A serious deterioration is taking place under the surface of the Uruguayan economy and when the current inflow of foreign capital reverts, the country is going to suffer unpleasant shocks with a strong rise in the price of the US dollar and an increase in inflation, according to a report from the US based BCP Securities.
“Unfortunately a serious deterioration is spreading under the surface of the Uruguayan economy which promises a very disagreeable surprise” said Walter Molano head of BCP Securities during the presentation: “Uruguay, a change of seasons”
Molano said that the massive influx of foreign capital that is reflecting an increase in the level of international reserves is “showing a worrisome tendency” because although part of it can be explained by Foreign Direct Investment, FID, the cellulose plants projects are culminating. In fact without considering this factor, FID dropped 11% in 2012.
“Most of the capital” that continued to arrive in Uruguay during 2012 “was from portfolio investments taking advantage of the very high interest rates” offered by the Uruguayan government said Molano.
And this to a great extent has been as a result of the “flood of praise” that risk-rating agencies crowned Uruguay with following the return of the investment grade. As a result Uruguay became “one of the preferred investment targets by the big global managers of assets”, added Molano.
“However this is going to bring surprises and tears when the influx is reverted leading to a depreciation of the Uruguayan Peso, a dramatic drop in international reserves and an increase in inflationary pressures”, added Molando who also was critical of the indexation system implemented for salaries and labour costs.
“The deterioration of domestic conditions coincides with the erosion of external factors” added the economist in reference to the slowing down of the Brazilian economy and the strict capital controls in Argentina.
“Uruguay is a country that has a good performance when its neighbours prosper, but also suffers disproportionately when things go bad in the neighbourhood. Is time to begin tightening the hatches, because the change of wind is beginning”, concluded Molano.