URUGUAY Country Audit Executive Summary The follow.docx

URUGUAY
Country Audit
Executive Summary
The following report is an evaluation of multiple facets of the
Uruguayan economy, its overall investment attractiveness, and
feasibility of doing business. After conducting research and
analysis on the country in areas such as legal frameworks, fiscal
policy, trade relations, infrastructure, housing, and monetary
policy, Uruguay proves to be an economy of strong opportunity
when evaluated against its regional/continental partners, but
with significant and pressing challenges that would place the
nation lower when considered at a global level. The national
government and political system are proven to be stable,
offering legal protections and investment frameworks that are
comparable to developed economies. As a member of
MERCOSUR and independently, Uruguay has ratified trade
agreements, particularly with developed nations and Latin
America, in a variety of structures, namely goods, services,
investment promotion and protection, public procurement, and
double taxation avoidance. The country offers valuable exports,
and derives its imports significantly from MERCOSUR
members in which people, goods, and currency are permitted to
move freely. Uruguay has shown strong numbers in growth,
particularly GDP and unemployment rate. Having reacted
appropriately to an economic and banking crisis in the early
2000s, Uruguay was one of the few countries that was not
significantly impacted by the 2008-09 economic crisis. The
housing market has also seen considerable growth and looks to
continue growing as the level of foreign direct investment in

construction increases. Challenges that have limited the country
and are foreseeable as continuing to limit Uruguay’s
attractiveness include a public banking system that offers
limited access to credit, undesired volatility in prime rate
lending, seemingly unsustainable fiscal policy, and a lack of
coordination in monetary and exchange rate policies. Given the
widespread availability and transparency of information on the
country and having taken all these factors into consideration,
we determine Uruguay to be one of best investment
opportunities in terms of a Latin American scope, but as still
significantly behind developed economies. A total score of 30.5
points out of a possible 55 was assigned.
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Description and Analysis of Each Measured Attribute
A.1 Government Expenditure, Tax System, Rule of Law, and
Education System - 2/5; This ranking reflects Uruguay’s
controlled government spending and competitive tax rate. The
tax free zones are a great way to incentivize companies to
operating in Uruguay. However, it does take into account the
difficult experiences that corporations undergo in paying taxes.
Uruguay benefits from a mature democracy with a stable
political system and independent judiciary system. Uruguay has
a well-established education system that provides free education
and equal access to all students through the university level.
However, the socioeconomic gap becomes increasingly wide at
the university level.
A.2 Trade Policy - 2/5; Uruguay’s government is generally open
to and encourages foreign direct investment (FDI) and trade
with the country. While the previous is true, a “level playing
field” is not necessarily in place; the MERCOSUR nations
significantly benefit from trade with Uruguay, as opposed to
other markets such as the United States or most of Western
Europe, due to limited specialized agreements with the
aforementioned governments.
A.3 Economic Growth - 2.5/5; This ranking reflects Uruguay’s
overall economic growth. After the 2001-2002 economic and

banking crisis in Uruguay, the country made a series of
consolidated structural improvements which enabled the country
in later years to post very good economic performance in
overall GDP, GDP growth and the unemployment rate. Uruguay
survived the global economic crisis of 2008-2009 because of the
previously mentioned improvements and prior economic
stability. However, the country’s performances in quality of
infrastructure and domestic savings rate prove to be
disappointing.
B.1 Budget Deficit, Sustainable fiscal policies, Debt
management and the yield curve, Interest rates - 7/10; Uruguay
has experienced significant volatility in all topics comprising
this portion of the assessment. Historical data shows consistent
budget deficits for Uruguay from 2010 to 2013 primarily
resulting from ineffective fiscal policies. A lack of transparency
in fiscal targets is causing additional volatility in short-term
interest rate markets. The bond market also shows Uruguay as
being unstable, commanding a 5-6% premium in its 10 and 20-
year treasury bills against the United States’. Unpredictability
and spontaneous fluctuations in prime lending rates adds to
uncertainty in the domestic lending market.
B.2 Housing, Financial Market Development, Government
Ownership - 6/10;
Uruguay’s housing market is relatively strong. Outside
investment continues to flow into the country, supporting
demand for new housing development on the coast. Increased
construction demand causes increases in the labor cost
component as it related to overall construction cost, but other
cost components have remained relatively stable over the last 10
years. This allows for housing to be priced at affordable levels.
The Financial Market Development is bogged down by the lack
of access to capital markets (i.e. equity and debt). This inhibits
the growth of investment and pursuit of economic advancement
inside of a country. Government Ownership and Control is
looked upon as being favorable, according to the Economic
World Forum. Uruguay’s legal framework and transparency in

policy making is seen as extremely favorable in comparison to
the global community.
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B.3 Growth and predictability of monetary policy. Inflation.
Wage increases. Unemployment. Central bank independence -
4/10; Due to high political stability and economic policy
predictability Uruguay earned a high predictability and growth
of monetary policy rating. Inflation and the government’s quick
reactions to battle this enemy has been the main focus for the
central bank. This rating reflects the positive changes over the
past decade and the ability to lower the economic monster that
is inflation. Although the country has taken promising steps to
increase the quality of life for its citizens, Uruguay still has
below average wages. Although there are low and uneven
wages, the future shows promise of equality and prosperity. The
unemployment rating was based on a strong number that reflects
a low unemployment rate but the possible repercussions that
might arise in the future. And finally, all the factors that are
taken into account when allowing independence for the central
bank and the below average rating from the IMF, Uruguay
ranked poorly in comparison to neighboring countries for its
central bank independence.
B.4 Exchange Rate Stability - 7/10; The Uruguayan peso’s
(UYU) recent history experienced significant changes in the
value of its currency (relative to the USD) without mindful
monetary policy coordination from the Central Bank. From
commentary and market interventions performed by Uruguay’s
Central Bank, it is clear there is little coordination between
monetary and exchange rate policies. As a nation that offers
valuable exports and has posted trade surpluses in its past, the
exchange rate should be considered by the Central Bank more so
than it ever has been, particularly in protecting the export
attractiveness of products produced within the country by its
citizens. However, it is important to recognize this as a difficult
challenge moving forward, as the Central Bank focuses its
efforts on limiting the country’s current inflation rate of

roughly 8%; regardless, the Central Bank’s monetary policy
should more closely consider its decisions’ effects on the
UYU’s exchange rate relative to other currencies such as the
Brazilian real, the Argentine peso, and the United States dollar,
three significant import/export and investment sources.
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A.1 (0-5) Main policy objectives. Government expenditures.
The tax system and possible effects on the business
environment. The rule of law and enforcement of property
rights. The education system. Ranking: 2/5
Government Expenditures
The Uruguayan Central Bank reported that government spending
in Uruguay totaled UYU 317.39 billion in 2012, or 31.3% of
GDP (IMF). The IMF has forecasted government expenditures
since 2013 and estimated it to reach UYU 464.61 Billion in
2015, or 33.1% of GDP (App A.1 Figure 1). Compared to the
rest of South America, Uruguay leads the group of five
countries with the lowest government spending in terms of GDP
(App A.1 Figure 2).
Tax System and Possible Effects
Corporations in Uruguay are subject to a 25% tax rate. Only
income that is derived from activities within its borders, from
property located in Uruguay, or derived from the economic
rights use within its borders, is taxed. Capital gains are treated
as ordinary income and taxed at the corporate rate (IMF). Doing
Business, which ranks countries in terms of how easy it is to do
business, ranked Uruguay 140 out of 189 in 2015 (Doing
Business in Uruguay). This was mainly due to the difficulties
experienced when paying taxes.
To promote business, Uruguay has established double taxation
avoidance treaties with Germany, Hungary, Spain, and Mexico;
it has also established general tax treaties with 10 countries
including Portugal, France, and Switzerland (Deloitte).
Uruguay’s corporate tax rate is the comparable to other South
American countries, having the same rate as Colombia, Brazil,
Bolivia, and Ecuador (App A.1 Figure 3). When compared to

the average tax rate of various economic blocs, it is evident that
Uruguay’s tax rate is very competitive (App A.1 Figure 4).
Uruguay has instituted various policies to promote movement in
its business environment. In 1987, the country established free
zones. Free zones are defined as privately or publicly owned
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areas that are isolated and fenced off with the purpose of being
used for manufacturing, commercial, and service activities
within the zone. Companies that operate within these zones are
exempt from all current and future national taxes but are only
allowed to conduct business within the zone or with third
countries. The only requirement is that 75% of those hired by
companies operating within a free zone be Uruguayan citizens
(Zonas Francas). Free zones have been established near ports,
airports, and business sectors to provide companies within the
zone prime locations in which to conduct business. The newest
zone, Punta Pereira, has had investments surpassing $1B. These
free trade zones benefit from the presence of multinational
enterprises such as IBM, HP, Fisher-Price, and Tata Consulting.
Rule of Law and Enforcement of Property Rights
Uruguay is a mature democracy with a stable political system.
Its judiciary system is independent and legal safeguards are
generally observed. In 2014, the Rule of Law Index ranked
Uruguay 1st in Latin America and 20th overall (App A.1
Figures 5 & 6). This ranking was based on government
accountability and the absence of corruption. The index,
published by the World Justice Project, found that Uruguay
benefited from agencies that were effective in enforcing
regulations. The country also has civil courts that are
independent and free of improper influence (World Justice
Project).
Property rights in the country are upheld. The 2015 Index of
Economic Freedom reported that private property in Uruguay is
secure and expropriation unlikely. Out of 100 possible points,
Uruguay was awarded 70 in this measure (App A.1 Figure 7). It
came in second to Chile at 90 and outperformed Mexico, Brazil,

Colombia, and Costa Rica, who tied in 3rd at 50 points
(Heritage Foundation).
Education System
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Uruguay has instituted various initiatives to improve its public
school system. As a result, almost 100% of Uruguayan children
attend school. The country has one of the highest literacy rates,
98.1% in 2014, among Latin American countries. Public
education is free from primary school through university.
Socioeconomic inequalities in access to primary and secondary
education are not as strong in Uruguay when compared to the
rest of the Latin American countries. Government expenditure
on education accounted for 4.5% of GDP in 2012, well below
the average for the OECD countries and slighter lower than
Latin American countries (App A.1 Figure 8). In terms of
performance, Uruguay achieved a higher than average score for
Latin American countries that participated in the PISA 2012
assessment. However, similar to the rest of the region, Uruguay
performed well below the OECD average in the same
assessment (OECD).
A.2 (0-5) Trade Policy. Policy toward foreign direct investment.
Central banking coordination. Government and antidiversion
policies (attribute towards corruption). Value of exports and
imports. Balance of payment deficits. Ranking: 2/5
Foreign direct investment (FDI) in general is respected and
encouraged by the government of Uruguay. Data from the
Central Bank of Uruguay indicates that FDI in 2013 reached a
level of USD 2,796 M; as a percentage of the country’s GDP
(5%), Uruguay came second only to Chile across Latin America
that year (Foreign Direct Investment in Uruguay). The data
reveals a significant upward trend of FDI from 2001 (App A.2
Figure 1). As part of the government’s promotion of FDI, a
strong legal framework and various investment promotion
schemes have been established. Arguably, the most significant
of these is Law 19,906 of January 1998, which offers a
guarantee of equal treatment for foreign investors relative to

domestic investors, and places no restrictions on the
introduction of capital to the country, nor on the repatriation of
capital or profits (Foreign Direct Investment in Uruguay).
Foreign investors may operate in Uruguay through a variety of
registration methods, such as a Corporation (S.A.), a
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form of LLC (S.R.L.), other types of personal companies, or as
a foreign branch (Business Environment). It is important to note
that of these business structures, there is no limitation on the
recruitment of foreign personnel or the ownership percentages
of Uruguayan nationals and foreigners of a company’s
organizational structure (Business Environment), with the
exception of the free zones as noted previously. One of the most
important aspects for a foreign investor in Uruguay to consider
is the country’s impressive track record on corruption; the
country was ranked first with Chile on combating corruption
across Latin America, and 20th worldwide by Transparency
International’s 2014 Corruption Perception Index (Transparency
International). Compared to the rest of Latin America, this is a
significant difference in ranking; after Chile, the next closest
Latin American country was Brazil at 69, and the rest with a
ranking of 100 or above (Transparency International). Uruguay
also enforces internationally-accepted standards with respect to
intellectual property, and was considered the best in South
America by the World Economic Forum’s Global
Competitiveness Report for 2013-14.
Albeit a small country with roughly 3.3 million inhabitants,
Uruguay has proven to be a country that offers valuable exports
and important trade balance information. Trade balance data
indicates the country posted a trade deficit of roughly USD
1,400 M in 2014; data from five previous years posts changes in
moderate trade surpluses and deficits (Trading Economics).
With regard to balance of payments, the current account shows
consistent deficits and the capital account shows consistent
surpluses (App A.2 Figure 2). The capital account surpluses
reflect the significant levels of FDI into the country as noted

previously.
Uruguay has largely positioned itself as a regionally-focused
importer and exporter of goods but has international agreements
across multiple continents. From analyzing the country’s
import/export markets and national sources of FDI, it is clear to
see the significant influence that
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Uruguay’s participation in MERCOSUR has. Among Uruguay’s
import and export partners, Argentina and Brazil appear in both
(CIA). The two countries also comprised Uruguay’s top two
sources of FDI in 2012 (App A.2 Figure 3). Regarding other
international agreements, Uruguay, as part of MERCOSUR or
independently, has agreements with other nations in the
following categories: goods, services, public procurement,
investment protection and promotion, and double taxation
avoidance (International Agreements).
What is perhaps of most importance to notice is the extent of
agreements with particular
countries and its effect on trade and FDI (App A.2 Figure 4).
Uruguay’s agreements with Spain
in investment protection and promotion and double taxation is
likely the most significant reason
for Spain being Uruguay’s third-highest source of FDI. Figure 4
in Appendix A.2 reveals other
notions about Uruguay’s attractiveness as a country to trade or
invest in; while Uruguay’s
government is largely receptive to foreign investment and trade,
real benefits of economic
activity with Uruguay vary significantly based on the foreign
country’s location. An example is
the United States’ investment protection and promotion
agreement with Uruguay; while a good
incentive, it is obviously more incentivizing for a Spanish
company to invest in Uruguay given
that country’s additional agreement in double taxation
avoidance. The Exhibit outlining

Uruguay’s international trade agreements largely influenced the
group’s trade ranking of 2 out 5
for Uruguay. Basic incentives are available for many developed
countries looking to do business
in Uruguay via trade or investment, but the strong preference
Uruguay has for MERCOSUR and
other South American nations means the country loses out on
incentivizing more developed
countries such as the United States or most of Europe.
A.3 (0-5) Economic Growth. Economic growth performance.
Quality of infrastructures. Saving rate and economic rate.
Ranking: 2.5/5
Economic Growth Performance
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In analyzing Uruguay’s economic growth performance we chose
to assess the country’s GDP, GDP growth and unemployment
rate. The economy of Uruguay is characterized by an export
oriented agriculture sector and a well-educated work force,
along with high level of social spending (Wikipedia). From
1999-2002, the economy of Uruguay suffered a significant
downturn; after bank deposits in Argentina were frozen,
Argentinean citizens made massive withdrawals from
Uruguayan banks, “which led to a plunge in the Uruguayan
peso, a banking crisis, and a sharp economic contraction”
(Wikipedia). Furthermore, “real GDP fell in four years by
nearly 20%, with 2002 the worst year. The unemployment rate
rose, inflation surged, and the burden of external debt doubled”
(Wikipedia). After this crisis, the government restructured its
external debt and made consolidated structural improvements.
These improvements enabled Uruguay to withstand the external
shocks during the 2008-2009 world economic crisis. In July
2013, the World Bank ranked Uruguay as a high-income country
with a gross national income per capita of $13,580. The average
annual growth rate of Uruguay was 5.5% between 2006 and
2013. In 2013, Uruguay’s GDP was $55.71 billion and its GDP
growth rate was 4.4% (Uruguay Overview). Compared to the

world and the Latin America and Caribbean area, Uruguay
posted higher GDP growth for 2005-2013, especially during the
2008-2009 world economic crisis. (App A.3 Figures 1 and 2)
Strong macroeconomic performance has reflected in Uruguay’s
labor market, which recorded historically low unemployment
levels in 2013 at 6.3% (App A.3. Figure 3). The country has
made substantial progress in poverty reduction, going from
39.9% in 2004 to 11.5% in 2013, and reduced extreme poverty
from 4.7% in 2004 to 0.5% in 2013 (Uruguay Overview). Export
markets have diversified in order to reduce dependency on the
country’s main trade partners; trading partners went from 14 to
19 from 2000 to 2012 (Uruguay Overview). Fiscal policy shows
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some sign of improvement as well. The country decreased its
public debt ratio from 100% in 2003 to 60% in 2014; it has also
managed to decrease the cost of its debt, reduce dollarization
from 80% in 2002 to 50% in 2014, and adopt more mature
financial commitments (Uruguay Overview). Despite the
country’s progress in these areas, debt still remains at relatively
high levels and its regional partners still receive major shares of
its exports (Uruguay Overview).
Quality of Infrastructures
Compared to Germany (the world’s top performer in
infrastructure), Uruguay’s performance is not very good (App
A.3. Figure 4). Uruguay’s performance is better than Latin
America and Caribbean area from 2007-2014. Nevertheless, in
2014 the score performance of Uruguay has declined to the
average level of that area. (App A.3. Figure 5)
Road Sector: According to “Infraestructura Uruguay 2030,” a
study commissioned by an Argentine investor, Uruguay’s lack
of investment in its road network for the past 15 years has left it
in dire need of maintenance. However, The Ministry of
Transport and Public works is conducting, in conjunction with
the National Development Corporation, the structuring of a
project for the reconstruction and maintenance of a corridor
between Routes 21 and 24, comprising a total of 170 kilometers

of highway.
Railway Sector: According to the Global Competitiveness
Index, quality of the railway network of Uruguay is ranked 117
out of the 142 countries. The whole system is like the 19th
century’s railway systems in some developed countries. The
current President insisted that it is important to improve the
quality of the railway network and modernize it because the rail
freight transport is viable alternative to trucking. Government
now is making large investment to the railway system and its
quality has substantially increased.
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Port Sector: Montevideo is Uruguay’s main commercial port
with annual movements of 10 million metric tons, 500,000
passengers and 100 cruise ships. The government has no plans
of development in this sector, but the rapid growth experience
in recent years has required an expansion of the Port of
Montevideo.
Education Sector: Over 40% directors of schools with children
in primary education reflected that desks in the classroom and
the bathrooms are problematic for the development of the
school. Nearly 50% directors expressed concern about the
conditions of leasable capacity and playgrounds. Lack of
properly soundproofed facilities has also been acknowledged as
an issue of major concern by teachers. Even though the
government has made some investment to improve the school
facilities, it still will continue to be developed under unsuitable
conditions.
Energy Sector: The country is transforming the structure of its
energy sector, reducing its costs and making it more diversified
and less susceptible to climate conditions.
Tourism Sector: After granting the construction and operation
of a $30 million convention center in Punta del Este, the
government is planning to invest a large amusement center.
Sanitation Sector: In the water and sewage sector, the State
Water and Sanitation Works
Company (OSE) will be investing USD 100 million throughout

2014 in constructing sewage
treatment plans.
Data source for entire Quality of Infrastructures section:
Canadian Trade Commissioner Service
Saving Rate
Uruguay’s saving rate is lower than the World’s average saving
rate from 2011-2013. (App A.3 Figures 6 and 7). A high saving
rate is important for a country’s economic growth so Uruguay
must make an effort to increase this.
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B.1 (0-10) The budget deficit. Sustainable fiscal policies. Debt
management and the yield curve. Interest rates. Ranking: 7/10
Budget Deficit
Uruguay has posted budget deficits from 2010 to 2013, ranging
from -1.0% to -2.6%; for comparative purposes, the world
average was -3.1% in 2013 (Cash Surplus/Deficit). These
figures are calculated as (1) Government Revenue, (2) Less:
Expenses, (3) Less: Acquisitions of Non-Financial Assets and
shown as percentage of GDP. A chart comparing the budget
surplus/deficits for Uruguay against other nations is included in
Appendix B.1 Figure 1.
Fiscal Policy
Fiscal policy in Uruguay is currently under criticism and to be
revised, as it is seen as being too relaxed. There is building
inflationary pressure in Uruguay, which the Country believes is
due to inflation contagion. Additionally, Uruguay switched from
an Overnight Fixed Exchange Rate to a Monetary Aggregate
system. This caused significant volatility in overnight interest
rates, with rates ranging from 2.5% to 40% as the market
adjusted to the new framework. Ultimately, the International
Monetary Fund sees Uruguay as having better success in
calming short-term interest rate fluctuation simply being more
transparent and open regarding fiscal targets. Last but not least,
the Country is considering the capping of real wage growth
from 0-3% in the coming years (IMF Country Report). This is
because wage growth has begun outpacing production per

worker. In an effort to combat this phenomenon, the Country
would consider overall economic growth (via GDP) and any
given sector’s productivity prior to determining the appropriate
wage cap.
Debt Management and Yield Curve
The Country has been historically successful and prompt as
related to its government bond program. There are significant
spreads (~5-6%) in the 10 and 20 year Treasury bond
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coupon rates in comparison to a stable market, such as that of
the United States (App B.1 Figure 2). Investors command higher
interest rates for countries with governments that are seen are
riskier investments, this is the basis for the higher Uruguayan
coupon rates. For purpose of comparison, 10 year treasury rates
are 3.3% and 4.5% for Mexico and Brazil, respectively (DMU).
Interest Rates
With respect to interest rates, our team has used the Prime
Lending Rate as our basis for this analysis. The Prime Rate is
the rate at which a commercial bank will lend to its best
customer and serves as the basis for the rate at which it lends to
the rest of the market. Uruguay’s Prime Lending Rate has
experienced significant fluctuations and volatility since 2006;
swings of approximately 6%, both positive and negative, can be
seen from 2006-2013 (CIA). This creates concern on the part of
borrowers, and uneasiness in the market. A graph has been
provided as Figure 3 in Appendix B.1. for more granularity on
the subject. The volatility in the Prime Rate is made clear by
the United States Prime Rate, shown in the aforementioned
Figure. Comparatively speaking, the United States Prime Rate is
stable, almost to a point of predictability. This allows for the
marketplace to instill confidence in interest rates over the short-
to-medium term. However, this mentality is lost in Uruguay due
to the sharp peaks and declines in the prime lending rate.
B.2 (0-10) The banking system and financial development.
Degree of government ownership and control. Degree of
globalization and capital control. Degree of globalization of the

banking system and capital market. The housing sector.
Ranking: 6/10
Financial Development
The Global Competitiveness Report shows Uruguay’s financial
market development as a 3.8/7.0. The primary drag on this
rating is due to access to capital markets, both domestic and
international. The ratings for local equity market financing,
access to loans, and venture capital
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availability are 2.2, 2.8, and 2.6, respectively. The limited
access to capital markets fails to aid in the financial
development of the Country; however, these are representative
of only the lowest rated factors contributing to the stymied
financial development. Overall ratings are low with respect to
components dictating the Country’s performance in this sector,
leaving the Country with a rank of 83 out of 144 countries in
this regard. See Table 1 in Appendix B.2. for more
detail into the lower scores assigned to the Country for this
category.
Data Source for entire Financial Development section: World
Economic Forum Global Competitiveness Report 2014-15.
Government Ownership and Control
The Global Competitiveness Report appears to capture
Government Ownership and
Control in the subsection entitled “Government Efficiency”, in
which the Country is ranked 56
out of 144 countries. Uruguay’s government does impose a
significant amount of regulation and
is considered to be very wasteful with respect to spending, as
indicated by its poor ranks in the
categories. However, if one takes into account the additional
factors comprising the government
(or “Institution”) ranking, Uruguay is very favorable; ranking in
the top 25% of Countries
assessed. Table 2 has been provided in Appendix B.2. that
details the Country’s performance.

Data Source for entire Government Ownership and Control
Section: World Economic Forum Global Competitiveness
Report 2014-15.
Housing Sector
Uruguay has realized significant growth in the real estate sector
since the recession of 1999-2002. Construction activity
maintained consistent upward growth from 2003-2013, a leading
indicator for both increased floor area growth and Gross
Production Value. Floor area refers to actual square meters of
new housing product constructed and Gross Production Value
(GPV) referring to the cost of inputs required to complete the
floor area. The data provided by
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the National Statistics Institute for the Country’s housing sector
is strictly from Montevideo, the capital.
The Construction Index Graph (App B.2 Figure 1) shows a
sharp decline in construction activity from 1999 through 2003,
before its subsequent recovery. The recovery in the construction
market leads to the obvious expansion in both physical space
developed and GPV of this space (App B.2 Figures 2 and 3),
which can be seen in the correlation observed between Figure 1
and 2 and Figure 1 and 3. The GPV is broken down further into
major construction components. The sharp increase in labor is
due to supply and demand factors in the market as idle
construction labor becomes scarcer (App B.2 Figure 4).
Moreover, the rise in construction activity signifies confidence
in the investment market (App B.2 Figure 5). This makes sense
as private investment is the catalyst for the increase in
construction.
Coastal areas in the Capital are home to high income population
and generate housing investment based on that fact. However,
areas outside of the coast are experiencing increase
development as well due tax exemptions that encourage the
construction of social housing for middle to lower income
families. The Central Bank of Uruguay expects that credit
availability with continue to generate demand in the housing

sector. In terms of development and construction, the coastal
region will begin to see a slow in construction activity, but
overall
activity will be buoyed by the middle and lower income regions.
Data Source for entire Housing Sector section: Uruguay XXI -
Real Estate Investment Opportunities in Uruguay.
B.3 (0-10) Growth and Predictability of Monetary Policy.
Inflation. Wage Increases. Unemployment. Central Bank
Independence. Ranking: 4/10
Inflation
Today the inflation rate of Uruguay sits at 8.05%. The Central
Bank of Uruguay has consistently battled inflation in the
country that has been observed since the mid-1900s. By
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exercising monetary policy, the central bank has managed to
keep inflation in the single digits for the longest period since
the inception of the country, dating back to the 1990s. During
this time period, Uruguay has set target ranges for inflation that
has rarely been met because the country focuses on setting
aggressive benchmarks (IMF).
Inflation is such an important issue for the continued prosperity
of the country that reducing it is now a top priority for the
central bank. The worldwide financial crisis has put the country
on red alert. As inflation rose during this period, the central
bank with the help of the government has begun to issue moral
suasion actions: freezing or reducing prices on specific
consumer goods. Over the past few years the central bank has
acted by raising the policy rate by 275 basis points and by
increasing reserve requirements (IMF).
It is important to note why Uruguay continues to focus on
battling inflation. In doing so the country, can better support
de-dollarization in the economy, lower public debt in local
currency, promote financial deepening, and help give the central
bank wiggle room to use monetary easing during the next
recession or boom.
Growth and Predictability of Monetary Policy

Predictability of monetary policy in Uruguay’s economy is
based on a stable political system, anticipated economic
policies, favorable government debt ratio, and promising
medium growth prospects. The government’s aptitude to make
well-timed modifications, especially the central bank’s ability
to react in dire situations encompasses the main reasons why the
economy continues to grow. Economists believe that these
economic policies aimed at lowering inflation, increasing pro-
investment policies, and focusing on debt management programs
will continue beyond the next election leaving Uruguay in the
prime position to strengthen its economic promise and continue
to excel (IMF).
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Uruguay has one of the most stable economic policies in South
America. This assumption is based on the reigning political
party’s standing on the far left of the political ideology
spectrum. The President of Uruguay, Jose Mujica, has stayed in
line with political party beliefs. He has focused on
strengthening economic stability, promoting investments in the
country and abroad, and increasing social program spending.
The main takeaway on this topic of predictability is based on
the economic beliefs of the many parties in the country. Over
the past decade, economic ideologies have narrowed as the
different factions have joined forces to fight the country's main
economic enemies: inflation and external economic risks. There
is a general consensus along these party lines. In essence, no
matter who is elected the next president, or whether another
black swan like the global recession will occur again, Uruguay
is known for economic consistency and will continue to promote
its current economic policies (Trading Economics).
Wages
The nominal wage rate in Uruguay has more than doubled over
the past 10 years as the country battles the world economic
crisis and its greatest enemy: inflation. With an average
nominal monthly wage rate of about 17,000 UYU in 2012,
which is roughly equivalent to $800, Uruguay suffers from very

low wages compared to approximate countries (Fedec).
According to the Global Wage report, in 2005, in an attempt to
match wages with the inflation rate in the country that
continued to increase inequality, Uruguay created wage councils
to add stability to the job market by fixing wages in line with
inflation. Moreover, these councils were in charge of fixing
minimum wages for the various sectors of the country. During
this period, real wages increased by 9.1% although wage
dispersion did also increase at this time.
17
Positive changes related to this move include gender equality of
pay, educational equality of pay, and the reduction of regional
pay gaps.
Unemployment
Unemployment in Uruguay is currently at an all-time low
following a disastrous scenario ten years ago when a financial
crisis first hit the country and the unemployment rate was over
20%. The unemployment rate currently sits at around 6.5%, a
promising number to encourage economic recovery (Fedec).
This low unemployment rate is the main factor for an increase
in wages and quality of life in Uruguay.
An issue has recently evolved, however. With such a low
unemployment rate, new and expanding businesses are finding it
more difficult to find workers. The hardest hit sectors include
construction and engineering jobs. This dilemma is putting a
huge strain on the growing economy as companies prepare for
salary wars as the number of available workers continues to
decrease. These salary wars are causing prices to increase. And
as prices increase, inflation tends to increase as well. And as
the paper stresses, inflation is the main economic enemy of
Uruguay. In an attempt to counter this low unemployment issue,
the country is trying to lure some ex- patriots abroad to return
home to enjoy more favorable conditions and work. By giving
certain incentives, Uruguay aims to embrace this low
unemployment rate by increasing the workforce and
encouraging individuals to live and work in the country.

Central Bank Independence
According to the IMF, central bank independence in Uruguay is
below average compared to all Latin American countries. This
rating is based on the selection process and limits placed on the
central bank by the government. Central bank members are
selected to short terms positions and appointed directly by the
legislature. It is mandatory that they be independent from
private
18
and public sectors to limit underlying incentives. Moreover,
they can be removed from office by any reason deemed
appropriate by the legislature.
In terms of operations, the central bank does not extend credit
to the government and does not receive government
capitalization either. It has full independence of monetary and
exchange rate policy. Moreover, any proposals or policy
changes need only be submitted to the legislature by ways of a
paper report, no formal appearance is necessary. However, all
actions and proposals are reviewed and approved by an
independent agency.
B.4 (0-10) The exchange rate system. Consistency of monetary
and exchange rate policies: the holy triology. capital controls.
Stability of the exchange rate and inflation. Degree of over or
undervaluation of the currency. Ranking: 7/10
“Uruguay offers free movement of capital, foreign currency and
gold from and to other countries and a free convertibility
exchange system for national currency” (Business
Environment). The absence of capital controls on the Uruguayan
peso (UYU), coupled with the Uruguayan Central Bank’s
presence in determining monetary policy, implies that the
country rests on the lateral of independent monetary policy and
free capital mobility, comparable to systems such as those of
the United States, Canada, or Japan. The UYU’s exchange rate
history relative to the USD shows significant swings in
appreciation and depreciation in short periods (App B.4 Figure
1). The last two years, however, reflect a consistent

depreciation of the UYU relative to the USD. Given this
depreciation, the country’s exports should look more attractive
to foreign purchases. What is interesting to note is the Central
Bank’s limited coordination of monetary and exchange rate
policies, with then Central Bank President Mario Bergara
declaring “we do not have any specific target, because we think
that the exchange rate flexibility is one of the corners of our
economy policy strategy” (Goodman & Kuzmanovic). As the
country looks to establish policy to combat aforementioned
inflation levels of roughly 8%, the UYU could be
19
considered undervalued. If the Central Bank were to take action
in the future to lower inflation, the currency will then likely
appreciate, defining its current status as undervalued.
20
Bibliography
Deloitte. (2012, July). Uruguay: Tax and Investment Profile.
http://www.deloitte.com/assets/Dcom-
Uruguay/Local%20Assets/Documents/Perfil%20de%20Inversion
es.pdf
Canadian Trade Commissioner Service. (2014, April).
Infrastructure Profile – Uruguay.
http://www.enterprisecanadanetwork.ca/_uploads/resources/Infr
astructure- Profile-Uruguay.pdf
Central Intelligence Agency (CIA). The World Factbook.
https://www.cia.gov/library/publications/the-world-
factbook/geos/print/country/ countrypdf_uy.pdf
Debt Management Unit (DMU), Ministerio de Economía y
Finanzas. http://deuda.mef.gub.uy/ Fedec, Anna. –
Uruguay Average Nominal Wages. Trading Economics.
http://www.tradingeconomics.com/uruguay/wages
Uruguay Unemployment Rate. Trading Economics.
http://www.tradingeconomics.com/uruguay/unemployment-rate
Goodman, J., & Kuzmanovic, J. (2013, June 13). “Uruguay
Denies Targeting Currency as Peso Plunges Most in World.”
Bloomberg. http://www.bloomberg.com/news/articles/2013-06-

13/uruguay-denies-targeting-currency-as-peso-plunges-most-in-
world
Heritage Foundation, The. 2015 Index of Economic Freedom.
http://www.heritage.org/index/country/uruguay
International Monetary Fund (IMF). –
IMF Country Report No. 14/6. (2014, Jan).
http://www.imf.org/external/pubs/ft/scr/2014/cr1406.pdf
World Economic Outlook 2015.
http://www.imf.org/external/pubs/ft/weo/2015/update/01/index.
htm
OECD, Development Bank of Latin America (CAF), and United
Nations. Latin American Economic Outlook 2015 Education,
Skills and Innovation for Development: Education, Skills and
Innovation for Development. OECD, 2014.
Trading Economics. Uruguay Balance of Trade 1993-2015.
http://www.tradingeconomics.com/uruguay/balance-of-trade
Transparency International. (2014). Corruptions Perceptions
Index 2014. https://www.transparency.org/cpi2014/results
Uruguay XXI. –
Business Environment. (2014, July).
http://www.uruguayxxi.gub.uy/guide/descargas/Business%20env
ironment.pdf
Foreign Direct Investment in Uruguay. (2014, April).
http://www.uruguayxxi.gub.uy/es/wp-
content/uploads/sites/6/2014/11/FDI-in-Uruguay- April-2014-
Uruguay-XXI.pdf
International Agreements. (2014, July).
http://www.uruguayxxi.gub.uy/guide/descargas/International%2
0agreements.pdf
Real Estate Investment Opportunities in Uruguay. (2014, Feb).
http://www.uruguayxxi.gub.uy/invest/wp-
content/uploads/sites/4/2014/11/Real-Estate- Uruguay-XXI-
2014.pdf
Wikipedia. Economy of Uruguay.
http://en.wikipedia.org/wiki/Economy_of_Uruguay.
World Bank Group, The. –

Cash/Surplus Deficit (% of GDP).
http://data.worldbank.org/indicator/GC.BAL.CASH.GD.ZS
Doing Business in Uruguay.
http://www.doingbusiness.org/data/exploreeconomies/uruguay.
Uruguay Overview. (2014, Oct 9).
http://www.worldbank.org/en/country/uruguay/overview
World Economic Forum. –
The Global Competitiveness Report 2013-2014. 2013.
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessRe
port_2013-14.pdf The Global Competitiveness Report 2014-
2015. 2014. http://reports.weforum.org/global-competitiveness-
report-2014- 2015/economies/#economy=URY
The World Justice Project. Rule of Law Index 2014.
http://worldjusticeproject.org/sites/default/files/files/wjp_rule_
of_law_index_2014_repor t.pdf
Zonas Francas. Area of Free Trade.
http://www.zfrancas.gub.uy/english/statistics/index.html
APPENDICES
APPENDIX A.1
Figure 1 - Uruguay Government Expenditure
Figure 4 - Average Corporate Tax Rates of Economic Blocs
Figure 2 - Government Spending of South American Countries,
% of GDP)
Figure 3 - Corporate Tax Rates of South American Countries
Figure 5 - Rule of Law Overall Score & Ranking
Figure 6 - Rule of Law Ranking, Latin America & the Caribbean
Figure 7 - 2015 Index of Economic Freedom (out of 100 points)
Figure 8 - Uruguay Government Spending on education as % of
GDP
APPENDIX A.2

Figure 3 - Top Ten Sources of FDI - 2012
Figure 1 - FDI inflow to Uruguay (Millions of US$ and GDP %)
Figure 2 - Current Account, Capital Account, and FDI; Source:
Uruguay in Focus. Uruguay XXI.
Figure 4 - Uruguay’s International Agreements by Category
APPENDIX A.3
Figure 1 - GDP Growth Rate (Uruguay vs World)
Figure 3 - Uruguay Unemployment Rate
Figure 2 - GDP Growth Rate (Uruguay vs. Latin America &
Caribbean)
Figure 4 - Infrastructure Overall Score (Uruguay vs. Germany)
Figure 5 - Infrastructure Overall Score (Uruguay vs. Latin
America & Caribbean)
Figure 6 - Average Gross Domestic Saving Rate (Uruguay)
Figure 7 - Average Gross Domestic Saving Rate (World)
APPENDIX B.1
Figure 1 - Comparative Budget Deficit Figure 3 - Prime Lending
Rate Comparison (2010-2012)
Figure 2 - Comparative Treasury Yield Curve
APPENDIX B.2
Table 1 - Financial Market Development Rankings (Economic
World Forum)
Figure 2 - Floor Area built in Montevideo by Product Type
Table 2 - Government Ownership and Control Rankings
(Economic World Forum)

Figure 3 - New Housing GPV in Montevideo ($MM)
Figure 1 - Construction Index
Figure 4 - Construction Cost Input
Figure 5
Private Investment in Construction ($MM)
APPENDIX B.4
Figure 1
UYU per 1 USD; Source: XE
On March 24, 2015, UTSA partnered with the San Antonio
Express-News and Time Warner Cable to host a San Antonio
Mayoral debate at the Main Campus.
Despite the debate’s convenient on-campus location and its
being hosted by UTSA’s Student Government Association,
Alumni Association and College of Public Policy, the event
failed to garner much attention from the demographic that was
most directly available — students.
The debate’s academic forum was not unprecedented.
Since the start of their campaigns, the 2015 San Antonio
mayoral candidates have visited a number of local schools,
including San Antonio College and Hector Garcia Middle
School. Establishing a presence in local education and
appealing to young adult voters no doubt motivates the direction
of mayoral campaigns. Students, however, did not seem
invested in the topics, and the candidates did not address issues
relevant to the students.
The university advertised the event well on campus and on its
social media feeds. Prior to the debate, UTSA used its social
media presence to encourage student participation. While the
Twitter hashtag #UTSADebate trended locally during the event,
the actual on-campus event remained poorly attended.
Perhaps UTSA students are justified in their lackluster

participation and general display of uninterest in mayoral
politics. While the candidates spoke indepth on topics of
gentrification, task-force safety and neighborhood preservation,
answers to questions that specifically pertain to students as
local stakeholders — such as the state of the Uber and Lyft
debacle and scholarships for low-income students — were given
cursory responses.
Arguably, the topics of voter engagement, brain drain, gun
control and transportation, which were discussed briefly at the
debate, remain relevant to students as to other local voters.
The lack of participation in mayoral elections isn’t isolated to
UTSA students. In the 2013 general local election, only 7.61
percent of San Antonio voters came out to the polls. Incumbent
candidate Julian Castro won with over 29,000 votes. With a
student population of almost 29,000, UTSA is teeming with
potential voters for candidates. Increasing the participation of
young-adult student voters on election day warrants a two-fold
solution — students must accept responsibility as local
stakeholders, and candidates must address issues significant to a
university student population.
- See more at: http://www.paisano-online.com/student-interest-
vital-for-san-antonio-politics/#sthash.YdFmaJFq.dpuf
CHINA
Country Audit
INTRODUCTION:
Long Term Prospects/Short Term Macroeconomic Risk
As a project for this course, your team will use information
from the various modules to quantitatively score or rate a
country along two dimensions: (a) A potential for long-term
growth and (b) Likelihood of a financial crisis.
First, choose a country to audit. You should choose your
country not only based upon group interest, but also accounting

for the availability of data by which you can evaluate the risk
attributes on which your team shall base their evaluation. For
example, for the country you are evaluating, you may want to
download from the Economist Intelligence Unit (EIU) site the
“Country Profile”. This document will provide useful
background information for your report. You might also start
looking at the economic data (including Country Commerce and
Country Finance) that is available at various sites including
some country institutions like the central bank of the country,
the Treasury, the EIU, the IMF or the World Bank.
The scoring of each economic attribute should be done on the
indicated scale below. Thus, if the scale goes between 0 and 5,
then 0 is best and 5 is worst. Selecting and justifying the
appropriate benchmark for each attribute will likely be the most
difficult part for the entire country audit. For instance, in
assessing your selected country savings rate, what is a high
saving rate? It is best to compare it relative to that achieved by
other nations within the region of the world, or should this rate
be evaluated relative to the average savings ratio for all nations
in the world? In most cases, the answer may be both.
Additionally, what should be the time frame for the
comparison? Should it be the past 10, 20, or 30 years or the last
1-2 years? A critical part of your project is your team
formulating (and explaining in the report) your method for
selecting benchmarks for evaluation. You may also rely on some
of my discussion criteria during each module.
Once, you have scores for all attributes identified below, you
will need to come up with two overall scores, one for Growth
and one for Risk. Thus the overall score for Growth will be the
sum of the individual Growth attributes. The overall score for
Risk would be the sum of the Risk attributes.
Require&Question:
Overall length of the report: Maximum of 4page, plus 1-2 pages
for charts/tables.
Prepare a written report with your findings. The report should

contain:
A description and analysis of each measured attribute. Your
narrative should include an explanation of why the attribute is
important for growth or risk and any useful information you
have come across in your background reading research.
B.1. (0-10) The budget deficit. Sustainable fiscal policies. Debt
management and the yield curve. Interest rates. （IN CHINA)
B.3 (0-10) Growth and predictability of monetary policy.
Inflation. Wage increases. Unemployment. Central bank
independence.(CHINA)
LAST,MAKE A POWERPOINT AS WELL.

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