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Moody's lowers Uruguay's banking system outlook to negative

Staff Writer | August 8, 2016
Moody's has lowered its outlook on Uruguay's (Baa2 negative) banking system to negative from stable.
Uruguay banking
Economy in LatAm   Inflation is a key challenge in Uruguay
The expectation is that asset risks will rise moderately as challenging economic conditions weigh on consumers and businesses alike, and profitability will decline.

However, capital levels and liquidity remain more than adequate, Moody's said in a report. But inflation remains a main challenge: the government stats office reported consumer prices rose 0.39% during July, totaling 10.05% in the last twelve months.

This was achieved following a 2.12% revaluation of the Uruguayan Peso against the US dollar during July, meaning a drop in Pesos of the so called tradable goods and services. The Central bank target inflation ceiling is 7%.

Weakness in Uruguay's sizable agricultural sector, combined with soft demand in neighboring Argentina and Brazil, the country's key trading partners, and a decline in private investment have undermined business and consumer confidence.

“The weak economy will push up corporate loan delinquencies, while rising unemployment will lead to higher delinquency rates for consumers as well,” said Alexandre Albuquerque, an Assistant Vice President - Analyst at Moody's.

The banking system's problem loan ratio rose to 3.1% in May 2016, from 2.1% in December 2015, and Moody's forecasts that it will climb as high as 3.6% over the next 18 months.

Inflation has also become a key challenge for banks. While households with inflation-linked salaries actually benefit from rising prices, workers that do not receive automatic salary adjustments have less money to spend.

As consumers prioritize spending on housing and utility payments, consumer loan delinquencies will rise. In line with softer consumer demand, revenue growth at domestic companies may also weaken, undermining corporate loan performance.