Uruguay: Sunshine on the Eastern Bank

The melancholy that once characterized the eastern side of the River Plate is giving way to an air of self-confidence and determination. With the Uruguayan economy growing at pace of almost 6% y/y and new mega-projects coming on line, Uruguay is graduating beyond the provision of tourism and financial services to its two volatile neighbors. Uruguay is embracing the international economy by moving aggressively into forestry, energy and mining. The controversial Botnia pulp plant opened operation in two months ago, and it will boost Uruguayan exports and growth. Although the construction of the Fray Bentos facility soured relations with Argentina, the two governments recently announced the launch of a joint-operation to process Liquid-Natural Gas (LNG) in Montevideo. The LNG project will process energy for the southern cone markets, taking advantage of the deepwater port facilities on the Uruguayan side of the River Plate. Investment is also moving into the mining sector, with Crystallex, a Canadian-based mining company, recently expanding its gold operations in Uruguay. These new projects are placing Uruguay on a trajectory of faster growth and greater independence from its neighbors.

The new dynamism of the Uruguayan economy, after the collapse of 2001, attracted foreign investment and doubled exports. Net foreign direct investment was 5.1% of GDP in 2007, after peaking at 7% of GDP in 2006. Exports soared to $23 billion in 2007, up from $11.5 billion during the crisis days of 2001. The heady pace of economic activity allowed Uruguay to reduce its unemployment rate to 8.2% in 2007, the lowest level in 18 years. The government expects the unemployment rate to fall to 7.5% in 2008. Unfortunately, the rapid growth rate and the increase in global food prices sent the inflation rate soaring. Consumer prices jumped 8.5% in 2007, much higher than the 4% to 6% target that was set by the central bank. Food prices spiked 20% y/y, and rents rose 10% y/y. Although the central bank was concerned about the increases in consumer prices, it widened the inflation band to 3% to 7% (instead of tightening monetary policy). It seems that the monetary authorities do not want to jeopardize the rare prosperity that the country is enjoying. There are also concerns about the overheating property market. A building boom is transforming the Punta del Este skyline and some of the tonier neighborhoods of Montevideo. Prices range between $2,300 and $3,100 per square meter, leaving it competitive against Miami and the Spanish coast, but an implosion of those housing markets could force global real estate prices to plunge—eventually rippling into Uruguay. Therefore, some economists believe that the Uruguayan economy could cool down on its own.

Not wanting to waste the good-will generated by the economic boom, Uruguayan President Tabare Vazquez is pushing for a constitutional amendment to allow re-election. The amendment will be part of an electoral reform package that needs to be approved by a general referendum. The different factions of Frente Amplio, the center-left ruling coalition, are coalescing on the idea, and the amendment could be introduced this year. The government is taking steps to improve its popularity in preparation for the reelection initiative, by reducing the public sector’s retirement requirements. This, of course, should be very popular with the labor unions.

While Uruguay charges ahead with economic and political initiatives, important changes are also taking place on the social front. An air of self-confidence is building. Uruguay is no longer as dependent on its neighbors, creating an aura of independence and pride. There are hints that the outwards immigration, that once sapped Uruguay of its most valuable resource, are ebbing. Of course, they should stay. Uruguay has much to brag about. It has one of the most stable societies in Latin America, bereft of the racial, class and regional tensions that characterize much of the continent. A revival of Uruguayan popular culture and the resurgence of retail activity suggest that more Uruguayans are staying put. Uruguay’s economic revival and independence is a boost for Latin America, by creating an oasis of stability in a region that is renowned for extreme volatility.

2 Responses to "Uruguay: Sunshine on the Eastern Bank"

  1. Nelson Noya   January 23, 2008 at 10:32 pm

    Walter:I have some light discrepancies with your analysis:a) ”Unfortunately, the rapid growth rate and the increase in global food prices sent the inflation rate soaring. Consumer prices jumped 8.5% in 2007, much higher than the 4% to 6% target that was set by the central bank. Food prices spiked 20% y/y, and rents rose 10% y/y”About 2/3 of the increase in domestic food prices is due to a domestic supply shock, originated in an extreme outlier data in weather conditions. It’s not right to fully attribute this shock to higher international prices or domestic demand pull conditions.b) “Although the central bank was concerned about the increases in consumer prices, it widened the inflation band to 3% to 7% (instead of tightening monetary policy)”. Admittedly, one can discuss if the current monetary policy should be tighter, but it’s hard to argument that policy is easier than some time ago, say 6-9 month ago. Besides, if the main source of the upsurge in inflation is a supply side shock due to bad weather, this shock is not only transitory but reversible also. So, do you really think that CB must react to such kind of shocks?c) “There are also concerns about the overheating property market. A building boom is transforming the Punta del Este skyline and some of the tonier neighbourhoods of Montevideo”. Your assessment of P. del Este boom can be a consensual one, but definitively not for Montevideo, even for its tonier neighbourhoods (I live in one of them). It’s true that conditions are quite better than 2-3 year ago, but by any comparison, are far from a boom.c) “Not wanting to waste the good-will generated by the economic boom, Uruguayan President Tabaré Vazquez is pushing for a constitutional amendment to allow re-election”. Although I am an economist, as an ordinarily citizen I am seriously doubt about the possibility of a re-election. Officially, Vazquez emphatic denied such alternative some months ago. So, strictly, you are wrong. He is not pushing for such a thing. Although I am sure that some of the fractions of Frente Amplio are pushing for a re-election, this can be attributed that they have no other leaders than can be a candidate with reasonable chances for the next election and disagree with the available ones.

  2. Guest   March 14, 2008 at 3:17 pm

    Mr. Molano:The numbers you cite as “exports” are, indeed approximately correct for GDP (USD 13.000 in 2002, and not in 2001; and exactly USD 23.738.096,22 in 07). All this is easily found on http://WWW.bcu.gub.uy/cuentas nacionalesRespect FDI, it must be stated that most of it has been applied to buy land and already existing factories, eg. slaughter houses, apart from construction in fancy places as Punta del Este.Botnia’s pulp plant is an enormous investment, but as it is in a “Zona Franca”, and pays only 5% of gross product as taxes and employs only 250 people, it’s impact on over all economy shall be small. Growth in GDP from 02 to 07 has been a high 40%, but if you calculate from last peak, which was in 1998, growth has been only 15% or a mere 1,66% annualy.Distribution of income has not changed for the last 40 years, and salaries account for only 20% of GDP.And total gross investment is a not brilliant 16% of GKP.This comes on top of a very favourable international climate. Should commodity prices (Our main exports) and international credit conditions deteriorate further, things may get really ugly again.William Yohai, not an economist but still member of “Red de Economistas de Izquierda del Uruguay”