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Sovereign Credit Risk Report Sovereign Credit Risk Report Oriental Republic of Uruguay Sovereign Credit Rating Local Currency/Outlook BB+/Positive Foreign Currency/Outlook BB+/Positive Rating time December 2010 Rationale Dagong assigns “BB+” to both the local and foreign currency long term sovereign credit ratings of the Oriental Republic of Uruguay (hereinafter referred to as “Uruguay”) based on a comprehensive analysis of its potential debt demand and realistic solvency risk etc.. With the improvement of the fiscal deficit, the government debt has been substantially reduced in recent years. As of the end of 2009, the central government outstanding debt to GDP ratio had declined to 37.6% from 84.2% in 2003, but the non financial public sector debt is still at a relatively high level of 59.7%. The recent debt-managing programs helped to optimize its debt structure. The proportion of 5-year and more than 5-year debt has increased to 68.8% of total, reducing its short-term debt pressure. However, the fact that the foreign currency debt accounts for 73.0%, which is a high level, is one of the main negative factors to its debt solvency. In addition, the relative big size of contingent debt burden is another risk exposure of Uruguay government. Considering that the fiscal condition will be improved in the future, the debt scale would be further reduced. Overall, the improving policy framework and low leverage level of the financial sector cut down the shock brought by the international financial crisis. The improvement of the fiscal condition and the decline of the debt rate enhance the government solvency. However, the absence of driving force behind its long-term economic growth and still high debt repaying pressure make its debt solvency risk at a middle level. It can be specified as: ​ The reform after its financial crisis in 2002 strengthened the compatibility of Uruguay’s overall economic policy framework, producing a high growth rate. Its capability against the Latin America shock, especial Argentina economic and financial crisis, has been improved markedly. However, the high inflation and low size of private investment restrict its long-term economic growing potential. ​ The strict fiscal discipline made the fiscal deficit decrease. Though the international financial crisis and the drought made the deficit increase in 2009, the size is still in a reasonable scale. The improvement in fiscal condition will help the government realize its aim of reducing the debt to 40% of its GDP. ​ The abundant international reserve and the declining external debt improve its external liquidity. Although there was capital flight in the international crisis, it has been under control all the time. The strengthening tendency of Uruguay peso is helpful to reduce its debt repaying pressure. Outlook The reforms in recent years improve the Uruguay capability against the regional economic shocks. The lower degree of economic opening up, leverage in the financial sector and the exposure to the toxic assets reduced the shock extent of international economic crisis. However, its high inflation rate and small size of private investment limit its economic growth potential in the medium term. The improvement in fiscal situation in the future will be helpful for the government to further reduce the debt size, but there is still a long way before the government realizes its debt-reducing target. Relative low domestic risks, high short-term growth anticipation and abundant foreign reserve improve the external liquidity and the government financing ability. The stabilization of peso could also reduce the debt repaying pressure of the government. As a result, Dagong keeps the positive outlook for Uruguay government’s local and foreign currency credit rating in the next 1-2 years