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Uruguay investing hundreds of millions to support the US dollar and exports edge

Saturday, April 20th 2013 - 09:07 UTC
Full article 21 comments
Central bank president Bergara: the real sector of the economy is threatened Central bank president Bergara: the real sector of the economy is threatened

Uruguay’ financial and political stability is backfiring as the Central bank is forced to buy a massive inflow of foreign capital which in turn creates an abundance of Pesos that need to be absorbed to control inflation and support the competitive edge of the country’s exports.

The Central bank in the first three months of the year has purchased more dollars than in the twelve months of last year, 667 million against 662 million. In the first quarter of last year the Central bank had bought 366 million dollars or 54% of what has happened in the first quarter of 2013.

However despite the heavy indebtedness of the Central bank that absorbs Pesos by selling bonds in the local market for which it must pay interests, the Uruguayan government is determined to continue with the policy of supporting the greenback to ensure that the country’s exports remain profitable.

Addressing the Finance Committee of the Lower House, Central bank governor Mario Bergara said that the abundant international reserves of Uruguay, at a record 14 billion dollars, are the consequence of “global financial conditions” which have forced an excessive appreciation of the Uruguayan currency.

“We must avoid the appreciation of the Peso, and the collapse of the US dollar in the local market, so that when international financial conditions revert, which at some point will happen, when we look at the real sector of the economy we won’t have to see a pile of dead bodies”.

Data to support the situation is available and abundant: last year the US dollar in the local market had actually advanced 0.22% and the Electronic stock exchange was operating 1.18bn dollars. However in the same period this year, the dollar has dropped 1.9% and the electronic stock exchange turnover was 1.7 billion dollars.

The situation with the massive sale of US dollars is partly explained by a decision from the same Central bank, which to combat inflation, in its last meeting of 2012, raised the benchmark interest rate from 9% to 9.25%.

This immediately made more attractive the Monetary Regulation Letters, LRM in Uruguayan Pesos, which meant a greater demand if we compare the first three and a half months of last year and 2013: 51.6 billion Pesos against 120.2bn Pesos. The coming week the Central bank will be floating another 4.3bn Peso in LRM.

Since last December to mid April the value of the US dollar has dropped 1.95% if we compare it with the same similar period of 2012.

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  • Conqueror

    Poor little Uruguay. It is suffering. It is suffering from its old, frightened, senile, ass-licking “president”, from being next door to argieland and from having its economy entwined with that of argieland. Just look at it. Uruguay suffered for years because it couldn't follow its own interests and build pulp mills. Because of the lies from argieland. The lies about pollution. The pollution that was being created by argieland. Then there are the channels in the Rio de la Plata. The northern channels where argieland is supposed to enable dredging for proper access to Uruguayan ports. Except that it doesn't. Because that would create competition for the argie ports of Buenos Aires and Rosario. Of course it's a treaty matter and so all is explained. When did argieland ever comply with treaties? Then there was the instance of argieland refusing to buy back its own currency from Uruguay. Currency that Uruguay had acquired by exchanging worthless argie pesos for Uruguayan pesos so that argie crooks could buy goods in Uruguay. Goods that were, effectively, stolen. Solutions for Uruguay? Get rid of the belly-crawling wimp. Get a man. If you want to do something in your own interest, do it. Ignore the whingers across the river. Dredge your own channels. If necessary, accompany the dredgers with warships. Trust us on this. If you fire at an argie warship and so much as chip a little paint, it and the rest will run. Remember that you helped Britain achieve the destruction of the Graf Spee. Argieland has nothing comparable to the Graf Spee. And the money? That's easy. When someone wants to buy, require production of a passport. For argies, require payment in US dollars. Under NO circumstances, accept or exchange argie pesos. Unless you have an overwhelming need for overpriced toilet paper!

    Apr 20th, 2013 - 03:32 pm 0
  • ChrisR

    Ignoring 'Comical Alli' above, this item seems to ignore one thing.

    667 M USD is only 0.75% more than the previous years total of 665! And this when inflation was (pick a figure) between 8% and 12%

    Are we not seeing the wood for the trees here, or are we so utterly confused we don't know what we are doing?

    If you keep sending different signals to the market (raising base rate to 9.25% to “combat” inflation) then something is seriously remiss when the Central bank president Bergara panics at the obvious result of offering investors MORE money and is surprised when they take it!

    I am one of the investors and so far it has worked out well.

    Mujica losing control of the cabinet such that there are TWO financial bodies operating to control the government money market is ludicrous in the extreme but he seems unabled to understand the conflict OR, more seriously, is unable to deal with it.

    Apr 20th, 2013 - 04:49 pm 0
  • cornelius

    Poor Uruguay is going the way of Cyprus remember Cyprus 8 times more deposit than the GDP Russian money.
    Uruguay has Argentinean money and the economy cannot absorb of course I wonder how many times over of Uruguay’s GDP Is there in Dollars from Argentineans I bet 5 billion along from Cristina the thief.
    This is a copy of the Cyprus situation.

    Apr 21st, 2013 - 01:02 am 0
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