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LATAM: JP Morgan Sees Fiscal Challenges In Uruguay After Presidential Election

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  • JP Morgan doesn’t expect any abrupt policy shifts following the election of Yamandu Orsi from the centre-left Frente Amplio coalition in yesterday’s Presidential run-off vote, but sees a change in focus and stances. JPM notes that this is the first time the Frente Amplio coalition will govern without a majority in both chambers, requiring negotiations between blocs and reducing risks of more radicalised proposals being approved.
  • JPM believes the new administration will shift toward a more expansive fiscal and monetary policy in 2025, as well as a more interventionist FX policy if need be. The Frente Amplio coalition acknowledges the need for a gradual fiscal consolidation of 1% of GDP over three years, maintaining a strong focus on a social agenda. On the monetary policy front, Orsi’s economic team has indicated they will keep the policy rate as an instrument and that they will continue to work on consolidating inflation within the 6% target ceiling.
  • Nonetheless, JPM sees fiscal challenges ahead. Higher expenditure pressures amid the election cycle prompted them to raise their central government deficit forecasts to 3.3% of GDP in 2024, and 3.0% in 2025. Meanwhile, the structural fiscal deficit is poised to deteriorate to 3.6% of GDP this year, with only a small correction expected next year. JPM sees risks tilted to higher deficits ahead amid an expected more expansive fiscal stance, which could result in an equilibrium of lower growth and higher inflation down the road.
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  • JP Morgan doesn’t expect any abrupt policy shifts following the election of Yamandu Orsi from the centre-left Frente Amplio coalition in yesterday’s Presidential run-off vote, but sees a change in focus and stances. JPM notes that this is the first time the Frente Amplio coalition will govern without a majority in both chambers, requiring negotiations between blocs and reducing risks of more radicalised proposals being approved.
  • JPM believes the new administration will shift toward a more expansive fiscal and monetary policy in 2025, as well as a more interventionist FX policy if need be. The Frente Amplio coalition acknowledges the need for a gradual fiscal consolidation of 1% of GDP over three years, maintaining a strong focus on a social agenda. On the monetary policy front, Orsi’s economic team has indicated they will keep the policy rate as an instrument and that they will continue to work on consolidating inflation within the 6% target ceiling.
  • Nonetheless, JPM sees fiscal challenges ahead. Higher expenditure pressures amid the election cycle prompted them to raise their central government deficit forecasts to 3.3% of GDP in 2024, and 3.0% in 2025. Meanwhile, the structural fiscal deficit is poised to deteriorate to 3.6% of GDP this year, with only a small correction expected next year. JPM sees risks tilted to higher deficits ahead amid an expected more expansive fiscal stance, which could result in an equilibrium of lower growth and higher inflation down the road.