MercoPress. South Atlantic News Agency

Uruguay committed to Mercosur, but also to greater world diversification

Bergara announced the establishment of a clearing house for domestic debt and banking reform based on the Chilean model

While Uruguay supports the regional trade group Mercosur, “we are also trying to diversify the economy more to other parts of the world” said central bank president Mario Bergara during his recent visit to meet investors in New York.

“We want more Mercosur, but we also want more of the rest of the world”, added Bergara who revealed that Uruguay has drastically reduced its financial, banking and trade reliance with neighbouring Argentina since the 2001 when the Argentine government of the time declared a major debt default of almost 100 billion US dollars.

“Our exposure to the regional risk is incomparably lower than 10 years ago” he said, that is why “the government’s policy is committed to Mercosur, but we also want more of the rest of the world”.

Mercosur full members are Argentina, Brazil, Paraguay and Uruguay, plus Venezuela in the process of incorporation. The rest of South American countries have associate status with the customs’ union group.

Bergara also announced that Uruguay next year will set up a local clearinghouse for domestic debt in a bid to lure international investment and cut the nation’s dependence on dollar-denominated bonds.

Uruguay increased its peso-denominated obligations to 35% of total debt from zero in 2004, when 100% was in U.S. dollars, Bergara said in the interview at Bloomberg’s main offices in New York. The government is seeking to develop the local capital markets as it strives to return to an investment-grade credit rating within two years, he said.

“We are in the process of de-dollarization of our debt” Bergara said at Bloomberg’s headquarters in New York. “The intention is to facilitate operations from international investors to participate in the domestic markets.”

A clearinghouse will be set up at the central bank in early 2011 modelled on Euro-clear, Bergara said. It will be backed by the nation’s two stock exchanges, Bolsa de Valores Montevideo and the Bolsa Electronica de Valores del Uruguay SA, to provide more open pricing and facilitate transactions in the local debt markets.

The government “has to be cautious” in encouraging the development as reducing dependency on dollar obligations too fast could cause “a short-term undesirable misalignment of the exchange rate,” he said.

“We have to balance a very healthy process of de- dollarization in the long run without misaligning the exchange rate in the short run” insisted Bergara. “We don’t have a specific target, but we all agree that dollarization is still high in Uruguay”

Investors demand an average 189 basis points, or 1.89 percentage points in extra yield to hold dollar-denominated Uruguayan bonds rather than U.S. Treasuries compared with 202 for Brazilian debt, according to JPMorgan Chase & Co. indexes. Uruguay has a total 13.9 billion US dollars of debt.

Brazil is rated investment-grade BBB- at Standard & Poor’s, while Uruguay is rated BB, two levels below, at S&P and Fitch Ratings and Ba3, three levels below, at Moody’s Investors Service, all with positive outlooks.

The three agencies assigned investment grade ratings to Uruguay in 1997 before reducing it five years later after neighbouring Argentina defaulted on 95 billion of debt.

“The combination of having a credible framework, a good reputation, guarantees and also a decent return is what makes countries like Uruguay fashionable to receive international investors” said US educated Bergara.

The Peso is down 6.5% against the dollar this year after gaining 25% in 2009. Uruguay’s 34 billion US dollars economy expanded the most since 2008 in the first quarter, led by increases in utilities, transport and manufacturing. Uruguay’s government forecasts economic growth will accelerate to 5.1% in 2010 compared with a 2.9% increase last year. The expansion will be fuelled by growing domestic demand and increased exports of goods including soybeans, beef and services.

Uruguay is also poised to approve changes in its banking laws to put the country “in the very same line as Chile, for example,” Bergara said.

However, the Organization for Economic Cooperation and Development included Uruguay on a so-called grey list of countries that “have committed to implement the internationally agreed tax standards, but have not yet substantially implemented them”.

“Transparency has improved significantly in the last six, seven years in Uruguay,” Bergara said. This process “is not an isolated measure, but part of a broader approach to have the right rules of the game for facilitating and promoting investment in Uruguay” he added.