No harm in dollarized Uruguayan banking system, says Moody’s report
Although 76% of deposits in Uruguayan banks are in US dollars, credit rating consultants Moody’s said there was nothing to worry about.
At the end of 2020, Uruguay had the highest level of dollarization with 74% of deposits, followed by Paraguay, Costa Rica and Peru with 44%, 42% and 39% respectively, according to Moody’s.
The agency’s report released this week lists a series of reasons why investors should not worry about the fate of their savings in a robust banking system.
In Europe, Belarus tops the list of foreign currency deposits with 65%, followed by Azerbaijan with 56%, Turkey 47%, Armenia 46% and Ukraine (38%). .
Maddy’s also said it does not expect Uruguay’s dollarization rate to decline in the coming years. “High inflation and the continued depreciation of the peso will continue to drive Uruguayan savers toward dollar safety,” the agency predicts. As a result, “about 76% of bank deposits are in dollars in September 2021,” the latest report showed.
Much of these dollars belonged to non-resident investors, particularly Argentinian savers, who hold about 10% of the system’s total.
According to Moody’s, high dollarization means long-term risks for banks and is very difficult to reverse. Normally, regaining confidence in the local currency and gradually reducing dollar lending and deposits requires many years of strong policies, even if macroeconomic conditions have stabilized and inflation has come down.
However, in the case of Uruguay, there are “several factors that protect the banking system from the risks of high dollarization”. Among them are the country’s long-standing positive trade balance since 2016 as well as the four recent Central Bank (BCU) interest rate increases from 4.5% to 6.5% to prevent the Uruguayan peso from depreciating. .
Mody’s report was written to forecast what might happen to the United States with its anti-inflationary policies that also include raising interest rates. “As interest rates rise in the United States, the flow of capital to emerging economies is expected to slow, which will negatively impact economic growth in these countries and weaken their currencies,” the document warns.