MercoPress. South Atlantic News Agency

Uruguayan announces more “active role” in exchange market to boost exports

Economy minister Fernando Lorenzo

The Uruguayan government plans a more active role in the foreign exchange market with the purpose of boosting exports competitiveness that have been suffering from the sliding depreciation of the US dollar.

“The Ministry of Finance will play a more active role in the currencies market. We want the Central Bank to remain as custodian of price stability and the ministry will be doing all the foreign currency purchases for the Uruguayan state”, said Economy minister Fernando Lorenzo.

“We expect quick and long standing repercussions from this new focus and a positive impact in the foreign currency exchange market”, said Lorenzo who added that the new system is also geared to reduce the fiscal cost and will not impose any levy or tax on capital inflows or outflows.

The local currency market responded Monday with a 3.5% increase the US dollar value from 19.20 to 19.60 pesos.

Lorenzo said that the Uruguayan economic development model is based on a strong exports’ impulse which “this year so far is doing very well” but “we want to ensure its long term sustainability and for this we need growing competition capacity”.

The minister also anticipated that in coming days a package of additional fiscal and credit measures to promote exports will be announced.

However the minister did not give details as to how many US dollars the government will be purchasing in the local market

Uruguay’s peso has strengthened 21% so far this year against the US dollar.

Uruguayan authorities follow closely the evolution of the Brazilian Real, which has become the country’s main trade associate, particularly for industrial goods, and is the only partner with which Uruguay maintains a positive competitiveness.

The Real has appreciated even more than the Uruguayan currency.

With all other trade partners, Argentina, China, US and the European Union, Uruguay has lost competitiveness because of the strong appreciation of the Peso which has a double impact: less income in peso from export dollars and higher costs since they are in appreciated Pesos.
However there are some unanswered questions in Lorenzo’s announcements.

The country’s annual purchase of US dollars to face interest and capital payments, energy and other goods is estimated in just over 3 billion US dollars.

The mechanism is quite simple: the government issues short term notes with which it will then purchase US dollars in the local market.

But the Central bank has been using a similar system with notes in indexed units (UI) adjusted to local inflation, at an interesting interest rate.

This as has happened in Brazil, has attracted a significant capital inflow which is guaranteed an attractive interest plus the appreciation of the local currency as more dollars move in, which once converted back into greenbacks can be paying double digit interest rates.

Uruguay besides has a longer record of political stability and honouring debts than its two large neighbours.

Uruguayan exports in the first five months of 2010 have increased 27% compared to the same period in 2009.

Opposition members have questioned the initiative arguing that it will only create more government debt by taking the burden from the Central Bank to the Finance ministry.

“I agree with President (Jose) Mujica that something has to be done with the US dollar to help exporters, but I think the boys from the Economy ministry will have to do better. They must begin by balancing the budget”, said opposition leader Pedro Bordaberry.