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Uruguay: Sunshine on the Eastern Bank

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Uruguay's economic revival is a boost for Latin America, by creating an oasis of stability in a region renowned for extreme volatility.

BY WALTER T. MOLANO


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 percent 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.

NEW DYNAMISM

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 percent of GDP in 2007, after peaking at 7 percent 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 percent in 2007, the lowest level in 18 years.
The government expects the unemployment rate to fall to 7.5 percent in 2008.

Unfortunately, the rapid growth rate and the increase in global food prices sent the inflation rate soaring. Consumer prices jumped 8.5 percent in 2007, much higher than the 4 percent to 6 percent target that was set by the central bank. Food prices spiked 20 percent y/y, and rents rose 10 percent y/y. Although the central bank was concerned about the increases in consumer prices, it widened the inflation band to 3 percent to 7 percent (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.

RE-ELECTION OF VAZQUEZ

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.

Walter Molano is head of research at BCP Securities.


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