Uruguay: The Pearl of the West

The Pearl of the East is the moniker that is used to describe oriental city-states, such as Hong Kong and Singapore. These small enclaves sit astride important waterways that provide access to strategic markets. Although much larger in size, Uruguay is a small country which was artificially concocted by European and local powers to ensure access to the lucrative markets that lie beyond the estuary of the River Plate. Most countries at the start of the 19th century were actively pursuing mercantalistic policies. The population pools that resided along the Parana, Paraguay and Uruguay Rivers often paid in bullion for the manufactured goods offered by foreign traders. These markets became particularly important for Britain during the Napoleonic Wars, when continental Europe was closed off to its merchants. Given the chaotic wars of independence in Latin America, during the same time period, British merchantmen shifted their attention to the South Atlantic. However, the independence of Argentina in 1816 allowed the new government to regain control of its waterways. This effectively closed off the River Plate, and it eventually led to an invasion of the eastern shore by Brazil. The invasion was repelled by Argentina during a 500-day war, but it produced a bitter stalemate which brought the two sides to the negotiating table. Through the skilful intervention of Lord John Ponsonby, the British diplomat convinced the two sides to remove the possibility of future conflicts by granting independence to a new buffer state. By signing the Treaty of Montevideo (1828), tensions between the two countries were eased, but it cunningly assured international access to the strategic waterway. The creation of Uruguay also served Argentina’s own domestic agenda. The ascendency of the Argentine cuadillo Juan Manuel de Rosas in 1829 witnessed an enormous consolidation of power within the port of Buenos Aires. Montevideo, which has a better and deeper port, would always have been a natural rival as the gateway and tollbooth of the nation. By excising Uruguay, the threat was permanently eliminated. Therefore, like Hong Kong and Singapore, Uruguay was an artifice that was created to bolster international trade and satisfy local political objectives.

Like Hong Kong and Singapore, the Uruguayan economy is humming. In 2010, the Uruguayan economy is expected to grow 7.8% y/y, which is more than three times the average 1.9% y/y growth that was posted during the last 50 years. Unlike its Asian counterparts, the international credit crunch did not have much of an effect. The Uruguayan economy grew 2.9% y/y in 2009. One of the reasons for the country’s strong performance is the development of long term foreign direct investment projects that help insulate it from the volatility in the international marketplace. Although Uruguay is benefitting enormously from the growing prosperity in Argentina and Brazil, as well as the booming trade that flows in and out of Paraguay and Bolivia, it is also developing its own natural resources. Foreign capital is developing the country’s timber, grain, livestock and mining output.  Foreign investment increased 21% y/y in 2009—including a new mining project announced by Aratiri and a new paper and pulp plant that will be developed jointly by StoraEnso and Arauco. Deft monetary management by the Uruguayan central bank produced an environment of price stability, despite the strong GDP growth, with inflation expected to remain close to 7.2% y/y in 2010 and declining to 6.5% in 2011. Although the development of new projects led to a sharp increase in the import of capital goods, booming commodity prices helped push the country’s current account balance into the black. This is one of the reasons why the Uruguayan peso continues to appreciate.

Although the Uruguayan economy provides enormous opportunities to multinationals and private equity investors, there are not many portfolio investment opportunities. Fortunately, one of the more interesting options is offered by the government T-bill market, which is denominated in local currency. Accessible to international investors, the government-issued notes have tenors of 1 month to 4 years, and rates of 6.9% to 9.3%. Although attractive, it is made even more interesting by the current trajectory of the currency. Therefore, Uruguayan T-bills could be an interesting way to gain access to a very dynamic marketplace. Like its oriental cousins, Uruguay is a small outpost in one of the most promising regions of the global economy. The Pearl of the East may be an elegant nickname for Hong Kong and Singapore, but the Pearl of the West may be a more adequate appellation for Uruguay.