NEXT PRESIDENT? If Finance Minister Danilo Astori becomes Uruguay's next president, he will give the country a big boost, the author argues. (Photo: Uruguayan President's Office)
Uruguay’s sharp contrast with chaotic Argentina is making it a haven in the southern cone.
BY WALTER T. MOLANO
The opposing banks of the River Plate are contrasts in style. They were always that way. Buenos Aires was usually metropolitan and bright, while Montevideo was provincial and sullen. However, now the two sides reversed position, with the northern bank showing an air of vitality and modernity, while the southern bank sinking into a morass of pessimism.
Uruguay is booming. After growing 7.2 percent y/y in 2007, the Uruguayan economy is poised to grow more than 6 percent y/y in 2008. Foreign investment is pouring into the country, taking advantage of its vast natural resources and tourism potential. Despite the tantrums demonstrated by Argentines against Botnia’s new paper mill at Fray Bentos, other multinationals are rushing to develop similar projects on the River Plate.
Argentine farmers and international grain companies are descending in hoards to buy up fertile farmland and escape the export tariffs on the other side of the river. The price of farmland spiked four-fold in some parts of the country. Likewise, building developers are transforming the skylines of Punta del Este and Montevideo into the Riviera of the South Atlantic. The massive capital inflows forced the Uruguayan peso to appreciate and international reserves to soar. It also helped overheat the Uruguayan economy, pushing the inflation rate to 8 percent. However, the massive mobilization of resources is allowing Uruguay to overcome the loss of competitiveness and emerge as one of the more affluent societies of Latin America.
THE INFLATION CHALLENGE
Unfortunately, inflation is the biggest challenges facing Uruguay. No one questions the official inflation rate, but the increase in prices is weighing heavily on households. Soaring oil and food prices are hitting many of the people that only recently emerged from poverty. To make matters worse, Uruguay faces a severe shortage of electricity. A series of factors pushed the national grid to the limit. Although a growth rate of 6 percent may not seem that unusual by emerging market standards, it is more than twice the average rate of the 1990s. The Uruguayan economy grew an average of 7 percent y/y, and nominal GDP jumped 50 percent, since the end of the 2002 crisis. The country also witnessed a sharp increase in birth rate, given the improvement in social conditions. Less of Uruguay’s youth immigrated, putting greater stress on basic services. Last of all, drought conditions in the north reduced the output at some of the country’s hydroelectric facilities. All of these factors left Uruguay with a shortfall of 200 MWs, which the congress is trying to close by ordering the construction of new generating plants.
One of the factors that distinguish Uruguay from its cousins on the other side of the river is a strong political party system. Although the field is choked with a variety of political parties, their ability to coalesce into strong coalitions engenders social and economic stability. With presidential elections scheduled next year, the country is preparing for the political season. The ruling Frente Amplio (FA) coalition will decide on a formal candidate next April, and most people are placing their bets on Finance Minister Danilo Astori. The soft-spoken accountant was instrumental in stabilizing the economy and making the government of Tabare Vazquez a huge success. Astori will give Uruguay a big boost, since it will signal a commitment to sound macroeconomic management. However, the government is not taking any chances. It recently increased public expenditures for 2008 and 2009, in a last push to boost the economy before the polls opened. Fortunately, a recent series of reforms and rising tax receipts helped offset the increase in outlays, thus allowing the fiscal accounts to remain balanced.
SOUTHERN CONE HAVEN
Uruguay’s sharp contrast with chaotic Argentina is making it a haven in the southern cone. Some companies and Argentine households are decamping for Uruguay, to take advantage of the better social and political environment. Uruguay was once one of the most prosperous societies in Latin America, but the collapse of commodity prices during the postwar period depressed the level of economic activity. The reintegration of China and India into the global community revived the demand for raw materials, bringing new life to the pampas. Fortunately, Uruguay has the political stability to allow it to fully enjoy the benefits of the improvement in external conditions.
Walter Molano is head of research at BCP Securities.
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From: Nancy, Huntington Beach, CA As someone who has decided to retire there from the US, I am always glad to hear this little country praised. It has the great advantages of affordability, stability and beauty. I look forward to my new life there.
From: Margarita Palantnik, Uruguay It´s pleasing to read of our country as a haven of prosperity, especially as opposed to our richer neighbor across the pond. Yet, we need Argentina´s stability in order to consolidate any period of prosperity and avoid the boom and bust cycle dictated by its economy. Despite a recent increased "decoupling," we are still too dependent on Argentine tourists and investors to be able to shrug off another crisis. We will only be able to see how far we´ve come in separating ourselves from Argentina when their next crisis hits. The longer it takes to occur, the greater our hedge will be, in the form of increased Brazilian, European and American investment.
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