Decrease in the deficit: “The nuts to adjust are minor and structural reforms are necessary”

For the new manager of Economic Consulting at Grant Thornton Uruguay, Sofia Harguindeguy, 2022 promises to be another year of dynamism for the domestic economy, although it will also be the time to face structural reforms to address inefficiencies such as transportation costs, a variable that investors continue to consider to be “in the must.” He hopes that the social security reform project will achieve a consensus (which it has not had until now) and explained why it will be a challenge to continue reducing the structural fiscal deficit to 2.7% as the MEF forecasts for this year. Below is a summary of the interview that the economist granted to The Observer.

The official GDP data for 2021 will be known next month. There is consensus that the economy will grow above the goal that the MEF had set (3.5%) and also the initial forecasts of most private analysts. Today there is talk of 4% as a floor. What prospects do you have for this year with some leading indicators that have already been published?

It is true that we do not have the official data but we do know some indicators that make us think that growth for 2021 will be above 3.5%. For this year, we are managing an expansion above what the Ministry of Economy and Finance has so far (2.9%), slightly above 3%. The variable that would be accompanying is growth in the external plane of the world economy. The World Economic Outlook projects an expansion of 4.5%. For Uruguay, China is important, which will be growing, although at a lower rate than that registered in 2021 (8%). For this year, growth of 5% is projected for that economy, which remains high. This slowdown in China would not be impacting Uruguay’s exports of goods to that market, which today has already established itself as the main destination.

At the regional level, it seems that Argentina and Brazil would do little to help the Uruguayan economy in 2022.

Exactly. At the regional level we find that there are certain uncertainties from the political point of view because we have elections in October in Brazil and the agreement between Argentina and the IMF is still pending, and we do not know if it will pass the filter of Congress. The forecast growth for Argentina is 2.5% for this year, while Brazil will be even lower: barely 0.3%. And these latest projections have been adjusting downward in recent months. On the other hand, at the international level, we could have international conditions that may be complicating the picture. Inflation in the United States is at 7.5% and closed its eleventh consecutive month outside the target range.

What he proposes should reinforce the Fed’s policy of raising rates, something that, in theory, should strengthen the dollar. However, since the year began in Uruguay and other emerging countries, the opposite has been happening and the dollar fell more than 3%. To what do you attribute it?

We have analyzed it carefully and today we do not have anything conclusive to explain why this trend is taking place. It is true that it could be expected that in the medium term the decisions being made by the Fed will affect our markets, but there can always be some lag in these effects due to the rise in interest rates. Now there is already talk of increases of between 100 and 125 points (1% to 1.25%) in the Fed rate for the first half of this year. This could have its effects for economies such as Uruguay, but more so in the medium and long term, in possible decisions by investors who consider the US interest rate to decide whether to come to the country or not.

You are usually in permanent contact with foreign investors. What is the climate today that is being observed in decision-making to invest in emerging economies? Is there more caution due to this new international context or is Uruguay’s good reputation still a call to capture the interest of capital?

The good management of the government with all the handling of the pandemic and the commitment to the stability of public finances is having a positive impact. However, there are some points in the conversations with investors that are often repeated, such as the costs of production in Uruguay, transportation, and fuel. These are issues that the country has had for a few years. Now the discussion about fuel policy has resumed a bit, but they are problems that we have been talking about for a long time. For example, a recent report by a private consultant —published by Uruguay XXI— identified that the cost of transportation in the case of wood was between 30% and 60% of its price. That is very high. Uruguay’s duty is to achieve reforms and investments to have roads that achieve more fluid traffic to save time and/or fuel.

The current government introduced a new scheme to regulate the fuel market that has been partially applied until now. In any case, Uruguay has a significant component of taxes on fuel consumption compared to other countries in the region. Can you appeal to reduce taxes to make rates more competitive in the short term?

The price of the fuels we consume depends on the oil, on the efficiency that Ancap may have, on marketing, distribution, and also on the cost of wages at each of the points in this chain. Obviously it also depends on taxes. If the objective is to reduce the value of fuels, there are many ways in which we can reach that goal. One can be reducing taxes, but today there is also scope throughout the chain to reduce costs.

Beyond the result of the referendum on March 27, several of his colleagues speak of 2022 as the “hinge year” for the government to advance with more structural reforms pending. One of those is social security. How do you see the approach to this topic today? Are you optimistic that it can be approved this year?

The diagnosis of the Committee of Experts was very good and the recommendations were supported by many studies by external consultants. However, one issue that worries me is that these recommendations have not been approved by all the members of the commission. If we are thinking about a reform that is sustainable in the long term, it is very important that there is unanimity in that decision. Perhaps there is still one more instance of negotiation; hopefully he can get away with the bill.

The fiscal deficit showed a fall in the last year that exceeded the forecast of the Ministry of Economy itself. However, there are analysts who attribute this additional improvement to the drop in the payment of wages and pensions below inflation and also to the scarce investment of the State. What is your view on this variable?

He expects growth for the Uruguayan economy somewhat above 3% for this year.

The fall in wages had its effect on that fiscal result that we saw at the end of 2021. Good results were also seen from public companies, in particular from UTE for the export of electricity to Brazil. However, we consider this result of UTE to be transitory and an additional adjustment is needed in terms of the efficiency of public companies. On the other hand, with regard to the improvement in tax collection, which is another important point within the public accounts, 2021 had a collection higher than that of 2019 and 2020, something that played in favor of improving the deficit. . As the economy continues to grow, those revenues will increase, although perhaps not at last year’s rates. The challenge of this 2022 is greater because the government hopes to further improve public finances. For this reason, these structural reforms are going to become increasingly relevant because the nuts to adjust are less. In 2021, the role of public investment was marginal and it will also do so in 2022.

Inflation moderated at the end of last year, but is still more than 1 point above the ceiling of the target range (7%). In addition, from September the new range will be more demanding with a floor of 3% and a ceiling of 6%. Can this scenario of strong rises in commodities and salary adjustments outside the guideline complicate the official goals? The government expects inflation of 5.8% by the end of this year.

We see it as a great challenge. In our case we are projecting inflation above that range. We had the data for January (8.15% annual), which was high, but was in line with expectations. We are only seeing inflation falling in the second quarter of the year, so it is likely to see high inflation in February and March. Perhaps for the rest of the year it will be located on an axis of 6%, 7%, which would not give an annualized inflation above the target range. Here the inflation that we are importing from abroad, which is generalized worldwide, and which is occurring with the price of oil and other commodities, is having an impact.

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