Although 76% of deposits in Uruguayan banks are in US dollars, credit rating consultants Moody's have said there was nothing to fear.
By the end of 2020, Uruguay had the highest level of dollarization with 74% of deposits, followed by Paraguay, Costa Rica and Peru with 44%, 42% and 39%, respectively, according to Moody's.
The agency's report issued this week lists a series of reasons why investors should not worry over the fate of their savings in a robust banking system.
In Europe, Belarus tops the list of deposits in foreign currency with 65%, followed by Azerbaijan with 56%, Turkey 47%, Armenia 46% and Ukraine (38%).
Moddy's also said it foresaw no drop in Uruguay's dollarization rate in the coming years. High inflation and the continuous depreciation of the peso will continue to lead Uruguayan savers to the safety of dollars, the agency forecast. As a result, approximately 76% of bank deposits are in dollars as of September 2021, the latest report showed.
Many of those dollars belonged to non-resident investors, particularly Argentine savers, who own around 10% of the system's total.
According to Moody's, a high dollarization means long-term risks for banks and is very difficult to reverse. Normally, regaining confidence in the local currency and gradually reducing dollar loans and deposits takes many years of strong policies, even if macroeconomic conditions have stabilized and inflation has subsided.
However, in the Uruguayan case there are several factors that shield the banking system from the risks of high dollarization. Among them is the country's longstanding positive trade balance since 2016 and also the recent four increases in the Central Bank's (BCU) interest rate from 4.5% to 6.5% to keep the Uruguayan peso from depreciation.
Moddy's report was drafted to foresee what may happen in the United States with its anti-inflation policies which also feature increasing interest rates. As interest rates rise in the US, the flow of capital to emerging economies is likely to slow down, negatively impacting economic growth in those countries and weakening their currencies, the document warned.