_Export Market Growth_ : Exogenous shocks that affect export market growth, such as economic downturns or geopolitical events in key trading partners, can significantly impact Uruguay's economy. If export markets experience a decline in economic growth, demand for Uruguayan exports may decrease. This can lead to lower export volumes, revenue, and potential job losses in export-oriented sectors.

**This exercise jointly simulates climate and macroeconomic shocks for a more comprehensive assessment of macroeconomic risks** . While the previous exercises are useful to understand the orders of magnitude of the second-round effects of climate shocks, their persistence, and to better illustrate their transmission channels, this exercise complements them by taking into account the fact that: i) the negative impact of climate shocks can be buffered by offsetting positive macroeconomic shocks, such as low international interest rates, a spike in export prices, or strong external demand for Uruguayan products; and ii) the negative impact of climate shocks can be compound by negative macroeconomic shocks. The latter case is of most interest from a macroeconomic and fiscal risk management perspective. As with the climate shocks, 1,000 stochastic simulations are run using the historical distribution of these exogenous shocks to project potential pathways for the Uruguayan economy. These are combined with drought and flood shocks to illustrate how much additional volatility macroeconomic and climate shocks can generate in the economy when they occur concurrently.<sup>13</sup>

**The economic impact of droughts and floods is exacerbated by the added economic volatility of exogenous macroeconomic shocks** . This is reflected in the wider range of outcomes experienced by the simulated Uruguayan economy. For example, if a drought occurs jointly with a fall in agricultural commodity prices and an increase in US interest rates, this will have a compounded impact on economic activity, incomes, and the government’s fiscal position. The median GDP outcome is still negative, with a larger downside risk to the agriculture sector than previously estimated (Figure 20). The combined impact of climate and macroeconomic shocks occurring at historical rates is estimated to lower annual GDP on average by 0.5 percent (compared to 0.4 percent when exogenous macroeconomic shocks are not incorporated), and downside risks roughly double, demonstrating the compounding effect of multiple shocks occurring at once. Lower annual GDP is driven by agricultural value-added falling on average by 2.3 percent.

**External and fiscal accounts are also subject to larger swings as a result** . The range of possible outcomes roughly double with respect to the climate shock scenarios. The fiscal balance can deteriorate around 0.8 percentage points of GDP in the face of a combination of negative shocks of the type that occur roughly once every six years. Negative combined shocks that occur once every forty years worsen fiscal accounts 1.5 percentage points of GDP. Compound negative shocks affect exports between 6 and 12 percent of GDP for the periodic shocks described above, respectively.

> 13 The simulated shocks are obtained from a Vector Autoregression model with 1 lag on the deviations from the Hodrick-Prescott trend of international interest rates (in levels), export prices, import prices and external markets ́ demand (all in logs). The VAR is estimated using annual data from 1995 to 2022. Simulated shocks are obtained assuming all variables are normally distributed.

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