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January 31, 2018

IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Uruguay. The staff report reveals that the banking sector in Uruguay is small relative to the size of the economy. The results of this exercise highlight that the authorities considered that the financial system was stable and well-supervised, with limited financial stability risks.

The staff report reveals that the banking sector in the country is well-capitalized, but bank credit remains weak. With the regulatory capital to risk-weighted assets ratio increasing since December 2015, the banking sector has comfortable buffers. Maintaining the stability of the banking sector is a priority. Banks’ operating costs are high; non-performing loans have risen; and bank profitability has declined in the wake of the peso appreciation in 2016 (since most banks were long in U.S. dollars). Although non-performing loans have increased in the last few years, they remain moderate, at less than 4%, and are covered by provisions and excess capital.

Nonetheless, stability risks to the banking system remain limited, as evidenced by the authorities’ stress tests, and are supported by rising capital-asset ratios. Supervision should continue to closely monitor banks’ exposures, assisted by the implementation of the International Financial Reporting Standards (slated for 2018). The recent steps to implement Basel III—including the phased introduction of the 2.5% capital conservation buffer, capital surcharges for larger banks, and of liquidity ratio regulations—are useful risk-mitigation measures. Moreover, the authorities created a fintech working group to analyze Uruguay’s noticeable position in this sector. The authorities also highlighted their six-month “e-peso” pilot project, for digital currency issued by the central bank.

The selected issues report investigates the impact of exchange rate movements on private consumption in Uruguay and examines next steps for promoting de-dollarization in the country.

 

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Keywords: Americas, Uruguay, Banking, Financial Stability, Basel III, NPLs, IMF

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