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Uruguay has attained middle income status for its relatively small population of 3.4 million. Years 1999-2002 will go down in the record books as one of the most difficult and challenging years for Uruguay as its reputation as a banking & tourism destination have been hit hard as the Uruguayan economy has had a flirtation with an economic melt down and depression. Below are BankINTRO.com’s summary research notes for Uruguay and how it relates to the Uruguayo peso.

POLITICS: in 1985, civilian rule began after a period of military control. During the 1990's, the politics in Uruguay shifted to the right with a decade of economic reforms which opened up the Uruguayan economy. To segments of the Uruguayan population, this was a painful adjustment as many industrial jobs were lost to foreign competition due to the inefficiencies of Uruguayan industry after decades of protectionism and state subsidies/tariffs with many factories have since been left empty and rusting. After four years of depression (1999-2002) whereby GDP contracted by 20 percent, Uruguayans voted for change in year 2005 by electing a centre-left coalition government wishing for a return of protectionism and left leaning policies in attempt to alleviate the painful economic readjustment. Next election is scheduled for 2009.

ECONOMY: the Uruguayan economy is presently slowly emerging from depression with strong macro economic fundamentals. The economy continues to grow although GDP growth is forecasted to moderate in 2008-09. Strong fiscal performance is allowing for increased social spending, capital investments into infrastructure and tax reform with tax cuts. Since year 2004, strong commodity prices, political stability have helped to garner economic gains for the country. One of the largest investments in the history of Uruguay has been successfully completed with a 1.2 billion USD pulp mill coming online in November 2007. This mill is expected to further boost GDP growth.

In the 1970's, Uruguay's economy was under the ideology of socialism with a high degree of government interference, protectionism and regulation. Protectionism created full employment but the by-product was inefficient industries, low foreign direct investment 'FDI' and high poverty rates. In contrast, during the 1990's Uruguay's economy was performing well as the economy opened up more to privatization, foreign investment and resulted in a higher standard of living. This all came to an end with the devaluation of the Brazilian real in early 1999 followed by the collapse of the Argentinean peso in 2001-02. By the fall of 2002, the Uruguayan economy stabilized. At present, further difficulties that may cloud economic recovery for Uruguay may include sustained higher global oil prices since Uruguay is a net energy importer. The Uruguayan labor environment is the freest in South America.

Economic Statistics Total GDP as measured by purchasing power parity stands at 37 billion USD (2007) with corresponding GDP per capita at 10,700 USD. Market GDP at 21.1 billion USD (2007). GDP growth rate for 2006 at 7 percent, year 2007 at 6.2 percent, year 2008 to moderate to 3.8 percent. Inflation quotes include year 2007 at 8 percent, year 2008 is estimated at 6.8 percent. The central bank has an inflation target of 6.5 percent. Uruguay’s current account deficit came in at 2.7 percent of GDP (2007) with corresponding trade shortfall at 1 billion USD (2007). However, the overall balance of payments account is positive at 685 million USD (2007). Fiscal account is balanced/modest surplus. Public debt is well down from 110 percent of GDP in 2003 to 62 percent in 2007. Uruguay is a net exporter of electricity at 1 billion Kwh (2007). Exports: agricultural. Imports: petroleum related products.

POSITIVES: well educated nation, IMF debt paid out in 2007, Uruguay is home to one of the continent’s most expensive tourist playgrounds ‘Punta del Este’ which attracts much needed foreign capital and resulting economic benefits from wealthy foreign tourists. CONCERN: historical incidences of foot & mouth disease in livestock. Livestock is a crucial part of the economy, accounts for 50 percent of exports. Only 30 percent of public debt is denominated in UYU notes. Poverty line is higher with 27 percent of the population living below. Many young Uruguayans have left the country seeking opportunity elsewhere. Tensions with Argentina over the operation of Uruguay’s new pulp mill across the river from Argentina – environmental concerns?

BANKING SYSTEM: one of the most USD-dollarized economies in the world, high level of USD dollarization of bank deposits.

In early 2002, storm warnings became evident in Uruguay's banking system as Argentina melted down economically coupled with banking fraud allegations against a principal shareholder of Banco Comercial, one of Uruguay's largest banks at the time. The Argentinean peso collapsed in late 2001, their banking system became insolvent with banking holidays. Argentines could not access their cash in Argentinean banks. Those Argentineans with safe haven bank accounts in Uruguay began to access their undeclared funds. By the time June 2002 rolled in, Argentineans started a run on Uruguayan banks as those Brazilians with Uruguayan accounts joined in.

Social unrest started in Uruguay with looting of supermarkets and public demonstrations of discontent. During this 6 month time frame, Uruguay lost 50 percent of its deposits and 80 percent of its foreign reserves as the Uruguayo peso could not be defended by reserves anymore and the government accordingly floated in June 2002 resulting in a currency crash in the uruguayo peso. Argentineans alone accounted for 5 billion USD in withdrawals. These series of events brought on by external factors almost brought Uruguay to the brink of bankruptcy.

Uruguay is a key banking & financial centre for trade flows between Mercosur countries as Uruguay enjoys strict banking secrecy laws, a historically somewhat safe and relatively politically stable environment coupled with overall favorable laws for international trade & foreign exchange. Prior to the banking system confidence crisis in 2002, Uruguayan banks for a long time were considered to be very sound with a high level of confidence within the banking system as a large number of Brazilians and Argentineans kept their monies with Uruguayan banks. Uruguay with geographic size as a country and bank secrecy laws drew strong similarities with Switzerland and garnered the title 'Switzerland of South America' as Uruguay has long been considered a banking haven.

Today, the banking system is profitable, well capitalized, highly liquid, low non-performing loans, non-resident deposits are at low levels unlike 2001-02. Net official reserve assets have now rebounded to a healthy level of 4.429 billion USD as of January 2008 equivalent to 6 months of import coverage or three times short term debt coverage.

REGIONAL: Argentina, Brazil
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KNOWLEDGE: Inflation
The immediate threat to the region and to Uruguay is a return to high inflations of the past. CPI inflation in Uruguay during 1986 - 1995 averaged 72 percent and fell to 28 percent by 1996. Inflation alone for 1990 was 133 percent, the economic policies of the 1990's did indeed help to contain inflation as the rate fell to 5 percent by year 2000. Historically, Argentina, Brazil and Uruguay have had periods of hyperinflation and with inflation in Argentina reaching 41 percent in 2002. It is this inflation threat that poses the immediate concern to the Uruguayo peso, a significant turn of events since inflation bottomed at 3.6 percent in 2001 but quickly rebounded again to 19.4 percent during the 2002 banking crisis.

CURRENCY: ISO symbol 'UYU', Uruguayo peso.
At time of review on March 19, 2008, the Uruguayo peso had an exchange value of 20.7 UYU to the US-dollar and/or 32.51 UYU to the Euroland euro (EUR). On June 20, 2002, the government floated the Uruguayo peso and it accordingly fell from 22.85 to 35 UYU to the USD ( 50 percent) at the bottom of the currency collapse. By July 31, 2002, the Central Bank decreed a banking holiday, banking curbs, one of Uruguay's worst financial crises ever. By October 29, 2002, the UYU peso stabilized.

The economy remains highly USD-dollarized as many big consumer ticket items are transacted in USD rather than UYU. A free floating exchange rate regime will allow the government in time to convert more of these transactions into UYU as the UYU gains confidence and credibility in the market thus reducing demand for USD transactions.

CURRENCY HISTORY: the UYU came into circulation in 1993 when the UYU replaced the former neuvo (new) peso at a rate of 1000 neuvo to 1 UYU. Previously, the neuvo peso itself was introduced as Uruguay’s national currency in November 1973 when the neuvo peso replaced the old peso again at a rate of 1000 to 1 neuvo pesos.

During 1999 and much of year 2000, a crawling exchange rate band was in place maintaining a consistent 7.5 percent/year depreciation of which the Uruguayo peso appreciated to the upper limit within the trading currency band under this managed float. By 2001, this depreciation band doubled to 33 percent to help offset the financial shocks in Argentina and Brazil. By 2002, the banking crisis that struck Uruguay resulted in the authorities abandoning the crawling rate peg to a floating exchange rate regime of which the UYU quickly depreciated. Many individuals and businesses were forced into bankruptcy as many held USD debts. With the renewed economic rebound, the UYU actually appreciated from 30 to 24 UYU to the USD during years 2004-06.

Historical exchanges rates include: 1993 at 4 UYU to the USD, 1997 at 9.44, August 1998 at 10.73, July 1999 at 11.47, May 2000 at 11.95, January 2001 at 12.56, January 2002 at 14.22, June 2002 at the bottom of currency crash at 35, year 2003 at 28.2, 2004 at 28.7, 2005 at 24.479, 2006 at 24.048 and year 2007 at 23.95.

CURRENCY FORECAST: high capital inflows to help support UYU valuation, confidence is returning to Uruguay with continuing stabilization for the UYU. BankINTRO.com’s one year forecast is 22 UYU to the USD due to an expected rebound in the USD in late 2008 – early 2009. Historically, inflation risk and persistent currency devaluations remain the primary currency risk factors for Uruguay.

In the long term, the global move towards regional currency blocs may be created for the Mercosur members and for the associate Mercosur members of Chile, Colombia, Ecuador and Peru (Venezuela & Bolivia are on their way to attaining full Mercosur membership). A new South American currency zone in 20 or 30 years is a strong reality representing the Mecosur zone countries in similar concept to the Euroland euro.

Historical currency instability, difficulties with periods of inflation and the continual threat of macro economic shocks warrant a moderate risk ranking for the UYU although current macro economic variables are positive.

UPDATED: March 19, 2008

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