Uruguay is a haven of stability in a volatile region

It’s official. Uruguay is Latin America’s safest country in which to invest. That is the consensus of experts taking part in a regular Euromoney survey, who are asked to assess 174 countries on a quarterly basis, providing a useful measure of relative investor risk worldwide.

According to the survey’s latest global risk rankings, Uruguay is the 18th safest country on the planet, and its risk score was still improving during the first half of this year as shown in its evolving political and economic indicators, and other metrics that include capital access, a structural assessment and debt ratings.

Political and policymaking stability

The president Luis Lacalle Pou, who ousted Tabaré Vázquez in 2020, is midway through a five-year term presiding over a broad coalition led by his National Party, with enough time to continue his reformist agenda.

His authority was endorsed by a referendum held in March to consider whether 135 articles of law – the main legislative initiative of the government – should be repealed, following a campaign led by the opposition left-wing party Broad Front together with trade unions.

The repeal was rejected by voters, thereby retaining measures that include curbing the government’s ability to run fiscal deficits and limiting the right to strike. The voter endorsement maintains an investor-friendly, pro-business agenda, which would not have been the case otherwise.

The president is also popular for the way his government has handled the pandemic and protected the economy.

Of course, like other countries, the economic winds have now turned. Inflation has increased – it is hovering at more than 9% – and with it borrowing rates have pushed higher. The labour market needs revitalising to get unemployment down, tourism is only slowly recovering, and new waves of Covid will test the economy and healthcare system.

Yet, in its latest forecasts, released in June, BBVA predicts favourable real terms GDP growth of 4.7% for 2022, up from 4.1% in 2021, before slowing to 3.5% in 2023.

The only visible opposition [to the pension reform] is union workers, but they do not have the strength to paralyse it

 - Gaby Nudel

Consumer price inflation is seen averaging 8.3% and 7% for 2022 and 2023 respectively, with fiscal deficits of 3.2% and 2.7% of GDP, down from 4.1% in 2021, and balance of payments current account deficits of 1.6% and 0.3% of GDP (narrowing from 1.8% in 2021), with the higher prices of imported commodities offset by increased oil exports earnings.

Lacalle Pou has demonstrated a desire to tackle inflation, and support for protectionism by pursuing trade deals. He also wants to reform the social security system to ensure its longer-term financial sustainability.

María Inés Mailhos, a local survey expert and an economist at Cpa Ferrer, notes that tensions within Mercosur (the South American trade bloc) are significant, with Brazil facing elections this year and Argentina in 2023.

However, the government has reinforced the need to open up to the world. Positively, too, pension reform is now under discussion.

“Uruguay has pension spending that is relatively high compared with other countries (around 10% of GDP). Half of this spending is financed by taxes and it is expected to continue rising in the following years. Thus, different players agree the reform is needed,” she says.

Independent LatAm region economic adviser and consultant, Gaby Nudel believes the project will pass sooner rather than later in Congress.

“The president himself presented it to the opposition party and discussed it beforehand. The only visible opposition is union workers, but they do not have the strength to paralyse it. The reform seeks to improve the pension regime in the medium term in terms of sustainability.

“That's why it will be good for public finance,” she says.

Strong attraction

Uruguay is certainly very appealing, in contrast to the leftist wave sweeping across the region and countries where the political scene is biased, fractious and poorly performing.

The survey scores for Brazil, Chile, Colombia, Mexico and Peru have all deteriorated this year, highlighting increased investor risk, along with the region’s riskiest options, Argentina and Venezuela, lying in 162nd and 167th place respectively in Euromoney’s global risk rankings.

Inés Mailhos believes Uruguay’s favourable status is the result of a combination of positive features.

The country has sound political parties and a stable and predictable macroeconomic framework, she says. It is a well-functioning democracy, with sound institutions. “In the region, it stands out due to its social and political stability.”

After six years, Uruguay achieved a consolidated primary fiscal surplus in June, and fiscal consolidation is on track.

Nudel agrees. “It is a combination of features: political stability with good dialogue between parties, financial and fiscal solvency, social cohesion and democratic spirit, plus foreign investor attractiveness due to tax incentives,” she says.

Of course there are always problems to address. Inflation and lower growth have been mentioned. This will put the 2023 and 2024 fiscal targets under some pressure. Nudel also points out a somewhat new and increasingly important factor to monitor – urban insecurity.

Yet Uruguay seems better placed than most to meet these challenges. After all, it is the lowest risk Latin American country in which to invest and it does not appear to be about to lose that status any time soon.