He is a veteran, and his mettle has been tested in the last year at the helm of Uruguay's incipient recovery. Isaac Alfie, Uruguay's economy and finance minister, chosen as Latin American finance minister of the year by an Emerging Markets poll of financial analysts, is respected for orthodox policies and his leadership in the restructuring of $5 billion in domestic and foreign debt – an unprecedented swap of 100% of the nation's debt.
During the Uruguayan financial crisis of 2002, Alfie led the technical team in intense negotiations with multilaterals that led to an agreement in August 2003 with the IMF, World Bank and IDB. “He has been the face of Uruguay in the eyes of investors since early 2003 on a direct and personal basis in the restructuring along with Julio de Brun, central bank chief,” says Chris Gilfond, managing director, Latin American debt capital markets at Citigroup.
His vast experience proved crucial as the deal was hammered out in 10 days and kept Uruguay afloat. When the ink was dry, the IMF had approved a loan of $787 million, and the World Bank had committed to disburse $200 million. The IDB, meanwhile, would release $460 million in funds that had been approved in the past. Getting all parties to agree shouldn't be a great surprise since Alfie knew the multilaterals from the inside: in previous posts, he had been Uruguayan governor to the IMF, World Bank and IDB.
Alfie had served for 12 years as top adviser in the ministry before taking over as chief of economic policy last year. He knew the Uruguayan economy chapter and verse, but even a seasoned finance official would have been taken aback by the economic crisis and banking collapse that slammed Uruguay from late 2001, as the country suffered directly from the default and devaluation in neighbouring Argentina. Growth shrank in 2002 by 11%, the debt-to-GDP ratio doubled in two years to 100% at end-2003, and Uruguay's risk premium shot up to 2,200 basis points over US Treasuries in February 2003. Adding insult to injury, Uruguay suffered perhaps the biggest run on deposits ever when fraud was discovered in two foreign banks operating in the country.
When the run started, bank deposits held in foreign currency equalled 100% of GDP, and frightened savers withdrew half of all deposits. The recovery, largely export-driven, is taking hold, with second quarter annualized growth of 15%. Uruguay is on course to reach its 5% growth target for this year as exports have so far surged by 30%. Unemployment remains high at 13% (though down from the peak of 20%) and the crisis has worsened Uruguay's income distribution. Recovery in these social dimensions will be slow to come.
Markets have shown their enthusiasm for Uruguay's debt management and recovery by snatching up two novel bond issues in the last year. In October 2003, just two months after Alfie was named minister, Uruguay returned to international markets with the first ever peso-denominated global bond. This was a successful strategy to reduce Uruguay's dollar-denominated debt and create a longer-term market in peso instruments. The government sold the equivalent of $200 million (later re-opened to increase to a total of $300 million), but demand was overwhelming, totalling $800 million. That bond was also the first inflation indexed global bond from an emerging market country.
Then last July, the government made another first by issuing $250 million of devaluation-protected notes that pay a fixed nominal rate or the percent change in the exchange rate. Also a strategic move, this issue completes the government's financing needs until next March when the new administration takes power. That issue “is an initiative of Alfie to pre-empt [market concerns]. Alfie has put Uruguay on a very solid footing to weather any volatility related to the elections,” says Gilfond, an adviser on the deal.
Minister Alfie spoke to Emerging Markets.
EM: You were senior adviser in the economy and finance ministry as the Uruguayan crisis unfolded. How were the negotiations with the multilaterals?
IA: It was very difficult. There was reluctance to loan more to Uruguay. The situation in Argentina and its problems were very green still. At the beginning, the IMF didn't want to make a programme with Uruguay.
EM: How did you break through that resistance?
IA: Uruguay talked with the international financial institutions and the US Treasury about the cause of the problem, and showed there was a programme that could move the country ahead without losing its history or tradition of respect for international laws and contracts. We managed to convince, first, the US Treasury, and after that the international institutions.
EM: How important was Treasury
backing?
IA: It probably influenced the multilaterals. First there was John Taylor [head of international affairs at the US Treasury], and I suppose the G7 played a role.
EM: The IMF has loaned Uruguay an unusually high amount, nearly 700% of the country's quota. Such large amounts are usually reserved for large countries that have no strategic importance. Why, and why Uruguay?
IA: You'll have to ask the IMF. We are too persistent. We've not yet received the full amount of the programme. If the situation improves, we won't have to use it all.
EM: You said negotiations with the IMF were difficult. Can you give more detail?
IA: There were stages. The Fund helped Uruguay in May and June 2002 with money, but regarding policy advising, we did not agree; there were many discussions. The Fund didn't want to renew the programme, and in February of 2003 we had quite a tense relationship. The Fund didn't share the programme that Uruguay wanted – it provoked problems because we didn't have money.
EM: What was the root of the problem?
IA: Eduardo Aninat (then deputy managing director of the Fund) said we had to restructure debt based on a reduction and first default ... that we did not have the path of solvent public finances. We said restructure the debt, yes, but there is no need to reduce the nominal value, and there has to be a process to keep up-to-date on payments while we restructure.
EM: What happened?
IA: We were convinced of the route of solvency and certainty. There was a break, the Fund accepted [in February 2003] our policy. It became convinced and came along with us and helped. The IMF gave us funding to maintain ourselves; it postponed some payments, supported the programme, and the country was in shape to go to private capital markets.
EM: How is the recovery going?
IA: All the factors are going at a very good rhythm. Our very orthodox path has created certainty, which was what we wanted to create. Investment is growing, there is a consensus for a greater opening in Mercosur, the microeconomy is becoming deregulated, telecoms (except basic service) is liberalized. The pending issue is the state monopoly on fuel, there are always things pending. Reform of the state has yet to advance.
EM: Are there lessons for Argentina from the way Uruguay has handled its crisis?
IA: Each individual has to extract the lessons.
EM: The IMF recently made a mea culpa for its handling of the Argentine crisis. Is a mea culpa in order for how it handled Uruguay?
IA: No, because the Fund has helped Uruguay. It helped a lot. Each case is unique.