Neighbours won’t infect Uruguay
No contagion risk from Argentina and Brazil; China now its leading export market.
Uruguay’s economy grew by 3.7% in the second quarter of 2014, versus the same period in 2013, according to figures released in September, and Mario Bergara, the economy and finance minister, has been reassuring international investors that there is no risk of contagion from the slowing neighbouring economies of Argentina and Brazil.
In 2003, Uruguay followed Argentina into default but Bergara says the country’s financial and business exposures have been diversified and risks of fallout from Argentina’s recession – and Brazil’s slowdown – are very small.
| We never announce strategy before we do
it [and] we don’t
“Uruguay is decoupling from the region,” he says. “Uruguay will continue to grow [albeit at a] decelerated pace but faster than Brazil and Argentina. The country is also decoupling in terms of the main transmission channels – we don’t have much financial connection with Brazil and most of our exports are commodities, so it wouldn’t be hard to re-orientate exports if Brazilian demand falls – which we haven’t yet seen.”
Exports to Argentina have fallen from around 25% to 4% in little more than a decade, as the country has developed not only new export markets, but new export segments such as paper pulp and soy beans.
On a trade basis, the country has accomplished diversification: Uruguay now exports to 140 countries and its biggest export market is China – a decade ago more than half of exports went to Argentina and Brazil.
Also, in 2001 40% of deposits in the Uruguayan banking system belonged to Argentina, while today Argentinean deposits account for less than 9% of all deposits.
Similarly, Argentina held 20% of the banking system’s assets in 2001; today it is virtually zero.
“Today we have no exposure to Argentinean risk and the share of nonresident deposits in the banking system has been declining,” says Bergara. “Our banking system is very solvent, NPLs are very low and liquidity is higher than 50%.”
Uruguay’s economy is also benefiting from the de-dollarization programme of the previous two governments. The country’s reduced FX and rollover risk on its outstanding debt was one of the main reasons why Moody’s and Standard & Poor’s raised it to investment grade in 2012.
The country has no immediate needs for capital but continues to monitor the international markets. “We are always exploring possibilities,” says Bergara. “We never announce strategy before we do it [and] we don’t need financing – we are very comfortable in terms of average duration and the currency composition of our debt but there is always room for improving rollover and FX risks.”
Uruguay’s recent popularity with international investors has led to a widening of its current account – at around 5% of GDP – but Bergara tells Euromoney that this is not a concern, even if – as some economists predict – it could widen to about 7% in 2015.
“What is important is not so much the actual figure but the composition,” says Bergara, who distinguishes between causes from high domestic consumption and foreign direct investment into the country. “We are comfortable with a higher current account deficit if it is completely explained by higher FDI.”
The country has been attracting high levels of FDI in recent years – the big driver of average growth of about 6% in the last decade. Half of this growth has derived from total factor productivity growth and, with almost full employment, the country will have to extend this productivity-led growth if it is to continue to be close to the top of Latin America’s growth rankings.
“We have increased productivity by an average of 4% over the last five years,” Bergara says. “The population growth rate is quite low so we have to take measures to stop human capital being a bottleneck.”
|The reason inflation is above the target is because
[the economy has been importing] significant
inflationary pressure from abroad
Capital Economics points to Uruguay’s high inflation rate as the country’s key economic weakness: at 9.1%, it stands well above the central bank’s recently widened target range of 5% plus or minus 2%, and is likely to “weigh on consumer and business confidence”.
Bergara admits that fighting inflation is “our main challenge” but says “we feel it is under control” and points to the fact that Uruguay has just completed a decade of single-digit inflation, when previously inflation averages were two, or even three, digits.
“The reason inflation is above the target is because [the economy has been importing] significant inflationary pressure from abroad,” says Bergara. “The exchange rate has fallen by 28% since the US began tapering and commodity prices didn’t fall as much. Also, private consumption is growing 1 percentage point higher than GDP growth – it’s not a problem but it is adding to inflationary pressures. However, we are not too worried because total credit is low, at 24% of GDP, and in particular consumer loans are just 6% of GDP.”
Uruguay’s central bank has responded to inflationary pressures with a constrictive monetary policy – the base rate stands at 9.25% – one of the highest in the region. Bergara says the policy is critical in the medium term but has not been “that efficient in the short term as the financial and credit channels are weak in Uruguay”.