narrow the deficit to 2.5% by 2019.

The stable trends reflect DBRS's view that risks to the outlook are broadly balanced, noting that the country's credit profile would benefit from greater fiscal space and counter-cyclical capacity.