Fitch Affirms Uruguay's FC IDR at 'BB-'; Outlook Stable

Business Wire,  June 13, 2008  

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NEW YORK -- Fitch Ratings today affirmed Uruguay's foreign currency sovereign Issuer Default Rating (IDR) at 'BB-' and its local currency IDR at 'BB'. The Rating Outlook remains Stable. At the same time, the agency maintained Uruguay's country ceiling at 'BB+'. The short-term IDR was affirmed at 'B'.

Uruguay's credit worthiness is supported by its manageable financing needs, above-average economic growth, and the country's high institutional quality and political stability, which reduce the risk of a marked policy departure from the current macroeconomic setting. Nevertheless, relatively high fiscal and external solvency ratios, the exposure of public debt to currency risk, and relatively low external liquidity remain as credit weaknesses.

Uruguay's growth has continued to outperform expectations due to the continued high commodity prices and robust foreign direct investment flows. The five-year growth average reached 7% in 2007 and compares favorably with the Fitch 'BB' median. FDI reached 3.8% of GDP, helping Uruguay diversify its narrow economy and finance its current account deficit. Higher growth is essential for further improvement in the country's fiscal and external solvency ratios.

While the government met its fiscal target in 2007, it has lowered the primary surplus target for 2008-09. 'The lowering of the public sector primary surplus is likely to slow the pace of public debt reduction. Nevertheless, Fitch recognizes that this decision is unlikely to undermine medium-term fiscal sustainability' said Erich Arispe, Associate Director in Fitch's Sovereign Group. In 2007, public sector debt equaled 64.8% of GDP compared to a median of 34.7% for sovereigns in the 'BB' rating category. Moreover, public debt dynamics are highly exposed to fluctuations in the exchange rate, as approximately 70% of public debt is denominated in foreign currency. On the positive side, astute liability management efforts have helped in reducing general government financing needs to 5% of GDP in 2008, which is lower than the 8% for the 'BB' median.

On the external front, Uruguay's net public external debt (NPXD), at 84.7% of current external receipts (CXR), continues to be an outlier in the 'BB' rating category, where most sovereigns are net public external creditors. Uruguay's external liquidity also remains weaker than rating peers, especially in the context of widespread, albeit diminishing, dollarization of the financial system.

Resilience to external shocks has increased through lower external financing needs (external amortizations plus current account deficit), export markets diversification and prudential measures in the banking system. 'The country remains vulnerable, though, to a sharp correction in international commodity prices and a deeper than anticipated deterioration in the Argentine economy,' added Arispe.

Fitch believes that supply shocks, high international commodity prices and continued growth above potential have increased inflationary pressures in the Uruguayan economy. Inflation is running at 7.2% on an annual basis, which is above the target range of the central bank. The fight against inflation should be of high priority for the authorities in order to build monetary policy credibility and support medium-term growth.

Sustained reduction in fiscal and external solvency ratios, continued improvements in currency composition of public debt, as well as continued resilience to the ongoing 'credit crunch' would be positive for Uruguay's credit profile. On the contrary, signs of weakening of the macroeconomic policy framework, especially if the authorities are unable to adjust fiscal and monetary policies in the face of external shocks, could hurt creditworthiness.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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