Uruguay is shifting its debt strategy towards domestic issues, economics minister Danilo Astori told Emerging Markets in an interview.
“Issues in local currency are the next challenge for Uruguay . This is in line with the process of reducing the dollarization of the Uruguayan economy,” Astori said.
Uruguay has won praise from investors for the way it has handled recent problems on its foreign debt. It avoided a moratorium following the collapse of neighbouring Argentina ’s economy, and has now turned the tide.
Eduardo Lora, acting chief economist of the IDB, told Emerging Markets: “It’s a very good development for Uruguay . Domestic debt markets have been growing in the past few years and this will continue. In Uruguay ’s case this is a healthy trend.”
A key problem in Latin America is exposure to dollar-indexed debt, Lora said. Countries “have to strike a balance between exchange rate risks and interest rate risks”.
Jerome Booth, head of research at Ashmore, said that several countries, including Brazil and Colombia , had shifted to local currency issues. “It’s not a panacea, but it is entirely appropriate for Uruguay .” Booth added that while domestic debt issues increased weakness in the short term, but building a local curve cut vulnerability long term.
Astori explained that his debt strategy is based on three criteria. “On one side, we’d rather increase the sovereign debt rather than conditional lending. Then the long-term debt may substitute short-term debt, and additionally cheaper debt instead of more expensive debt.
“All of this is being done within the context of reducing of the debt to GDP ratio.”
Uruguay ’s debt-to-GDP ratio rose to more than 70% in recent years, and a large share of public debt is linked to the dollar. The small Uruguayan economy may also suffer from the impact of a likely fall in commodity prices, which may impact export revenues.
Astori has managed to defend orthodox economic policies in the government of Tabare Vasquez, but the delicate balance with the ruling coalition has meant that he had to backtrack on his proposal to implement a free trade agreement with the US .
The Uruguayan foreign minister Reinaldo Gargano had threatened to resign if his country signed a fully fledged free trade agreement with the US , and Brazil also expressed concern that such an agreement would not be compatible with Mercosur internal rules.
The suggestion has been ditched, after Uruguay signed a less ambitious trade and investment framework agreement (TIFA) with Washington . “I think that we need to improve our commercial relationship with the US . We are trying to pursue this on the basis of TIFA,” said Astori.