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Uruguay: More of the Same

Uruguay’s President Jorge Mujica is following the wrong lesson from Brazil’s Lula.


It’s been almost a decade since Uruguay restructured its foreign debt, but today it is the toast of the town. Uruguay’s GDP growth rate in 2010 was almost 9 percent y/y, and it should exceed 6 percent y/y in 2011. The economy expanded 6.8 percent y/y during the first quarter of this year, and the unemployment rate dropped to a historical low of 5.4 percent at the end of 2010. The diaspora that robbed the nation of its most promising talent reversed, and many young people are seeking their fortune on the country’s verdant pampas. It now has one of the highest per capita incomes in Latin America, and a recent study by FGV considered it to have the most attractive investment climate of the region. Greece should take note of the benefits of debt relief and exchange rate adjustment. Unlike Argentina, which wrote off a massive amount of its external obligations, the Uruguayans offered investors a bond exchange which extended debt maturities. Moreover, it did so in an orderly manner, before missing any coupon payments or amortizations. The government also implemented a massive devaluation of the Uruguayan peso, resulting in a run on the banks and the collapse of several financial institutions. Nevertheless, the move allowed the economy to regain competitiveness and return to positive GDP growth. Today, Uruguay is one of the hottest investment destinations, with Brazilian, Chilean and Argentine investors bidding up the price of farm land and taking advantage of its other natural resources. Strategically located at the mouth of the River Plate, Uruguay has the potential to become a major logistics hub for the Southern Cone of Latin America. The favourable external environment for commodities is clearly propelling Uruguay ahead, but the country’s new political management is not doing anything to consolidate the gains by implementing more structural reforms—which mean that it is allowing a unique opportunity to slip away.

Last year’s election of President Jose Mujica marked a sharp turn to the left. Mujica was a former Tupamaros guerrilla who spent more than 14 years in prison (two of them chained to the bottom of an abandoned well). He was elected for his humble demeanor and liberal approach. The decision by former Finance Minister Danilo Astori to join the ticket as his running mate allowed Mujica to sweep into power. Like Ollanta Humala’s victory in Peru, Mujica styled his campaign on a Lula-type of approach, promising liberal social policies while wooing foreign investors. So far, the strategy seems to be working. The Uruguayan economic team was recently making the rounds in New York, trying to drum up support for the new Public Private Partnership (PPP) that aims to modernize the country’s infrastructure. The new program is seeking investments in energy, highways, ports, railroads and jails. Like Brazil and Peru, which also used PPP initiatives, Uruguay is hoping to improve the country’s output through the active participation of the private sector. However, upon closer inspection, the government is not doing much to revamp the country’s productivity.

The Mujica Administration is not taking any steps to privatize ANCAP or ANTEL, the two state-owned energy and telecommunications giants. Although the service quality of the two companies is decent, they are bloated institutions that sap government resources. Moreover, in private hands, the two companies would attract foreign investment and become regional player. The government also indicated that it has no intention of implementing any labor reforms, given the low unemployment rate. Yet, with the inflation rate approaching 9 percent, there is ample evidence of inefficiencies and bottlenecks in the Uruguayan economy. Political leaders across Latin America are taking the wrong lessons from the Lula Administration. They think that the secret to his success was the adoption of redistributive policies, the shelving of structural reforms, while pandering to Wall Street. Unfortunately, they are completely wrong. The key to Lula’s success was a combination of luck and low expectations. Lula came into power at the precise moment when China re-entered the global economic community and pushed commodity prices into the stratosphere. Moreover, Lula campaigned on a platform of nationalizations, default and breaking with the IMF. Fortunately, he did none of the above, thus gaining everyone’s appreciation. Nevertheless, he was able to coast on the favorable external environment and the enormous efforts of his predecessors. Lula-wannabes, such as Mujica and Humala, also inherited well-run economies and a favorable external environment, but doing “more of the same” means that their luck will evaporate as soon as external conditions change.

Walter Molano is head of research at BCP Securities.

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