Argentina’s poor cousin? Not Uruguay
The following piece by Jude Webber writing for the Financial Times explains the different approach by the two neighboring countries to the windfall earnings of the commodities boom.
While Argentina apparently is letting a wonderful opportunity pass by, Uruguay already has overtaken its neighbor in beef exports, attracting foreign investors and is on route to attaining investment grade rating.
The full article follows:
Uruguay is a little country jokingly considered – by Argentines – to be just another province, or even an annex, of their nation, albeit with better beaches.
Yet Uruguay has already overtaken Argentina in one area where it hurts – beef exports – and its ability to attract big investments, such as the two billion US dollars Montes del Plata pulp mill, is another factor that sets Uruguay apart from its larger neighbor. The prospect of attaining an investment grade credit rating as early as next year, as forecast by Nomura Securities in a new research note, is another.
“The combination of strong growth and robust fiscal framework should continue to lower the debt burden. In addition, the gradual de-dollarization process and the declining share of foreign-currency-denominated debt is expected to put Uruguay on a solid path towards an investment grade credit rating sometime in 2012. Inflation remains a threat, but the prudent monetary policies and the dissipation of commodity price shocks should minimize the risk”, points out the Nomura report.
Roberto Lavagna, Argentina’s economy minister between 2002 and 2005, highlighted Uruguay, alone with Chile in the region, as taking full advantage of the current booming conditions for producers of primary products.
“I have the feeling that the bonanza effect isn’t being taken full advantage of in Latin America to the fullest possible extent, with the exception perhaps of Chile and Uruguay,” he told foreign correspondents last week.
Uruguay, he said, was using favorable conditions to push through “deeper structuring changes than the rest”. The country, he said, had changed – by adding value to production of primary goods – and “I don’t see that being the case of other countries, and it clearly isn’t the case of Argentina,” Lavagna said.
Which isn’t to say that Uruguay has no problems at al: chief among them is inflation. As Nomura says:
“Headline CPI is currently running above the target band (4-6%) as a result of surging commodity prices and hot domestic demand. However, we believe it will moderate somewhat to slightly above 7% by year end.
“After stabilizing between 6% and 7% in annual terms during the 2H 2010, inflation has been increasing steadily since January to 8.34% in April. The main culprits are increases in gasoline (9.8% y-o-y) and electricity prices (5.5% y-o-y), elevated food prices (10.7% y-o-y) and strong demand-side pressures, which can be attributed to wage increases (10.3% y-o-y) and strong consumer credit expansion. While we don’t discard the possibility that inflation, in annual terms, exceeds 9% in the coming months, we believe it will decline to 7% by December, on the understanding that the central bank (BCU) will keep tightening monetary policies. In order to tackle above-target inflation and limit the contamination of inflation expectations, BCU has already put into place significant tightening measures, via sharp increases in the policy rate to 7.50% from 6.25% in March and elevating reserve requirements. We judge that the latter channel is more effective in a highly dollarized economy such as Uruguay. Moreover, supply-side shock from high commodity prices seems to be dissipating. For instance, in the past two weeks, oil prices have collapsed by 13% with WTI prices now below the US$100/bl psychological threshold”.
HSBC, in a recent report entitled “Growing Pains”, described inflation as at “burdensome levels” but it also expected it to peak – around 9% somewhere in the second quarter, it reckons – and forecast 7% inflation by year-end. Both it and Nomura are now forecasting 5.5% growth this year – still robust, after last year’s 8.5%, and Nomura highlighted the government’s strong commitment to fiscal discipline.
Furthermore, as Nomura notes:
“Uruguay is poised to attract sizable FDI inflows due to a particularly inviting business environment. According to Brazil Getulio Vargas Foundation, an independent think tank, Uruguay is ranked the top Latin American country in terms of the quality of its business environment”.
In one key sector – energy – Uruguay, an importer, is preparing a second tender of offshore hydrocarbons blocks and has this year announced an on-land discovery of hydrocarbons, which is now being studied.
So there is plenty for President José Mujica, to cheer about. Yes. But this week, he is looking glum. His Broad Front (Frente Amplio) coalition decided at the weekend to vote – against his wishes – in support of a bill to overthrow a law that granted amnesties to dictatorship-era figures.
One might be forgiven for thinking that Mujica – a former urban guerrilla who was himself imprisoned for 14 years in the 1970s and 1980s – would be in favor, but he says it is wrong to annul not one but two referenda on the issue (1989 and 2009) but has already said he will not veto the bill.
The vote is Thursday in Uruguay’s Lower House; the Upper house approved the bill earlier this year, meaning that it will become law if approved. Political analysts say the issue has weakened Mujica. At least he can take some cheer from the economy.