April 24 - Fitch Ratings has revised the Rating Outlook on Uruguay's Foreign
and Local Currency Issuer Default Ratings (IDRs) to Positive from Stable. In
addition, Fitch affirms the following ratings:
--Foreign Currency IDR at 'BB+';
--Local Currency IDR at 'BBB-';
--Short-term IDR at 'B';
--Country Ceiling at 'BBB'.
The Rating Outlook is Positive.
The Outlook revision reflects Uruguay's continued reduction in external and
fiscal vulnerabilities underpinned by its strengthening international liquidity
position and improved currency composition of government debt. Uruguay's
sustained growth momentum and on-going diversification of the economy buttressed
by robust foreign direct investment flows also support this rating action.
Growth continues to outperform peers and higher rated sovereigns, reaching a
five-year average of 6.1% in 2011.
High GDP per capita, strong social indicators, and a sound institutional
framework are additional anchors of Uruguay's creditworthiness.
Further progress in reducing government indebtedness, as well as strengthening
of external credit metrics, given commodity dependence and relatively high
financial dollarization, will be supportive of an upgrade to investment grade.
International reserves increased by over 30% in 2011 alone, reaching an
historical high of USD10.3 billion. 'Large inflows of foreign direct investment
(FDI) and the government's pre-financing strategy in 2011 have resulted in
strong foreign reserve accumulation, increasing the resilience of the country to
external shocks,' said Santiago Mosquera, Director in Fitch's Sovereign Group.
The sovereign, though, remains a net external debtor at 22% of CXR. Partly
balancing this credit weakness, the government has continued to accumulate FX
liquid assets to cover future debt amortization, thus mitigating government
debt's FX exposure and rollover risks. Moreover, the sovereign has secured
contingency credit lines with multilaterals for an estimated 3% of GDP in case
conditions in global markets deteriorate.
Uruguay's fiscal position has improved in recent years, with relatively low
government deficits in comparison to the 'BB' median. Nevertheless, central
government debt levels, both in gross and net terms, still remain higher than
peers. Favorable debt dynamics supported by continued growth and modest fiscal
deficits could bring government debt down to levels comparable with low
investment grade rated sovereigns over the forecast period.
Proactive and adept liability management has led to a noticeable improvement in
government debt composition. At the same time, the share of public debt
denominated in foreign currency has fallen from 66% in 2010 to 51% in 2011, thus
reducing currency risk.
'Government debt has a manageable repayment schedule, with the third-longest
debt duration among sovereigns rated by Fitch,' added Mosquera.
The weak fundamentals of the Argentine economy as well as increased risk
aversion resulting from its government policy actions could weigh on Uruguay's
growth performance, but these factors are unlikely to result in significant
balance of payments or financial pressures.
Inflation, averaging 8.1% in 2011, remains higher than peers, reflecting both
vigorous domestic demand momentum and limited monetary policy tools given the
high levels of financial dollarization, early development of local markets and
relatively low levels of financial intermediation.
Although not in Fitch's base case scenario, a material deterioration in
government debt burden and composition, or increased macroeconomic instability
could weigh on Uruguay's credit profile.