Uruguay economy braces for growth

Strategically placed between two South American giants, Uruguay is the gateway to the Mercosur − the biggest common market in the region

 

Besides its long-standing political and juridical stability, the richness of its natural resources and the high social and educational level of its inhabitants, a sustained process of economic growth experienced in recent years has turned Uruguay into the “jewel of the region”.

The Oriental Republic of Uruguay, a small country located in the south east coast of South America, has stirred up the interest and attention of the international community, due to its socio-economic, political and geographic characteristics that have made of it one of the most stable, reliable and safe economies in the Americas.

Strategically located between Argentina and Brazil, Uruguay has the entrance key to the Mercosur − the biggest market in the region with more than 250 million consumers − and a growing gross domestic product.

In recent years, besides its political stability, democratic tradition and juridical reliability, Uruguay has experienced an important and sustained process of economic growth at a faster rate than the Latin American average. Between 2005 and 2008, GDP increased at a rate of 7.5 percent p.a., while in 2009 the increase reached three percent. Thus, Uruguay has become one of the few countries that managed to maintain its expansion in spite of the recessive international scenario.

This successful performance has been the result of a qualified and responsible economic management that was able to implement a model of sustainable, equitable, and balanced economic growth, based on solid pillars comprising: prudent macroeconomic policy, search of balance in public accounts, responsible management of public debt, a growing degree of opening to the world, and a healthy banking system.

Macroeconomic policy
The cautious management of the fiscal and monetary policies set a favourable scenario for the planning and development of private investment, an essential driving force for sustainable growth.

The monetary policy kept under control the inflation in spite of the great increase in the international price of commodities (food and energy). As of June 2010, annual inflation reached 6.2 percent, within the target range set by Government. On the other hand, the existence of a flexible exchange rate system provided the economy with a greater adaptation capacity when faced with external ups and downs.

Balance in public accounts
Since the respect for fiscal balance was considered a key factor to assure the sustainability of the economic model, the average fiscal deficit of the last five years was around one percent.

The excess capacity of public accounts allowed the adoption of a set of anti-cyclical measures as from the end of 2008 to face the negative impacts of global crisis and the increase in energy costs as a consequence of the drought that hit the country, while maintaining the fiscal deficit at reasonable levels. However, the fiscal balance is still a priority condition for the economic management of the country, and this has been reflected in 2010 in the reduction of the fiscal deficit.

Public debt management
The competence of public debt management and planning enabled to reduce the vulnerability of national economy, decreasing its external exposure degree through a strong reduction of the debt burden on GDP and the construction of a clear maturity horizon for the next years. As a result, the price of Government Securities has experienced an unprecedented increase, reaching historical highs. Thus, country risk fell down 200 basis points.

Furthermore, Uruguay shows a sustainable increase in international reserves, achieving a record level by mid 2010 ($7.500m, ie 22 percent of GDP).

Opening degree
The country has developed a model of economy open to the world, thus enabling the strong economic growth to be accompanied by a greater opening degree (60 percent of GDP in the last five years), a growing diversification of destinations, and a remarkable increase in the exports of services, mainly of software and tourism.

From the beginning of 2010 up to this moment, exports from Uruguay have shown a strong and sustained dynamism, reaching averages not only above 2009 amounts but also above 2008 historical highs.

Banking system
The Uruguayan banking system has remained sound and liquid, away from the toxic assets and risky practices that originated the ups and downs in international financial markets during 2009.

Composed of a public bank (Banco República) and 13 first rate international banks, the Uruguayan banking system has remained healthy, needing no support from the State. This is remarkable within a worldwide scenario in which governments had to bail out their financial systems through multimillionaire capital injections.

Concerning solvency, the prudential regulations applied in recent years provided for requirements even more demanding than those recommended by Basel. As a consequence of this, the capital adequacy (Tier 1) of the system was about 17.5 percent through these last years.

As opposed to what has occurred in other banking systems, the delinquency has remained extremely low (1.2 percent), due to the banks’ high quality credit portfolio.

The excellent economic results obtained by Uruguay in recent years, which received the recognition of many international leaders, have been supported by a socio-political climate that has allowed Uruguay to be internationally well-known.

Stable political and juridical scenario
Due to the stability, soundness and transparency of its political structure, Uruguay has earned, on several occasions, international recognition. The Economist places Uruguay at the top of its democracy ranking, being the only country in South America with full democracy. Transparencia Internacional ranks it together with Chile as the countries with the lowest level of corruption in the region.

Its reliable juridical framework – with clear and equitable game rules for domestic and foreign investors – has made the country an excellent destination for investments.

The existing investment regime includes a series of tax exemptions and benefits, and also the free repatriation of capitals and free access to the exchange market. This is facilitated by a banking system that, unlike many others, deals in national and foreign currency.

As a result, the volume of FDI has multiplied in recent years until achieving in 2008 a record amount of more than $1.800m (six percent of GDP). During 2009, the FDI flow felt the impact of the global crisis, although above the average of the last five years, showing an upturn in 2010. The stability, strength and perspectives of the Uruguayan economy determined an increase in the quantity and amounts of projects submitted under the law for investment
promotion.

The total investment has registered a sustained increase of its share in GDP, and it is foreseen that it will continue growing in 2010 and 2011.

In short, the economic growth model adopted by Uruguay in 2005 has offered the country the possibility to successfully overcome the international crisis.

The financial stability together with the favourable natural, cultural, social and political conditions, have turned the country into an excellent destination for investment.

The recent report on economic climate in Latin America, made by Fundación Getulio Vargas, placed Uruguay within the countries with the best climate and possibilities of improvement in the region.

The Cepal has foreseen a growth rate of the level of activity for 2010 of seven percent, thus ranking Uruguay as the second Latin American country of greater dynamism after Brazil.

During the first quarter of 2010, the GDP increased by 8.9 percent as from the same quarter of 2009, with a strong expansion of all the productive sectors, mainly the external sector, with an increase in consumer and private investment of eight percent and 13 percent, respectively.

The boost in internal demand, the recovery of the world economy and external demand, the good international prices of main exports, the return of investment flows and the solid economic basis of the country, allow us to ensure that Uruguay will continue showing an ongoing and sustainable growth in the years to come.

For further info Tel: (598 2) 1896 2710 Email: secretariapesidencia@brou.com.uy; www.bancorepublica.com.uy