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Uruguay Politics October 2019

Uruguay: Economic policy continuity expected despite election uncertainty

Uruguay’s 27 October elections remain highly uncertain. Recent polls signal a tightly contested race between the center-left Broad Front Coalition’s Daniel Martínez and the opposition conservative National Party’s Luis Lacalle Pou who emerged as frontrunners at the presidential primary elections on 30 June. That said, despite prevailing election-related uncertainty—a second-round presidential runoff currently appears likely—economic policy prudency is expected, partly thanks to a divided Congress and the need for consensus-building around the center. As such, despite diverging views on how to tackle the fiscal deficit problem, both left-leaning Martínez and right-leaning Pou remain reasonably close to the center and share similar views on trade and investment-related policies among others.

Assessing the frontrunners respective economic agendas, both share similar views on boosting trade links, which bodes well for the Mercosur deal, as well as the country’s investment climate, necessary to drive domestic as well as foreign investment. However, their views on tackling the spiraling fiscal deficit diverge: Whereas Pou favors belt-tightening measures such as cutting public employment, Martínez has called for higher taxation to shore up government revenues. That said, the country’s mature and consensus-building political system should prevent more radical reforms on either side of the spectrum.

While the Broad Front Coalition has governed Uruguay uninterruptedly since 2005, the National Party came out on top in June’s primary presidential election, with voters punishing the incumbents for failing to tackle rising unemployment and revive sluggish economic growth. This time around, however, volatile sentiment makes the final election outcome highly uncertain. On the one hand, recent polls signal that Martínez should comfortably win the first-round vote. On the other hand, it seems improbable that Martínez can secure an absolute majority, thus most likely putting him in a second-round presidential runoff with the National Party’s Pou. If this were the case, Pou would likely be able to count on the support of the majority of voters from the Colorado and Cabildo Abierto parties, the other two opposition forces currently trailing in not-so-distant third and fourth places in the polls.

Commenting on the looming election, Diego Pereira and Lucila Barbeito, economists at JPMorgan, share the view that while it is almost certain that the governing Broad Front will not maintain its majority in the legislature, the presidential vote looks poised to produce a second-round runoff between Martínez and Pou. They also agree that economic policy continuity is expected, noting:

“Different from neighboring Argentina, there seems to be a broad consensus that fiscal and pension reforms are required to steer the ship. That said, in our view the new administration will need to deliver supply-side reforms and fiscal/social security reforms, which seem a necessary condition for the country to avoid further potential growth decay. Moreover, the onerous tax burden continues to exert pressure on the private sector’s profitability, with relatively elevated social and pension spending endogenous growth. In all, the administration taking office March 2020 will need to take due diligence and tackle these macro and microeconomic issues. Otherwise the investment grade status would be compromised.”

Notwithstanding the election result, growth is seen rebounding next year on subsiding political uncertainty, which would allow for an implementation of much-needed reforms, and an improving regional backdrop.

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