MercoPress. South Atlantic News Agency

Uruguay successfully floats Samurai bonds; warnings of economy over-heating

Economy minister Fernando Lorenzo headed the road-show in Japan

Interest for Uruguayan ten-year bonds in Yens more than doubled the issue equivalent to 490 million US dollars. The bonds are guaranteed by Japan Bank for International Cooperation with a 1.6% yield.

With the sale of 490 million US dollars Samurai bonds, Uruguay completes the 1.7 billion USD debt issue contemplated in the budget for 2011 and since the country will need to finance 2.25 billion USD to cover the budget deficit and other outlays, the remaining 450 million USD will have to come from budget savings or multilateral organizations.

At the beginning of the year Uruguay issued bonds in local currency equivalent to 1.256 billion USD so the Samurai bonds will be the last significant operation of 2011, according to the Economy ministry and Central Bank sources.

“Last week we made the presentation of the Yen issue before investors and we had a very positive feedback”, said Azucena Arbeleche from the Ministry of Economy Public Debt Department. She added Japanese investors were most receptive to the presentation adding that currently “the Japanese market is a very good option”.

According to ministry sources the road show in Japan headed by Economy minister Fernando Lorenzo emphasized on Uruguay’s political stability, institutional quality, low index of corruption perception, the growing performance of exports and the fact Uruguay is rated as having the best business climate in Latin America.

Ms Arbeleche also pointed out that Uruguay is fully involved in a policy of diversifying markets and bond issues with the purpose of ‘de-dollarizing’ sovereign debt.

A recent report from the Spanish bank BBVA forecasts that the Uruguayan economy will continue to expand at an average 5% in the next two years (5.3% in 2011 and 4.6% in 2012) boosted by domestic demand and foreign direct investment, although it warns that overall production is reaching its potential capacity and shortages have begun to surface.

“Inflation currently stands at 7.5% which has become the main concern of the government with clear signals of over-heating including in the labour market”, adds the report from Joaquin Vial chief economist for the South America Department of the Banco Bilbao Vizcaya Argentaria, BBVA.

“The monetary authorities have reacted strongly surprising local markets with higher interest rates and increases in bank reserves, which should begin to take effect in 2012, if the government manages to contain labour salaries and working conditions demands”, points out the report.

Another issue in the report refers to the strong pressures on the Uruguayan Peso to appreciate its value which is forecasted to continue, given the sustained domestic demand and the need to contain inflationary peaks.

“A tightening of fiscal policy and salaries would help ease pressure on interest rates and the exchange rate”, underlines the report.