Open for investmentUruguay has come a long way in the past 10 years, growing and diversifying its economy. Foreigninvestors have responded. Jason Mitchell reportsUruguay has become one of the most attractive countries in Latin 1. Real GDP growth, 2003-2011America for foreign direct investment during the past decade because of 03 04 05 06 07 08 09 10 11strong economic growth and a solid rule of law. 0.8 5.0 7.5 4.1 6.5 7.2 2.9 8.5 6.0The country - with a total population of 3.3 million - has one of the Source: Central Bank of Uruguay. For 2011 the figure is estimatedhighest rates of FDI against GDP in Latin America: in 2010, the overalleconomy was valued at $39.0 billion and total FDI amounted to $2.35 2. Unemployment rate, 2003-2011billion, giving an overall rate of 6%. Within Latin America, only Chile had 03 04 05 06 07 08 09 10 11a higher rate at 7.4%. Peru had a rate of 4.8%, Brazil 2.3%, Colombia 2.3%, 16.9 12.2 13.1 11.4 9.2 7.6 7.3 6.7 6.0Argentina 1.7%, Paraguay 1.5% and Ecuador 0.6%. Source: National Bureau of Statistics. Annual Average“As a proportion of GDP, Uruguay is investing much more today than itdid historically,” says Luis Porto, vice-minister of Economy and Finance. recent investment in that sector means that soya exports are also likely to“Today, the overall investment rate is around 20% while historically it pick up during coming years.was around 13% to 14%. FDI inflows have been a major contributor to ahigher investment rate. The goal is to increase that rate to around 25%.” Today, Uruguay has very much its own economic trajectory, quite independent from Argentina or any other Latin American country. ForOver the last decade, Uruguay has been transformed. Traditionally, the example, Uruguay has an inflation rate of around 8% while Argentina’scountry was seen by investors as an economic appendage to Argentina rate is at around 25%.but that is no longer the case. When Argentina experienced its economicmeltdown between 2001 and 2002, Uruguay was also particularly vulner- During the past decade, Uruguay has become a highly fashionable tour-able. At that time, around 45% of bank deposits in Uruguay belonged to ist destination (the total number of foreign visitors jumped to 3.5 millionArgentines, today the figure is only around 15%. Argentina was also one last year from 2.1 million in 2005). For many decades, Punta del Este,of the country’s most important export market but today Uruguayan the country’s main resort, was a well-known playground for the rich butexports to Argentina account for only 7.3% of its total goods exports during the past 10 years many more visitors from around the world have(nowadays, 20.3% are destined to Brazil and 8.3% to China). come. Uruguay is one of only 10 countries in the world that receives more foreign visitors annually than its resident population. Many foreigners,Changing economy especially Argentines and Brazilians, have bought holiday homes in PuntaDuring the past 10 years, Uruguay has diversified its economy dramati- or neighbouring resorts such as La Barra and Jose Ignacio.cally. It used to be one of the main offshore financial centres for the restof Latin America, especially rich Argentines and Brazilians. That industry However, it’s not only Punta that is becoming more attractive to tourists:is far less important to the country than it once was. Agriculture has been many new hotels are opening up in Montevideo. Colonial hotels that fellthe backbone of the economy for decades and Uruguay has made big into disuse are being restored to their former glory. For example, Sofitel,strides in increasing its agricultural exports - especially meat and dairy the luxury French hotel group, is bringing back to life a grand hotel nearproducts - during the past few years. The country has moved up the sup- the beach in the upmarket Carrasco neighbourhood of the city. This willply chain and its companies export a lot of ‘gourmet’-type produce today. be the most luxurious hotel in Uruguay, if not the region, when it opensSoya plays a less important role in the economy than in Argentina but later this year, and will feature 116 rooms and include a casino and spa. Colonia del Sacramento, a small city in the south west, by the River Plate, facing Buenos Aires, has also taken off during the past 10 years. It has a beautiful historic quarter, which is a World Heritage Site, and many Uru- guayans and Argentines now have holiday homes in the city. A construction boom is also under way in Montevideo - whose greater metropolitan area has a population of 1.8m people. Many new office building and residential blocks are being built. The city’s charming his- toric centre is carefully being restored. Pulp and mining Between 2005 and 2007, Botnia, a Finnish paper producer, invested $1.2 billion in a pulp mill at Fray Bentos on the River Uruguay, which divides the country from Argentina. At the time, this was the biggest foreignUPM pulp mill in Fray Bentos investment ever in Uruguay. The annual capacity of the mill is 1.1 million
tons of eucalyptus pulp for which the mill uses around 3.5 million cubic says Jean Shaw, vice-president of global customer support at Sabre Hold-metres of eucalyptus wood. In December 2009, Botnia sold its interest in ings, a global travel technology company headquartered in Southlake,the plant to another Finnish pulp producer, UPM. Texas, which already has more than 900 employees in Uruguay but is expanding further. “There are a lot more cars on the roads, for example.Today, Montes del Plata, an Uruguayan pulp producer 50:50 owned by The country attracted our business here eight years ago because of theChilean forestry group Arauco and Swedish-Finnish forestry company high level of education and talent. That is one of the main factors thatStora Enso, is investing $2 billion in a new pulp mill at Punta Pereira, a free continues to bring investors to Uruguay.”trade zone in the department of Colonia, 190km west of Montevideo.The plant will produce 1.3 million tonnes of pulp a year, and it will have a Uruguay is a beautiful country: it has 500km of beaches, often consisting160MW biomass-based power generation unit. of white sand and clear and pure blue seas. Even the capital, Montevideo, has beaches - such as Pocitos and Carrasco - right on its doorstep. MostThe project also includes a river port terminal and barge terminals with of the coastal cities - including Montevideo - have a rambla, or an avenueyards for wood storage, as well as a wood chip plant. The eucalyptus that runs parallel to the beach. An important part of the Uruguayan wayplantations that will feed the mill are located throughout Uruguay. of life, they are popular with walkers and joggers.Minera Aratirí, the Uruguayan subsidiary of Anglo-Swiss mining group Uruguay has a total geographic area of 176,215 sq km, greater thanZamin Ferrous, also plans to invest $3 billion in open-cast iron ore mines England and Wales combined. A lot of the interior of the country consistson the border of Durazno, Florida and Treinta y Tres departments, in the of rolling, green landscape. International Living magazine regularly ranksgeographic centre of the country. The project - which could have some Uruguay number one in Latin America for the quality of life.environmental impact - has not yet received the go-ahead from thegovernment. The country is also rated highly be a number of international organisa- tions. The IFO-Getulio Vargas Economic Climate Index ranked UruguayIt would involve the construction of a plant, a pipeline, pumping stations second in Latin America (behind Chile) in its January 2012 survey. Trans-and the country’s first deep-water port. Aratirí would extract magnetite, parency International ranked it in 25th place worldwide on its rankingwhich has a high iron content. Reserves of 250 million tons have been of least corrupt countries in 2011 (only Chile had a lower ranking withindiscovered but it is estimated that they could surpass 1.1 billion tons. Latin America). The Economist Intelligence Unit ranked it in 17th place on its Global Democracy index in 2011, the best rating for any LatinUruguay is also building up an important business in logistics. The American country. According to the 2011 Legatum Prosperity Index,country is gradually becoming the distribution centre for the Mercosur Uruguay is the 29th most prosperous country in the world, first in Latintrading bloc zone, with the port of Montevideo as the hub port for the America and third in the Americas, behind Canada and the Unitedregion. Last year, the port handled 518,120 containers, a 28% increase on States. The Heritage Foundation ranked Uruguay in 29th position onthe 2010 volume of 405,593 containers, according to Uruguay’s National its economic freedom index globally in 2012 - only Chile beat it in LatinAdministration of Ports. America.During the past decade, a large number of multinational groups have Uruguay also treats domestic and foreign investors equally. Invest-opened regional or global customer service centres in the country. They ments do not require prior authorization or registration and there is freehave taken advantage of Uruguay’s highly-skilled labour force, which transferability of capital and profits. Investment projects may qualify forincludes a large number of graduates bilingual in Spanish and English. corporate income tax rebates ranging from 51% to 100% of the amountOutsourcing has become one of the main drivers of the services sector in invested.the country. Uruguayans are also highly computer literate and softwaredevelopment is a growing industry. Uruguay has created a diversified, modern economy in the past decade. The country is efficiently managed and the government sets great storeQuality of life by maintaining the rule of law. This is one of the main reasons why it has“Uruguay has become much more prosperous during the past five years,” been so successful, and will cotinue to be, in attracting FDI. 3. Global fiscal and primary results, 2003-2011 4. Global and Net debt, 2003-2001 4 120 Global fiscal result Global public debt Primary result Net debt 2012 Guide to Uruguay 100 2 80 Percentage terms of GDP Percentage terms of GDP 0 60 40 -2 20 0 -4 2003 2004 2005 2006 2007 2008 2009 2010 Sept. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 Source: Ministry of Economy and Finance Source: Central Bank of Uruguay 3
Reduced vulnerabilities,increased confidenceQ: what are the most successful aspects of theUruguayan economy today?The country has experienced nine years of growth above the average ofLatin America and overall rates of expansion during the period have beenmuch better than during Uruguay’s history.Exports of goods has been the main motor of economic growth. Thishas created a lot of employment opportunities. The strong fiscal stabilityhas been one of the economy’s main anchors. Debt against GDP is lowcompared to other countries and this means that the economy has noreal vulnerabilities.The sovereign does not have to re-pay much debt during the next fouryears and the markets now allow it to issue debt with a average time tomaturity of more than 12 years at favourable rates. Finance and Economy Minister, Dr Fernando LorenzoQ: how has the economy progressed during the pastdecade? because of the excellent business opportunities in the country. ThereUruguay has taken full advantage of the favourable international envi- really are many opportunities in many sectors, in many activities. Theronment for its exports during the past decade and it has been careful to government is committed to ensuring that the best possible businesscreate credibility for its macroeconomic policies. climate exists in the country. That is one of the reasons we have pursued such a prudent macroeconomic policy. The country has had a very longUruguay has reduced its vulnerabilities markedly during the past decade. tradition of a strong rule of law and that is of utmost importance forIt’s economy is much more diversified today. We have seen an inter- foreign investors.nationalisation of the economy. Important sectors include software,outsourcing, logistics and tourism. The country has maintained a strong The current level of industrial action in the country is much lower than itrule of law and that has strongly encouraged foreign direct investment. experienced in the Nineties. There are some disputes today but these are limited to the public sector and have little impact on the private sector.Q: what challenges does the economy face today? There has been a transformation in the administration of the public sec-One of the short-term challenges is to confront problems at the interna- tor and this has greatly improved its efficiency.tional level, especially in relation to events in the eurozone. However, thecountry should be able to do this easily in the same way that it coped Q: why is Uruguay viewed favourably by the markets?with the international crisis during 2008 to 2009. The financial markets have a favourable view of Uruguay because economic policy has been conducted well during the past 10 years, theIn the longer term the country faces two major challenges: firstly, there government has completed all its main economic goals, and the state hasmust be massive investment in infrastructure to help business develop- respected the rule of law completely. The markets have been impressedment throughout Uruguay; and secondly, there has to be a rise in worker by the evolution of the country’s sovereign debt during the past decade.productivity and an increase in human resources. Improved training is The debt burden has become much more manageable.key to this. Q: when do you think the country will achieveThe government estimates that economic growth will be 4% this year investment grade?and that level should be sustainable in future years. Currently, inflation Uruguay has been waiting a long time for investment grade. However, Istands at around 8% but the Central Bank has a target of 4% to 6%. One think the country will achieve it sooner or later, it is only one notch belowof the country’s main objectives this year is to ensure that inflation is it now. The ratings agencies take many criteria into account but the truthbrought within or closer to the target range. is that Uruguay’s economic fundamentals are better than those of some Latin American countries that already have investment grade. They areQ: why is Uruguay an attractive destination for foreign also better than some European countries with investment grade. Thedirect investment? economic dynamics are important, economic growth has not started toUruguay has been attracting a lot of FDI and will continue to do so flatten out.
Uruguay can already issue sovereign debt at favourable rates and even atrates below countries that have investment grade. The markets are acting Dr Fernando Lorenzo, biographymore quickly than the ratings agencies. The importance of achievinginvestment grade should not be over-estimated but it would help the • Finance and Economy Minister, since 1 March 2010.country to access international markets if there was a deterioration inthe international outlook and less global liquidity. During turbulent mo- • Economist, graduated from the Faculty of Economics Sciences andments, markets differentiate between those countries with investment Business of the University of the Republic of Uruguay in 1984.grade and those without - that is why it is very useful to have it. Uruguayand its people have made a huge effort to improve the economy during • 1985, Diplome d’Etudes Approfondies en Economie et Financesthe past 10 years. There has been a decade of sacrifice. It would be good Internationales at the University of Paris IX-Dauphine.to see that rewarded with investment grade. • 1997, Ph.D. in Economics from University of Carlos III in Madrid.Q: what are the main infrastructure projects plannedfor the country? • 2005-2008, director of macroeconomic and financial advisory at theWe are planning many new infrastructure projects in all the main areas, Ministry of Economy and Finance, Uruguay. 2005-2008including energy and transport. We have been considering strongly newsources of renewable energy. We want to become more inter-connected • Former director of trade policy advisory at the Ministry of Economywith Brazil, so that that country can provide us with more electricity. We and Finance, Uruguay.are also looking at how we can use more liquefied natural gas and thatwould involve the development of a re-gasification terminal. We also • Since 2009, President of Network of Economic Research of Mercorsur.want to improve energy efficiencies and we are encouraging people touse less energy. • National and international consultant on economic and financial subjects.In terms of transport, we plan a major upgrade of the highway network.Many existing roads will be improved. We are also looking at rehabilitat- • 2006-2008, Director and researcher at the Centre for Economicing the railway network, which has fallen largely into disuse during the Research (CINVE-Uruguay).past few decades. We also want to ensure that Uruguay has the fastestinternet connection available, the best broad band on offer. • Author of publications and reseach about macroeconomy, trade and international finance, and quantitative methods applied to theThe state has a plan for infrastructure and it will invest as much as it can economy.afford. It is important that the state creates the right framework for thedevelopment of infrastructure projects. We are also examining carefully • Teacher in post-graduate studies in economy at the Economicthe feasibility of private participation in infrastructure or PPI projects. One Department of the Social Sciences Faculty (University of the Republic,of the biggest challenges is to ensure that infrastructure is maintained Uruguay) and of the University ORT (Uruguay).and remains of a high quality. We are considering all types of agreementand mechanisms with private sector involvement. Perhaps the statecan guarantee a project in some way and that can help to ensure that itreceives long-term financing. Uruguay offers many competitive products. Soya has not been such an 2012 Guide to Uruguay important export for Uruguay compared to Argentina, say. Cattle is veryQ: has the eurozone crisis impacted upon Uruguay important to the Uruguayan economy - the country has more than 15min any way? how would a double-dip recession in the ha of cattle-grazing land. Wool and dairy products are also significantdeveloped world and/or a significant slowdown in parts of the economy. Natural resources are also playing a more impor-China impact upon Uruguay? tant role.The main consideration for Uruguay is what happens in the principalAsian countries, China and India. They are important export destinations Uruguay has a very open economy. However, the country today is in afor us. Also, what happens in the two other BRICs, Brazil and Russia, is of much better position to absorb external shocks. Many of the country’smajor concern to us. Obviously, Brazil is a giant neighbouring country but former vulnerabilities have been removed. We saw this during the 2008Russia is one of the bigger importers of our meat, as well. During the past to 2009 period, when the country emerged pretty much unscathed. Thisdecade, Uruguay’s economy has expanded more rapidly than Brazil’s. is because of all the hard work we have done over the years. 5
Uruguay rises 10 places inEuromoney’s country riskratingsEconomists’ sentiments sharply improved in 2011 as Uruguay scored highly across a range of political,economic and structural indicators. Above-average scores indicate the country has good grounds toexpect an upgrade from the rating agenciesIn the latest results of Euromoney’s Country Risk ratings (ECR), economists that several investment grade countries including India, Croatia, Russiaresponded to Uruguay’s strong growth prospects and the continued and Hungary are ranked alongside Uruguay in the ECR system. Indeed,reform agenda of its policy-makers by awarding the country improved Uruguay receives a higher score from economists than four countries withscores across a range of political, economic and structural risk metrics. As investment grade ratings: Morocco, Tunisia, Barbados and Kazakhstan.a result, Uruguay climbed 10 places in Euromoney’s risk rankings during2011, to 65th globally. A comparison with Uruguay’s BB-rated peer group provides additional evi- dence in Uruguay’s favour. Uruguay receives consistently higher (ie, moreKey drivers behind the improved risk ranking included higher scores in the favourable) scores for economic, political and structural risk than the aver-survey categories for bank stability, monetary policy/currency stability and age score for BB-rated sovereigns, outscoring its peer group in 13 of ECR’semployment. While the results were in keeping with the positive economic 15 qualitative variables. In both the economic and structural sections,trends observed in the aggregated scores for Latin America, they indicate economists award Uruguay scores in line with the average for sovereignsan improved level of confidence among analysts in both Uruguay’s macro- with a BBB rating (structural risk categories include demographics, hardprudential regulatory framework and the monetary policies pursued by and soft infrastructure and labour market/industrial relations).Uruguaythe central bank. The improvement drove an overall increase of 1.3 points also outperforms its peers in the political risk section, where Uruguay’sin Uruguay’s economic score (out of 100). score is five points higher than the BB average. Uruguay’s score for corrup- tion is favourable and is the region’s second best, after Chile.The survey results also revealed a sharp improvement in economists’ viewsof the levels of political risk posed to investors in Uruguay’s economy. However, several areas continue to drag on Uruguay’s overall rating.Survey scores in the categories for regulatory policy, information access/ Uruguay’s score in the access to capital indicator undershoots the BB aver-transparency, government stability and the risk of government interfer- age, suggesting that further efforts are required to attract internationalence/non-repatriation of capital have all seen substantial improvements in investment. Increased transparency in the banking sector is necessary tothe past twelve months. The improvements, which coincide with the con- improve Uruguay’s score for bank stability, a key metric in the economictinued growth of foreign direct investment in the country in recent years, survey, where the country marginally undershoots the BB average. Uru-point to the renewed credibility of Uruguay’s state institutions, corporate guay’s below-average score in the monetary/policy currency stability sec-governance and legal framework in the eyes of international investors. This tion illustrates that Uruguay’s inflation rate, which remains above target,assessment is consistent with Uruguay’s improved score in ECR’s access to continues to be a concern.capital markets indicator, which rose sharply during 2011. Given Uruguay’s strong GDP growth outlook, it is likely that its economicIn global terms, Uruguay’s overall country risk score places the country in scores will continue their upward trajectory in 2012. A further positive shiftthe third tier in ECR’s five-tier system. Typically, Tier 3 countries are emerg- in market perception towards Uruguay, as measured by ECR’s access toing economies with improving structural characteristics and stable politi- capital markets section, would significantly improve Uruguay’s country riskcal systems. The country’s ECR score, the eighth highest in Latin America, score, and bring the country’s overall score into line with the average forranks Uruguay alongside established borrowers in the international capital investment grade sovereigns.markets including Romania, Bulgaria, Jordan and the Philippines. Five analysts take part in Euromoney’s Country Risk survey for Uruguay:Given the continued debate surrounding the hesitancy of the credit rat- Andrea Keenan (AM Best), Victoria Marklew (Northern Trust), Nicole Perel-ing agencies to award Uruguay an investment grade rating, it is notable muter and Guillermo Diaz (CAF) and Philipp Mayer (Erste Group). Uruguay: outperforming its rating peers ECR Economic Political Structural Debt Credit Access to capital score (100) (100) (100) (100) indicators (10) ratings (10) markets (10) Uruguay 50.3 55.8 51.5 55.8 5.0 3.8 3.8 BB Average 45.1 48.7 46.8 43.6 4.2 3.2 4.7 Source: ECR, Standard and Poor’s (December 2011). Credit rating score is derived using the average of Fitch, S&P and Moody’s rating for each country.
Towards investment gradeSince its debt crisis in 2003, Uruguay has built up a reputation as one of Latin America’s most prudentand consistent sovereign borrowers. Ratings agencies have taken noticeInternational financial markets are already factoring in that Uruguay will of more than 30 major institutional investors from the US, Latin Americaachieve investment grade soon. The credit ratings agencies are expected and Europe.to grant the sovereign this status this year. Secondly, between 5 and 9 December, it repurchased $1 billion equiva-On 26 January, Moody’s revised its rating outlook to positive from stable lent of short-dated dollar-denominated and euro bonds. This involvedfor the Ba1 rating of the government of Uruguay, because of a steady im- a fixed price cash tender offer and the foreign exchange bonds wereprovement in Uruguay’s sovereign credit profile. It says that the govern- bought at their market value.ment has shown a strong and continued commitment to fiscal discipline,which has resulted in moderate fiscal deficits and better debt metrics. Thirdly, the transaction extended the maturity of $725 million equivalent 5% global UI bonds, due in 2018, by exchanging them for the new 2028Currently, Moody’s ratings of the government of Uruguay are Ba1 as long- global UI bond. The exchange offer had a 53% success rate.term issuer (domestic and foreign currency), Ba1 for senior unsecured(domestic and foreign currency) and (P)Ba1 for senior unsecured shelf On 12 December, after the successful completion of the exchange, the(foreign currency). sovereign took the fourth step of expanding its global UI 2028 offering by $275 million equivalent new cash, also issued at par price with 4.375%“Along with an enhanced ability to manage adverse economic and coupon.financial conditions, the government’s credit profile has been improv-ing gradually -- but steadily -- moving closer in line with that present Overall, the transaction - which involved Uruguay’s first global bond sincein higher-rated sovereigns,” says Mauro Leos, a senior credit officer at 2009 and the first UI bond since 2007 - meant that the republic increasedMoody’s, clearly indicating that the sovereign is being considered for an the proportion of the central government’s Uruguayan peso-denomi-upgrade. nated debt to 49% of the total amount of debt. The average maturity has also increased to 12.3 years.On 30 January, Moody’s changed to positive from stable the outlookfor the Ba2 long-term global foreign currency deposit ratings of Banco Warm welcomeSantander, Banco Itaú and Lloyds TSB in the country. It also changed “I think rating agencies will look favourably on the recent funding andthe outlook to positive from stable of the Ba1 and Aa2.uy foreign cur- liability management transaction pursued by the republic, as it furtherrency deposit ratings of the two government-owned banks, Banco de reduces currency risk while extending the average life of the sovereign’sla República Oriental and Banco Hipotecario, on its global and national debt profile, already one of the longest in the region,” says Juan Pabloscales, respectively. Gallipoli, a vice-president in debt capital markets at HSBC.Reducing vulnerabilities “The deal was well received by real-money accounts and, through theThe credit rating agencies say that the sovereign has not yet achieved combination of the new issue and exchange components of the trade,investment grade because of some underlying vulnerabilities embed- resulted in the creation of the largest local-currency benchmark for theded in the government debt structure, mostly relating to the share of sovereign. It is also one of the largest local-currency bonds in globalforeign currency-denominated debt. However, the government has been format for the region and brings additional visibility and liquidity tomaking a big effort to reduce these vulnerabilities through recent liability Uruguay’s peso curve.management operations. “While the overarching liability management transaction was complex,Between 5 and 15 December, Uruguay issued a $2 billion equivalent including the sovereign’s first peso-to-peso exchange, the investmentglobal UI bond, a local currency, inflation-indexed bond maturing in decisions made by holders were very straightforward, a factor that con-2028. With Citi and HSBC acting as joint bookrunners, the issue createda new benchmark for the sovereign and the offering represented one of The evolution of Uruguay, Latam and Global EMBI 2010-2012 2012 Guide to Uruguaythe largest local currency bonds ever issued by a sovereign in the region. 500 EMBI GlobalIn a testament to the extent to which the financial markets now respect 450 EMBI Uruguay EMBI Brazil EMBI Peruthe sovereign, the issue was able to proceed successfully despite the 400 EMBI Colombiaextreme turbulence in international markets at the time. 350 300The offering’s main goals were to reduce foreign currency borrowings 250to a lower risk level and to support the credit rating; to extend portfolio 200maturities; and to raise incremental cash to pre-fund possible 2012 cash 150needs. It achieved these objectives in four steps. First, on 5 December, it 100 01/2010 04/2010 07/2010 10/2010 01/2011 04/2011 07/2011 10/2011 01/2012raised $1 billion equivalent in new benchmark 2028 global UI bonds, witha coupon of 4.375%. The final, oversubscribed order book was made up Source: Bloomberg and JPMorgan 7
tributed to deliver high participation rates for the trade, especially for the made this move because of improvements in its external and fiscal sol-sovereign’s top priority targets.” vency ratios, strengthened external liquidity, and the enhanced currency composition and maturity structure of government debt. High GDP perHe adds that it is healthy for a country to align the currency composition capita income, strong social indicators and a solid institutional frame-of its debt stock with that of its revenue profile, as Uruguay has consist- work underpin Uruguay’s creditworthiness.ently aimed to do. Fitch adds that growth performance and outlook remain quite favour-Azucena Arbeleche, director of the debt management unit at Uruguay’s able. Its five-year average growth increased to 6.2% in 2010, consider-Ministry of Finance, says: “The country has a very conservative and very ably higher than the BB-graded median over the same period. Reducedcautious approach to debt management. Uruguay has built up a strong trade and financial links with Argentina make Uruguay less vulnerable tofinancial cushion, which means it can easily run counter-cyclical policies”. economic developments in its neighbour, it says.“We don’t really understand why credit ratings agencies feel that the Prudent and consistenteconomy still has some vulnerabilities. During the past decade, we have In 2003, Uruguay suffered from a severe sovereign debt crisis, largelyworked very hard to improve the country’s economic fundamentals. Our brought about by the country’s past dependence on Argentina, whichstrong financial cushion means that we can be very opportunistic in the itself experienced an economic meltdown between 2001 and 2002. How-international markets and only have to tap them when we see a clear ever, since that time, it has built up a reputation as one of Latin America’swindow. Sometimes we do it to preserve our dollar yield curve.” most prudent and consistent sovereign borrowers. Since 2003, it has lowered its overall cost of funding across currencies and instruments, andMoody’s says that there are other factors behind the country’s positive improved the republic’s credit ratings markedly.credit outlook, including sustained economic growth supported by struc-tural aspects that have consolidated the medium-term potential growth In May 2003, the sovereign rescheduled $5.1 billion of debt, whichprospects; improved government financial buffers, supported by an helped to eliminate any financing gaps until 2005. The voluntary ex-ample Central Bank cash reserve; a transition towards a more diversified change - which was open to holders of Brady bonds, eurobonds, samuraiexport structure; and a track record of policy continuity, coupled with bonds and domestic securities - had a 93% participation rate.enhanced policy predictability. In February 2006, Uruguay pre-paid $430 million of extraordinary loansThe ratings agency says the external environment is likely to be char- from the World Bank and Inter-American Development Bank. In Augustacterized by an extended period of low global growth and persistent and November 2006 Uruguay made two prepayments to the IMF of ap-global financial turmoil in the short term. It says that Uruguay - as well proximately US$916 million and US$1.1 billion, respectively, thereby dis-as the rest of the region - is likely to be tested during the next year to 18 charging all outstanding obligations to the IMF. In October 2006, it issuedmonths. This creates an opportunity for it to assess the country’s credit an aggregate principal amount of $602 million of 8% bonds due 2022resilience to see if it is comparable to that typically associated with invest- and an aggregate principal amount of $277 million of 7.625% bonds duement grade-rated sovereigns. 2036. It tendered $275 million.In July, Standard & Poor’s upgraded Uruguay’s rating by one notch to In December 2007, it conducted a global offering, which involved theBB+, only one notch below investment grade. “The upgrade on Uruguay purchase of $116 million out of $435 million eligible in dollars and euros.incorporates its growing track record on the implementation of prudent It also had a local offering, whereby $74 million was purchased out ofand consistent economic policies,” said Sebastián Briozzo, a Standard & $401 million eligible and $50 million UI equivalent was purchased out ofPoor’s credit analyst, at the time of the upgrade. $1.1 billion UI equivalent that was eligible.Last July, Fitch also upgraded Uruguay’s long-term foreign currency In June 2008, three concurrent exchange offers took place, targetingissuer default rating to BB+ from BB, reflecting the agency’s opinion that more than $2.9 billion of bonds and resulting in the extension of aroundUruguay’s external and fiscal vulnerabilities had reduced. It says that it $800 million of multi-currency external and domestic debt. Uruguay central government debt risk indicators 2004 2005 2006 2007 2008 2009 2010 2011 Roll Over Risk Average maturity (yrs) 7.4 7.9 12.1 13.6 13.0 12.7 12.3 12.3 % debt due in one year 11.3 16.0 4.8 2.9 2.3 3.6 5.5 2.4 Liquid assets CG/amortization due in 1 year 0.3 0.3 0.4 0.7 1.6 1.4 0.7 4.0(1 Interest Rate Risk % debt that refixes rate in 1 yr 32 34 22 18 20 11 15 6.4 Average time to refix (yrs) 4.9 6.6 11.1 12.3 11.9 12.0 11.3 11.7 Duration (yrs) 5.6 8.0 8.9 10.5 9.9 10.3 10.4 10.2 % debt with fixed rate 77 78 82 83 81 91 88 94 Foreign Currency Risk % local currency debt 11 11 15 26 28 31 34 49 Source: Debt Management Unit, Ministry of Economy and Finance (1) Amortizations of the next 12 months starting in December 2011
FDI set to stay at record levelIn the past 10 years, Uruguay has become a key destination for FDI, attracted by the country’s richhuman and natural resources and stable political environmentUruguay’s fast-growing economy has attracted record levels of foreign foreign groups to the country, including the solid rule of law, tax and fis-direct investment and is expected to attract a similar level this year. cal incentives, and the stable social and political environment.”Between 2004 and 2011, the economy expanded at 6% a year and the The country has attractive free zone, free port and free airport regimes,government is forecasting that it will grow by 4% this year (independent and broad investment-related tax exemptions. It also provides access toeconomic consultancies estimate growth will be in the region of 5%). FDI Mercosur, the free trade zone including Argentina, Brazil and Paraguay,inflows in 2010 stood at around 6% of GDP and it is estimated that they which has a total GDP of $2 trillion. The country offers the best labourreached a similar level last year. value for money in the region and has a convenient time zone between the US and Europe. It has world-class free port facilities in Montevideo,Huge investments - such as one of $2 billion by Montes del Plata, the the strategic regional hub for South America’s southern cone.pulp producer 50:50 owned by Chilean forestry firm Arauco and Swedish-Finnish forestry group Stora Enso - should help to boost FDI rates to even “Salaries have increased markedly in Uruguay during the past decade,”higher levels in the future. adds Villamil. “However, remuneration packages for chief executives, chief financial officers and middle management are lower than those in Brazil,Domestic investors lead the way Argentina and Chile.”FDI inflows have consolidated investment by domestic companies, whichhas pushed the investment rate up to around 20% of GDP from a historic Up to 450,000 Uruguayans live overseas - including an estimated 116,000 “A number of factors are attracting foreign groups to the country, including the solid rule of law, tax and fiscal incentives, and the stable social and political environment”level of around 14%. In January, Ancap, the state-owned oil company, in Argentina - but many are returning home because they perceive manyannounced plans to invest $330 million in the modernization of an oil economic opportunities in the country.refinery at La Teja, a neighbourhood of Montevideo. It expects to havefour new highly efficient and environmentally-friendly refining units up Back to the soiland running by the second quarter this year. An example of a highly successful local business is Union Agriculture Group, a diversified agricultural company founded in 2008. The com-Between last year and 2013, Antel, the state-owned telecommunications pany started with only 6,000 hectares of land but now owns a total ofcompany, plans to invest $180 million in fibre-optic cables throughout 95,000ha. It is among the top five land owners in the country and is thethe country, providing much faster internet connections. By September only one of the five that was set up by Uruguayans (big Argentine groupslast year, it had already invested $30 million of the total and some 85,000 are important landowners). It plans to list on the New York Stock Ex-homes, mostly in the capital, had high-speed access. The investment change this year and will become the first Uruguayan company to do so.should raise the speed of transmission from 14.4 megabits a second - the 2012 Guide to Uruguayfastest possible through copper cables - to between 50 and 100 Mbit/s. It “If you want to invest in farmland, Uruguay is the place to go,” says Juanexpects to invest $100 million in the new technology this year, so that a Sartori, UAG’s executive chairman. “The country has a high level of secu-further 240,000 homes have access to fast internet. rity. It is the only country in the region where there are virtually no restric- tions on agricultural exports. Brazil and Argentina were the first countriesModernizing the economy in the region to embrace more intensified agricultural production. We are“Uruguay has been attracting foreign investment from companies starting to catch up.”around the world,” says Roberto Villamil, executive director at UruguayXXI, the country’s investment and export promotion agency. “State- He says that in 2003 only 10,000ha of land in the country was plantedbacked companies themselves are heavily investing in new infrastructure with soya beans but that by 2010 that level had reached 1 million ha.and, combined with the foreign direct investment, this is helping to However, the country has the potential for up to 6 million ha to bemodernize the Uruguayan economy. A number of factors are attracting planted with the crop. 9
overseas sales from their countries with direct loans for capital goods - Current account and Foreign direct investment, 2003-2011 have also helped. The fact that the pulp mill was granted free zone status, 8 providing important tax relief, has also been a huge advantage. Current account 6 Foreign direct investment The pulp mill - at Conchillas, in the Colonia department, on the River 4 Plate - is only 250km from the eucalyptus forests. This will help to keep Percentage terms of GDP 2 transport costs down. 0 Human resources -2 UPM - the Finnish forestry group that took over control of the huge pulp -4 mill at Fray Bentos from another Finnish group, Botnia, in December 2009 - says that human talent was one of the factors that lured it to Uruguay. -6 2003 2004 2005 2006 2007 2008 2009 2010 Sept. 2011 Source: Central Bank of Uruguay “The country has excellent human resources,” says Alberto Brause, direc- tor of corporate relations and business development for Latin America at UPM and a Uruguayan who used to live in the US but returned to theUAG produces a range of crops - including rice, soya and wheat - on a country because of the employment opportunities. “When Botnia firstrotation basis to preserve the quality of the soil. The land is also used for invested in the pulp mill it sent staff out from Finland to train locals butcattle grazing as part of the rotation cycle and to ensure that it is 100% they were surprised at just how quickly Uruguayans picked up the skills.utilised. Uruguay is now sending experts to Finland and we even send them to Africa when we are considering projects in that continent.”The company plans to list 20% of its equity in New York and expects toraise around $200 million. Since 2008, it has raised $350 million from UPM employs 3,400 staff directly in the country, including 500 universityinvestors around the world - mostly family offices or high-net-worth graduates. Some 400 of its staff work in laboratories or research andindividuals - who took equity stakes in the business. development.“We are holding off the listing at the moment until market conditions The Uruguayan government believes there are many opportunities forimprove,” says Sartori. “We are all ready to carry out the IPO but we want foreign companies in private participation in infrastructure (PPI) projects,to do it at the right moment when valuations have recovered. I hope we either through the construction of the projects or through managingwill set an example for other Uruguayan companies that want to come them post-construction. The country is embarking on major infrastruc-to the market in the future. The Montevideo stock market is quite illiquid, ture projects in new roads, railways, ports, prisons and social housing. Theso New York presents a good alternative. I believe we will see many more government has set an upper limit of the net present value of its financialhigh-quality companies from the country - which of course are of an ap- obligations of 7% of GDP and annual payments to the private partnerpropriate size - seek a listing in the future.” cannot exceed 0.5% of GDP.Montes del Plata says it was attracted to Uruguay mostly because of its It says that some 2,000km of new roads are being considered but theirnatural setting, the excellent political and economic environment, and development would be over a 20- to 30-year period. It would like to up-the country’s strong economic performance. It says it only takes 10 years grade the country’s ports so that they are suitable for larger ocean-going “Parties on the left and the right all recognize the importance of maintaining the rule of law. The country has had the right macroeconomic policy for a long time now”to harvest eucalyptus plantations in the country because of the high soil vessels. The potential investment ranges in size from $400 million to $1quality; in other countries with poorer soil conditions it can take much billion, depending on how the ports are modernized. The governmentlonger. says the railway network is now antiquated and has high maintenance costs. It would like to revamp and expand the whole network. A new“The high-quality soil provides a big production advantage,” says Erwin prison will entail an investment in the order of $220 million.Kaufmann, general manager at Montes del Plata. “However, the politicalenvironment is also important - parties on the left and the right all recog- Uruguay has become one of the most attractive destinations for FDI innize the importance of maintaining the rule of law. The country has had the Americas during the past 10 years. The country has a high quality,the right macroeconomic policy for a long time now. It is also reassuring educated work force that still offers labour value for money. The govern-to know that it will continue to move in the right direction.” ment is one of the most business-friendly in Latin America and sets very few restrictions on exports. The free zone regimes have created a power-The company is financing the construction of the mill from its own funds, ful incentive for foreign investors and the country is expected to receiveas well as international loans. European export agencies - which support even greater sums in FDI in the future.
Roundtable: Uruguayan financial leaders Q: what was Uruguay like after the financial crisis in Argentina between 2001 and 2002? What was Roundtable participants BROU like at that time? Fernando Calloia: The financial crisis in Argentina had a very big • Fernando Calloia, president, Banco de la República Oriental del impact on Uruguay, because at that time many Argentines had bank Uruguay (BROU), the country’s main state-owned bank deposits in this country. The country is much less dependent on Argentina nowadays. At that time, BROU was not efficient. There was • Mario Bergara, governor, Central Bank of Uruguay no corruption but the bank was very politicized. The bank’s informa- tion systems were very bad - it was hard to get a grip on what was • Ignacio Azpiroz, investment director, Union Capital, one of Uru- happening at the bank. However, in fact, the crisis was an opportu- guay’s main pension funds nity. All bad credits were taken off the balance sheet and placed in a fideicomiso, guaranteed by the state. We improved the information • Martin Guerra, chief executive officer, Scotiabank, the Canadian systems and gradually things started to turn round. By 2005, the bank bank, in Uruguay was in a much healthier situation. All the performance indicators have improved markedly. Uruguay, which are known as AFAPs. BROU has an AFAP and it’s Q: What industrial sectors does BROU lend the the biggest with a 56.5% market share. It is followed by the SURA most to? AFAP, which has an 18% market share, our own AFAP with 16.5% of FC: Recently, agribusiness, especially that involved in the planting of the market, and the AFAP of Integracion (part of Grupo Bandes, the wheat and soya, has become a lot more important to Uruguay and Venezuelan bank), which has an 8.5% share. We are owned by the we are lending considerable sums to that industry. The dairy sector Brazilian bank, Itau Unibanco, but we operate pretty much indepen- is significant in the country and there are some mega projects being dently from it. planned, which we are also supporting financially. Other sectors that we are lending to include laboratories, renewable energy and The AFAPs are regulated by the Central Bank. Uruguay is quite a hospitality. Many new hotels are being developed in Montevideo and conservative country - every one invests in just one fund under the Punta del Este - we are helping them to get off the ground. In US dol- system. In the medium term, I hope the regulators will introduce lar terms, overall lending increased by 22% last year. We are not a big more of a multi-fund system based on the one we see in Chile. Chile mortgage lender. There is a lack of long-term lending in the country. has a very successful model for Uruguay. However, I think the more immediate step is for the authorities to allow two funds - even that Q: Can you explain how the private pension funds would be a step forward, as it would allow cautious investors to put work in Uruguay? their money into one kind of fund and more aggressive investors to Ignacio Azpiroz: There are four main private pension funds in put their money into a different kind of fund. The current, sole fundMinistry of Tourism and Sport / Aguaclara Studio 2012 Guide to Uruguay Montevideo 11
can only invest in high-quality sovereign bonds and only up to 15% Q: What is inflation like in Uruguay?overseas. Some 1.2 million workers in Uruguay - out of the country’s MB: We have always to be concerned about inflation. Uruguay has atotal workforce of 1.6 million - are affiliated to one of the private pen- history of very high inflation. However, since 2003, the inflation ratesion schemes. has always been in single digits. All our figures are highly transpar- ent and credible. Currently, the rate is 8%, compared with, say, 6.5%Q: What is the role of the Central Bank in in Brazil. Our target range is 4% to 6%. The government has workedUruguay? very hard to ensure that the fiscal situation is good. Almost everyMario Bergara: Following the financial crisis of 2002 to 2003, some year economic growth has surpassed the government’s forecasts. Wefinancial institutions were closed in the country. There have been big have learned that high inflation is a very bad thing, so we will not letregulatory changes since then and we have moved much closer to it get out of control in the country. Even in Russia and India inflationbest international practices. There is much more rigorous regulation is around 10%. There is no inflation spiral in Uruguay. The reasonin place these days. The bank’s charter was changed in 2008, before why the rate is above the target range is because commodity pricesthen the charter was quite confusing. The bank is in charge of super- have gone through the roof and the economy has been growingvising the whole financial system, pension funds, the capital markets for seven years above its long-term potential rate of growth. I don’tand currency exchange system. That gives us a lot of control over the think people are too concerned about the inflation rate being slightlywhole financial system and we have been able to devise consistent above the target range. The country’s benchmark interest rate is now “The government has worked very hard to ensure that the fiscal situation is good. Almost every year economic growth has surpassed the government’s forecasts”rules for the whole system. In 2009, a new law for capital markets was at 8.75%. It’s difficult to say when inflation will start to drop, becauseintroduced: before this legal change those markets were more based that depends on international prices. Domestic demand also remainson self-regulation. The law sets standards and is helping to promote strong. However, I think we will see a gradual reduction during thethe country’s capital markets. next 18 months - as long as it goes in the right direction, that is the main thing.Today, we regulate 14 banks, including BROU. The most importantprivate banks include Santander, Itau, BBVA and Citi. Non-residents Q: Why did Scotiabank decide to start a business inmake up around 20% of all deposits today - Argentines make up Uruguay?around 15% of all deposits in the system but that is way down from Martin Guerra: In July last year, Scotiabank completed the purchase2002 when they accounted for around 45% of all deposits. of NBC, a Uruguayan banking group, and of Pronto, a consumer credit card business, from Advent International, the private equity company.The Central Bank has a very high level of reserves of $10 billion to We acquired Pronto because we thought it had a very interesting$11 billion, more than 20% of GDP. That is a very high proportion and very innovative consumer credit model. NBC is a bank with acompared to GDP, one of the highest in Latin America and creates a similar ethos to our own; it’s much more of a traditional bank, andsignificant cushion for the Uruguayan economy. Overall, credit in the we thought it was a great opportunity to acquire both businesses.economy is low at only 22% of GDP - there is a lot of margin for that to Pronto has around 250,000 active clients, mostly with credit cards orexpand in the future. There is a great deal of liquidity in the Uru- loans. We now have around 37 branches in the country through theguayan financial system - it’s amazing. Banks’ solvency is double the consumer credit side of the business and a further 48 branches on thecapital required by the rules - we will not have any problem fulfilling banking side.the Basle III requirements. Non-performing loans peaked in 2008 at1.5% of all credit, they are now under 1%. There is a superintendency Q: Why is Uruguay such an attractive country toin charge of supervising the banks - although it reports to the Central invest in?Bank, it operates quite autonomously from the Central Bank. Some MG: I think the strong rule of law is the main factor. The country has30% of the bank’s staff are employed by the superintendency. A meet- very strong institutions, a very strong democracy. Furthermore, thereing takes place every three months at which we decide the appropri- has been macroeconomic stability for a long time. I am very optimisticate level for interest rates. about Uruguay. I think it will have investment grade by the end of next year. I think the markets have factored in the probability of in-Q: Do you think there should be a new law for the vestment grade by some 80% to 90%. The credit ratings agencies areprivate pension funds? a bit concerned about the rate of inflation, 8% is too high. However,MB: The new legislation is held up in the Congress, currently. The the government is concerned about the rate and is putting in placelegislation would introduce two funds in which people can invest. policies to contain inflation.
Natural advantages Long a favoured destination for visitors from neighbouring Argentina and Brazil, Uruguay is increasingly attracting tourists from further afield The number of foreign tourists visiting Uruguay jumped to 3.5 million last have bought second homes in or around Punta del Este. year, from 2.1 million in 2005, according to the Ministry for Tourism and Sports. “Argentine visitors also come to the country for economic reasons,” adds Liberoff. “They have been very prominent in modernizing farming and The number of Brazilians visiting Uruguay increased to 430,000 last year, the agricultural industry in the country. They have been at the forefront from 170,000 in 2005. Many cross the border and go shopping in Uru- of soya production in Uruguay. The strong rule of law in Uruguay has guay, as a ‘free shop’ exists and prices are lower. Many more Brazilians also been one of the factors that has attracted them.” travel to the coastal resort of Punta del Este and the capital, Montevideo. Argentines have long been very active buyers in Uruguay’s second home He adds that many Argentines have settled in the country permanently property market but Brazilians are also more and more attracted to this and this can be seen if you visit the best schools in Punta or Colonia, market. Brazilians perceive the country as a safe, and close destination. where many of the pupils come from Argentine families. It has also become more common for Argentines to live and work in Buenos Aires Between 2007 and 2009, Argentines found it difficult to visit Uruguay during the week but to spend the weekends in their second homes in while the Botnia pulp mill was being developed on the River Uruguay, Colonia, which is just a short distance across the River Plate from the because environmental activists closed the bridges that connect the two Argentine capital. countries. The number of Argentine visitors dropped to 1.98 million but, since the end of the dispute, the figure increased to 2.47 million in 2010. Punta del Este has a short peak summer season, which starts immediately after Christmas and lasts until the third week of January. During this pe- Wider appeal riod, the city is brimming in private jets belonging to wealthy individuals According to the Ministry for Tourism and Sports, the country attracted from around the world. Its marina is also full of luxurious yachts. 60,000 Chilean tourists last year, 130,000 Latin American tourists from outside the Mercosur zone, 110,000 North American tourists and 180,000 The local government of Maldonado department, in which Punta del Este Europeans. Up to 15,000 Germans and up to 17,000 British visited the is located, plans to develop a major convention centre and exhibition hall country. near the old airport of El Jagüel, which today is only used by helicopters. This is expected to bring many more visitors to Punta during the off-peak Today, there are 91 flights a week between São Paulo and Uruguayan season (although hotel occupancy between April and November is airports and 34 flights a week between Santiago and Uruguayan airports, already at the reasonably healthy level of 70%). underlining how interconnected Uruguay has become. The land for the project costs $14.5 million with a 30-year lease and the “Argentine tourists represent a very mature but important market for us,” construction cost is $24 million. An additional $4 million is being spent says Benjamin Liberoff, Uruguay’s national director for tourism. “However, on the business plan and the convention centre’s promotion. It is being Brazilians are becoming a more and more significant market.” financed through the issuance of a fideicomiso, a type of fiduciary trust common in Latin America and backed by investors. One reflection of the importance of Argentina to Uruguay is the estimate that Argentines own close to 300,000 properties in the country. In The conference centre will be able to host a total of 5,500 people, includ- particular, Argentines from two of the country’s main cities, Rosario and ing 2,500 in the main halls and the rest in the side halls. The centre’s Cordoba, have had very close links with Uruguay historically and many construction is expected to start in the first quarter next year..Ministry of Tourism and Sport / Indias Studio Capital investments Montevideo is also attracting a great deal more investment in hotels. As well as the refurbishment of the grand hotel in Carrasco by Sofitel, the luxurious French hotel chain - which includes the development of 2012 Guide to Uruguay an important casino - many international groups are converting historic buildings in the city’s old town into luxury boutique hotels. Last year, the city’s hotel capacity increased by 850 new rooms and it is expected to expand by a further 1,200 rooms within the next 18 months. Since the start of the last decade, the country has promoted itself with the slogan ‘Uruguay Natural’. More and more foreign visitors are coming to the country to make the most of its beautiful beaches and to enjoy its lush, green interior. Increasingly, Uruguay is finding a place on the Punta del Este international tourist map. 13