Uruguay has a set of social, economic and political conditions that strategically place it as the main entrance to the Mercosur, the biggest market in the region.
During the last five years, this country has been through an accelerated process of economic expansion. With an average growth rate of over seven percent pa, it has become one of the most dynamic economies in Latin America, consolidating a sustainable model of economic growth and social development.
This excellent performance was achieved by highly qualified economic management, which has led the country towards growth and development, based on responsibility and balance.
The main factors that have allowed Uruguay to face unfavourable international conditions are: cautious macroeconomic policy, a search for balance in public accounts, responsible management of public debt, opening up its fiscal borders, stable and reliable political and legal environments and the existence of a healthy banking system.
Macroeconomic policy
The cautious management of the fiscal and monetary policies set a favourable scenario for the development of private investment, an essential driving force for sustainable growth.
Inflation has remained under control in spite of the great increase in the international price of commodities during the first half of 2008. On the other hand, the existence of a flexible exchange rate system provided the economy with a greater adaptation capacity when faced with external ups and downs.
Since the respect for fiscal balance was considered a key factor to assure the sustainability of the economic model, the average fiscal deficit of the last five years was below one percent.
The excess amount of public accounts offered a margin to adopt a set of anti-cyclical measures since the end of 2008 to palliate the negative impacts of external shocks and to face higher energy consumption due to an acute drought, maintaining the fiscal deficit at reasonable levels.
Public debt management
The competence of public debt management and planning reduced the vulnerability of the national economy, decreasing its external exposure through a strong reduction of the debt burden on GDP and the construction of a clear maturity horizon for the next years.
Thus, the scenario of the international credit contraction provoked by the crisis finds Uruguay with a record reserve level by the end of 2009 (USD 7.700m, 24 percent of GDP) and with a sustained growth.
An economic opening
The strong economic growth has been accompanied by a greater degree of economic opening, averaging 60 percent of GDP in the last five years.
The exports of goods and services reached their historical peak in 2008, exceeding USD 9.000m (28 percent of GDP). This performance, that in the last four years has implied the duplication of exports value in US dollars, was accompanied by an important process of diversification of destinations and also a sharp increase in the exports of services, which grew by 85 percent since 2005, and among which, software exports stood out.
This way and in spite of the strong contraction of international trade that provoked deep falls in world trade volumes, the value of the Uruguayan exports between January and September, 2009 decreased by only 14 percent compared to the same period of 2008.
Stable political environment
The political and juridical stability has been a characteristic of Uruguay that has distinguished it throughout its history as a trustworthy destination for investments and, therefore, a transparent and reliable juridical framework has been developed, with clear and equitable game rules for national and foreign productive capitals.
The investment regime includes free access to the exchange market and free repatriation of capital, allowing remittances to be made at any time, in any currency and without previous controls. There is also a series of tax exemptions and benefits for companies investing in the country.
As a result, the volume of foreign direct investment (DFI) has multiplied in previous years, exceeding USD 1.800m (six percent of GDP) in 2008. In the year ending June 2009, FDI exceeded the average of the last five years. At the same time, the total investment has registered a sustained increase of its share in GDP.
Banking system
The Uruguayan banking system has remained sound and liquid even in the middle of the collapse of international financial markets that led to the bankruptcy of some of the main world banking institutions.
Composed of a public bank (Banco República) and 13 first rate international banks, the Uruguayan banking system has remained healthy and with excellent solvency and liquidity indicators, due to a low grade of exposure to external turbulences and to the high quality of its assets.
Concerning solvency, the prudential regulations applied in the last years provided for requirements even more demanding than those recommended by Basle. As a consequence of this, the capital adequacy (Tier 1) was about 17.5 percent during 2009.
The liquidity of the institutions has reached levels higher than 60 percent. Thus the assistance of the regulatory authority has not been necessary.
Finally, as opposed to what occurred in other banking systems, the delinquency has remained extremely low (one percent) due to the high quality of the banks’ credit portfolio.
In short, the economic growth model adopted by Uruguay in 2005, based on solid pillars, has offered the country the possibility to successfully overcome the deep international crisis. While the economy has felt the impact of the worsening of external conditions, mainly due to the contraction of foreign trade and foreign investment, the annual GDP as of June, 2009 grew by 5.1 percent as for the same period of the previous year.
The recovery of the world economy and external demand, the return of investment flows, and the solid economic basis of the country allow to ensure that Uruguay will continue to show an ongoing and sustainable growth in the years to come.
For further information email: fernando.calloia@brou.com.uy
