President Tabaré Vázquez and his FA government continue to suffer an erosion of popular support, despite signs that the center-left government has managed to weather the worst of an economic storm that has badly battered Uruguay’s neighbors.  Part of the problem is the appearance of evidence of corruption in high places, as is common in governments that have held power for an extended period of time.

The next presidential and legislative elections are still more than two years away, but even Sen. Lucía Topolansky, the leader of the leftist MPP, has conceded that the FA’s chances of winning a fourth consecutive term in 2019 will be dim unless the bloc rallies behind Economy and Finance Minister Danilo Astori, a former vice president and a leading figure within the FA’s moderate wing.  However, Astori’s own poll numbers are not all that favorable at present, and his advocacy of an orthodox liberal approach to economic policy has not endeared him to far-left members of the governing alliance, many of whom are less pragmatic than Topolansky.  Consequently, even if Astori decides to pursue the FA’s presidential nomination, he is likely to face competition, and is far from assured of defeating a candidate put forward by the Blancos.

Astori managed to keep the economy growing even as Uruguay’s much larger neighbors and principal trading partners, Brazil and Argentina, have struggled with recession.  However, that achievement required a loosening of fiscal policy that the government must now reverse without choking off the recovery.

A package of fiscal reforms enacted last year reduced the deficit for the 12-month period to March to just 3.8% of GDP, and the shortfall is forecast to narrow to 3.3% of GDP by the end of 2017, putting the goal of limiting the shortfall to 2.5% of GDP by 2019 well within reach.  Less positively, the counter-cyclical policy has contributed to an increase in unemployment, which climbed to 9% in March, the highest level in more than a decade.

Astori will resist pressure to ease fiscal constraints, in which case the government’s hopes for a fall in the unemployment rate will hinge on the continued gradual acceleration of economic expansion.  Given the degree to which Uruguay’s economic fortunes are tied to those of Argentina and Brazil, real GDP growth is expected to increase only gradually over the medium term.  A proposal to build a second paper mill creates the potential for an upside surprise, but the Finnish investor, UPM, does not appear to share the government’s sense of urgency about the project, making it difficult to predict the degree to which it might positively affect economic performance ahead of the 2019 elections.

 

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