Q: Fitch Ratings last month joined two other major ratings agencies in giving Uruguay its coveted investment grade, a move that lowers the nation’s borrowing costs and opens up opportunities for new investors. Meanwhile, Uruguayan Vice President Danilo Astori said recently that trade relations with neighboring Argentina are “at their worst point in a long time” in the wake of new taxes in Argentina on vacation packages abroad, which “greatly affects Uruguay” due to the high proportion of Argentine tourists in Uruguay. How important are ties with Argentina to Uruguay’s economic outlook? Considering the broader global economic picture, will investment-grade status bring Uruguay the benefits it expects? What priorities should the country’s economic policymakers be focused on in the near- and mid-term?
A: Graciana del Castillo, managing director of Macroeconomics Advisory Group: “Uruguay has benefited from regaining ‘investment grade’ status from S&P and Moody’s because of the U.S. regulatory requirement of institutional investors to acquire bonds only with this status, and because of contractual arrangements of certain funds with their low-risk investors. With its amortization payments covered until late 2015 and with precautionary liquid assets, Uruguay has managed to improve its external debt profile by extending the average maturity of the debt at historically low yields. Because of this, in January LatinFinance honored the country with the ‘Deal of the Year’ recognition as Best Sovereign Liability Management. What the new upgrade from Fitch adds may be marginal. On Argentina, I fully agree with Vice President Astori. Argentina has adopted a number of unfair practices that affect Uruguay greatly because of its dependence on exports, investment and tourism. It is not clear to me, however, how Argentina’s move to increase the tax on credit card purchases abroad to 20 percent will affect tourism. Even with that tax, expenditures abroad would be cheaper than if dollars had to be purchased in Argentina at the parallel-market rate which is above 8 pesos to the dollar. What is clear is that the import restrictions are affecting manufacturing exports from Uruguay. This is worrisome since this is the sector that creates employment in a country in which exports are increasingly commodity-intensive. The government needs to focus on lowering costs resulting from an appreciated exchange rate and inflation and lowering the fiscal and external deficits, which increased greatly in 2012.”
A: Claudio Loser, visiting senior fellow at the Inter-American Dialogue and president of Centennial Group Latin America: “Uruguay has become a small diamond in a rocky landscape. The upgrade by the rating agencies is more a recognition of the work done so far than a recommendation on the future. Accordingly, it is difficult to predict exactly how Uruguay will perform. There are a number of important benefits for the country. Even though its rate of inflation has been higher than targeted, Uruguay has shown better economic policies than Argentina and Brazil. Furthermore, its average growth rate in recent years exceeded theirs, and it ranks higher in virtually all significant indicators, be it the World Bank’s ‘Doing Business’ or the ‘Competitive Index’ of the World Economic Forum. With this track record and the rating upgrade, there will be great interest on the part of institutional investors to buy Uruguayan bonds, thus reducing the cost of capital and enhancing foreign direct investment. That being said, Uruguay’s close links to its neighbor to the west will be detrimental to its prospects. Tourism is highly dependent on Argentina, which will continue to intensify foreign exchange and import controls. In addition, Brazil’s economy is slowing down. However, these issues would have hit Uruguay in any event. Therefore, the country’s prospects will be better than before. It may even be possible for the country to consider an alliance with Mexico and western South America, and closer trade and financial relations with the United States and Europe. Still, hard work is needed in many areas for Uruguay to reach its full potential.”
A: Christian Daude, head of the Americas Desk at the OECD Development Centre: “In the last 10 years, there have been significant changes in the economic and financial linkages between Argentina and Uruguay. While ties in the banking sector and merchandise exports have decreased significantly, Argentina still represents a large share of service exports, mainly tourism. For example, the expenditure of Argentine tourists amounts to around 2.8 percent of Uruguay’s GDP. Thus, further foreign exchange restrictions in Argentina can have a negative and significant effect in this dimension. Other links, such as Argentine investments in agriculture and real estate, would probably be less sensitive to these restrictions. Overall, Argentina’s policies continue to spill over, but they have a less disruptive force than in the past. Fitch’s investment-grade decision is of course good news, although the direct effect on the cost of financing will be modest as spreads of Uruguayan credit are already tight. The main short-term challenges for Uruguay are to restore the recent fiscal slippage and reduce inflationary pressures. This will not be an easy task as politicians position themselves for the upcoming 2014 general elections. In the medium term, policymakers should focus on sustaining economic growth and making it more inclusive. This requires a strategic approach regarding the country’s trade and financial integration beyond Mercosur. Institutional reforms that avoid the pro-cyclical bias in fiscal policy are also needed, especially if mining takes off in the near future. Without such reforms, the recent evolution suggests that it will be difficult to fully benefit from the regained investment-grade rating.”