Good news from Bloomberg on the economy ‘Re-Invented’ Uruguay Trades at Investment Grade on Brazil Ties2011-09-29 03:01:00.1 GMT By Lucia Baldomir and Bill Faries Sept. 29 (Bloomberg) -- Long vulnerable to periodic financial crisis in neighboring Argentina, Uruguay’s growing ties with Brazil and more diversified exports are prompting investors to bet the country is heading toward its first investment-grade rating since 2002. The extra yield investors demand to hold Uruguayan bonds instead of U.S. Treasuries is 288 basis points, or 2.88 percentage points. That’s less than investment-grade countries including Russia and Poland and above the 273 basis points investors demand for Peruvian debt, another investment-grade nation. Uruguay learned to diversify after Argentina’s $95 billion default in 2001 pushed the economy into recession and forced it to restructure $5 billion of debt in 2003. A $1.2 billion pulp and paper mill inaugurated in 2007 is boosting trade with Europe and markets are opening up in places like Turkey, where exports climbed 140 percent this year. The country’s banks, long a haven for foreign investors, depend less on Argentine deposits. “They have re-invented themselves, ” said Mauro Leos, an analyst at Moody’s Investors Service in a phone interview from New York. “They are one of the countries better prepared to handle the bad news.” President Jose Mujica, a former member of the Tupamaros guerrilla movement, has continued the market-friendly policies of the previous government, which won Uruguay three credit upgrades from Moody’s since 2006. While officials including central bank Governor Mario Bergara have said an investment grade rating is overdue, the government’s attention is now focused on cushioning the $44 billion agricultural and services- based economy from the global slowdown. Rate Cut? As in Brazil, where the central bank last month cut interest rates in the face of accelerating inflation, policy makers in Uruguay must decide at their quarterly meeting today whether to reverse the direction of monetary policy even with prices expected to rise 7 percent both this year and next. Florencia Carriquiry, an economist at Deloitte Montevideo Research, said Bergara has good arguments to leave the benchmark rate unchanged at 8 percent though a 25 basis-point cut is more likely. “It would be more cautious to pause and wait a quarter to see whether the market turmoil impacts the local economy or not, ” said Carriquiry in a phone interview. “But the central bank tends to assign more importance to a slowdown in activity than to inflation.” Eight of 11 analysts surveyed by El Pais newspaper expect the bank to leave borrowing costs on hold after it raised them 150 basis points at its two meetings this year. The remaining three are forecasting a rate cut after inflation reached 7.57 percent in August, above the upper limit of the bank’s target range of 4 percent to 6 percent. The five-member board will announce its decision after 4 p.m. New York time. Market Performance Moody’s rates Uruguay Ba1, one level below investment grade, putting the country in the same category as Guatemala and Morocco. Standard & Poor’s also rates them one notch below investment grade. The Uruguayan peso has fallen 0.8 percent this year to 20.05 per dollar compared with a 9.8 percent plunge in the Brazilian real and a 5.4 percent fall in the Argentine peso. Uruguayan government debt has returned 4.9 percent this year, more than the 3.5 percent for Brazil and 2.8 percent for Peru, according to JPMorgan Chase & Co. Maintaining Growth Officials are seeking ways to maintain 6 percent growth this year, as Uruguay’s small size and lack of competitiveness make it more vulnerable to global turbulence. “The convergence toward the target range will be gradual, it’s not going to be fast, ” Economy Minister Fernando Lorenzo told Sarandi radio in Montevideo Sept. 19. Sandwiched between Brazil and Argentina, Uruguay also suffers the effects of decisions taken by its bigger neighbors and partners along with Paraguay in the Mercosur trade bloc. Last week, El Pais reported that Effa Motors laid off 400 workers and closed its plant in San Jose after Brazil raised a tax on imported vehicles like the ones Effa assembles from China. On Sept. 27, after officials travelled to Brasilia to protest, the two countries reached an accord exempting Uruguay from the tax increase. Since Argentina’s 2001 crisis, Uruguay has lessened its dependence on Argentina. The share of total exports going south across the Rio de la Plata has declined by half from a 26.8 percent average between 1996 and 2001, according to Moody’s. Trade with Brazil rose 82 percent to $3.1 billion from 2006 to 2010 compared with a 46 percent increase with Argentina to $1.9 billion over the same period. Deposits by Argentines, who traditionally have taken advantage of Uruguay’s bank secrecy laws to evade taxes, have also shrunk to 15 percent of the financial system’s total, or $2.8 billion, from 40 percent in 2001, according to the central bank. Competitiveness While the country has made great strides, its economy must be able to compete at a global level, said Leos. The World Economic Forum this month ranked Uruguay 63rd on a list of 142 countries in terms of competitiveness, placing it behind countries including Iran, Mauritius and Sri Lanka. “In the context of Latin America, they appear pretty good, ” said Leos. “But what is relevant is the global comparison. If you are small you can be more flexible. They have to exploit the positive advantage of their small size.´´ | 
