Brazil, Argentina drag Uruguay down as Astori pushes diversification
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Emerging Markets

Brazil, Argentina drag Uruguay down as Astori pushes diversification

Uruguay is working hard to diversity its economy, which is certain to be hit by the recessions in its two large neighbours, Brazil and Argentina


Uruguay’s geography is doing it few favours. With its two large neighbours, Brazil and Argentina, in recession, Uruguay’s economy is suffering, and is due to slow down to 3% or less this year, after averaging nearly 6% over the last 10 years. “[It] is impossible to ignore this impact,” Danilo Astori, Uruguay’s finance minister told Emerging Markets. “The difficulties experienced by Argentina and Brazil have an impact on Uruguay. We have reacted in diversifying export markets. We now have interesting alternatives.”

Uruguay has tried to diversify and open up its economy to the point that it is now trading goods with 140 countries. China has recently become its largest client, surpassing Brazil, its key Mercosur partner, mainly thanks to soya and pulp cellulose exports. It also plans to build a third pulp cellulose plant. “The insertion in the international economy is the key to economic growth,” he said.

Astori, who was vice president under the previous administration of Jose Mujica, said that economic growth might be lower than 3% this year, after 3.5% in 2014 and an average of 6% in the past decade.

Astori said that fighting inflation — which stands above target at 7.4% — and

implementing fiscal discipline are at the core of his policy strategy. Uruguay’s solid economic record has already led the country to be upgraded by Moody’s last year to Baa2 with a stable outlook, in spite of lingering inflation concerns. “Inflation is a long running problem in Uruguay,” said Mauro Leos, Latin America’s sovereign credit analyst at Moody’s. “I do not expect significant progress, because inflation expectations are outside the range [of the inflation target].”

The upgrade has allowed the country to act pre-emptively on the international capital markets. Late last month, it re-opened its 2050 fixed interest bond at 5%, and sold $1.2bn at 5.014%, in an effort to limit the potential damage that may be caused by the expected rise in financing costs that will follow the likely US interest rates hike. “Eighty-seven percent of the country’s public debt is fixed rate, and 60% of the entire debt is in local currency,” said Astori, who insisted that the de-dollarisation process has paid off in the past 10 years. In addition, he said, little more than 10% of the country’s debt matures in less than a year.

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