MercoPress. South Atlantic News Agency

Uruguay’s prospects entangled in Mercosur senior members’ policies, says EIU

Mujica good relations with Cristina Fernandez and Dilma Rousseff are positive factors

Uruguay will have to learn to live with Argentina’s ‘unpredictable policies” and its growing tendency to protectionism, both from President Cristina Fernandez as from Brazil in a context where both economies growth is slowing down.

This is basically the summary of the latest chapter on Uruguay from the The Economist Intelligence Unit, EIU.

The regional trade group Mercosur which includes the two South American largest economies, plus Paraguay and Uruguay is described as “an imperfect customs union” with which Uruguay will continue to have “close political and economic links”.

However policies implemented by its large neighbours will complicate Uruguay’s attempts to consolidate growth of foreign trade in other areas of the world.

In the case of Argentina, EIU argues that the “possibility that Buenos Aires gets involved in trade and diplomatic disputes remains high”, as part of an international strategy to address the deterioration of global prospects, based on protectionism.

“Argentina has shown it is capable of triggering disputes even with its main trade partners, such has been the case with China and Brazil, the country’s main trade partners”.

Political uncertainty according to EIU in the case of Argentina is not only limited to foreign affairs: the internal scenario makes it difficult to forecast what course the government will take.

Following the re-election of President Cristina Fernandez “the risks to political stability persist” according to foreign analysts; it is believed that the president “will continue as combative in her dealings with the opposition, the media and the business community”.

As to Brazil the EIU warns of a ‘mix’ of non orthodox policies: a fiscal expansive component with a high interest rate has exacerbated the policy dilemmas with the increase in commodities prices. Brazil had to opt between deepening the battle against inflation and retaining competitiveness and fell for the second option.

The way Brazil is trying to address the competitiveness problems of its industry is through a program called ‘Brazil Maior’, which improves the position of strategic sectors through rebate in taxes, easier credit access and “trade restriction” measures for imported goods, says EIU.

As happened last August with the auto industry, protectionist measures from Brazil which try to compensate the loss of competitiveness, could have an impact for the export of Uruguayan goods.

However, analysts of the Uruguayan economy and politics believe that the country is in a good diplomatic position to address the political obstacles imposed by its large neighbours.

“The good relation of President Jose Mujica both with Brazil’s Dilma Rousseff and the Argentine leader, Cristina Fernandez, should help to contain the misbalances of the customs union”.

But the political misunderstandings with the region are not the only ones to weigh into the Uruguayan agenda. Also in the economic field, the region provides uncertainty in the near future.

Brazil’s economy is slowing down and behind it will follow both Uruguay and Argentina.

After having grown at a spectacular 7.5% in 2010 the Brazilian economy slowed down this year and will expand 3% according to EIU, which is below the country’s potential estimated in 4.5%. For 2013 expansion is estimated at 3.5%.

Furthermore the Brazilian currency, Real could depreciate more than expected in the event of a surprise slowdown of Chinese growth.

For Argentina the current mix of policies will ensure growth in the short term but it is generating distortions that will slow growth and increase volatility risks in the mid term”. For 2012, EIU expects the Argentine economy to expand 4% with a strong deceleration compared to the 9.2% of 2010 and the 7.5% expected this year.

“To the uncertainty prospects of Uruguay’s main trade partners (Brazil and Argentina) must be added China’s deceleration, so the country’s growth can be expected to fall from 5.7% in 2011 to an average 3.9% for 2012 and 2013. Last year the Uruguayan economy expanded 8.5%. However, the EIU warns of an “elevated risk that the world economy falls into recession, which most probably will force a downwards review of these forecasts”.