Uruguay is too expensive in dollar terms and needs to adapt quickly because the adjustment will come anyway ‘and will be painful’ unless inflation is brought under control and costs equilibrium is reached with Brazil with a competitive dollar at 25 Pesos.
The statements belong to two Uruguayan economists, Alfonso Capurro and Gabriel Oddone during a conference on Uruguay’s economy prospects organized by a private group closely linked to the construction industry.
“The prospects for the Uruguayan economy in the coming global scenario is not necessarily dramatic but it is imperative to bring down costs in dollars before the international situation forces it on a way that can be abrupt”, cautioned Oddone
Capurro pointed out that recent measures implemented by the Uruguayan government to impede the massive inflow of dollars, which plunged the value of the US currency in the local market to 18 Pesos and thus threatening competitiveness are “not miraculous” but are insufficient “because we are not going to recover overnight the competitiveness we’ve lost in the last two years”.
In current circumstances, “if this continues we won’t be able to sell overseas not even a screw; the latest measures put a floor to the slide of the US dollar in the local market, but that is not enough” warned Oddone.
Oddone who has a PhD in economic history, said that the bilateral real exchange rate of the Uruguayan peso with the US dollar is at its lowest level since a century ago, in 1913, which means “we are expensive in dollars all over the region”.
“Relative prices in Uruguay need an adjustment of 20% to 25% to have a reasonable level of prices (and costs) at least in the region”, emphasized Capurro.
“In quick numbers the US dollar should be costing in the range of 25 Pesos so that we can recover the relative prices equilibrium we had with Brazil”, added Capurro.
Brazil is Uruguay’s main trade partner and in the last twelve months has left its currency to drift and devalue at least 20%. However Capurro also pointed out that in doing so “inflation would sprint and again squash competitiveness”.
The first natural barrier to having the dollar at 25 pesos is inflation, which might not be a priority as it was in 2012, “but we can’t let it shoot off”.
Capurro and Oddone coincided that the second barrier to change the real exchange rate should ‘address the fundamentals’, but the latest battery of government measures do not attack the ‘fundamentals’ but rather the nominal variables.
“The measures are welcome because they prevent the US dollar from continuing to slide below 19 Pesos, but we are not addressing the variables which move the real exchange rate”
To correct the misbalances “measures should contain real salaries, government spending, consumer credit and aggregate demand, which at the end of the day determine demand’s possibilities”, said Capurro.
However ‘these policies are complex, non pleasant and it is hard to see the government implementing them when we are 15 months away from presidential elections’.
Oddone estimates that the US dollar at the end of the year will be costing 21.50 Pesos and by the end of 2014, 22/23 Pesos, but “if it’s not corrected we won’t be able to export a single screw”.
Taking into account that the current account deficit is almost 6% of GDP, the worst in 18 years, ‘this is going to have an impact in the jobs’ market since Uruguayans prefer shopping in Argentina’.
If this relative prices situation persists it’s going to generate an impact on salaries and at the end of the day, “the corrections will surface abruptly with all their strength, at the cost of the jobs market that will deteriorate, and with growth below target”, concluded the economists.