Bloomberg News

‘Re-Invented’ Uruguay Sees Bonds Trade at Investment Grade

September 29, 2011

(Updates with rate decision in ninth paragraph.)

Sept. 29 (Bloomberg) -- Long vulnerable to periodic financial crisis in neighboring Argentina, Uruguay’s growing ties with Brazil and more diversified exports are prompting investors to bet the country is heading toward its first investment-grade rating since 2002.

Economy Minister Fernando Lorenzo, in an interview at Montevideo’s World Trade Center, said investors are already treating the country like one of the safest borrowers in Latin America after the government reduced its debt denominated in dollars and dependence on commodities exports.

The extra yield investors demand to hold Uruguayan bonds instead of U.S. Treasuries rose 2 basis point, or 0.02 percentage points, to 290 at 5:48 p.m. New York time. That’s less than investment-grade countries including Russia and Poland and above the 261 basis points investors demand for Peruvian debt, another investment-grade nation.

“The ratings agencies aren’t always right,´´ said the 51- year-old Lorenzo, who continues to teach economics at Montevideo’s Universidad de la Republica even as he steers the nation’s economy.

Uruguay learned to diversify after Argentina’s $95 billion default in 2001 pushed the economy into recession and forced it to restructure $5 billion of debt in 2003. A $1.2 billion pulp and paper mill inaugurated in 2007 is boosting trade with Europe and markets are opening up in places like Turkey, where exports climbed 140 percent this year. The country’s banks, long a haven for foreign investors, depend less on Argentine deposits.

‘Better Prepared´

“They have re-invented themselves,” said Mauro Leos, an analyst at Moody’s Investors Service in a phone interview from New York. “They are one of the countries better prepared to handle the bad news.”

President Jose Mujica, a former member of the Tupamaros guerrilla movement, has continued the market-friendly policies of the previous government, which won Uruguay three credit upgrades from Moody’s since 2006. While officials including central bank Governor Mario Bergara have said an investment grade rating is overdue, the government’s attention is now focused on cushioning the $44 billion agricultural and services- based economy from the global slowdown.

Rate Cut?

As in Brazil, where the central bank last month cut interest rates in the face of accelerating inflation, policy makers in Uruguay today had to decide at their quarterly meeting whether to reverse the direction of monetary policy even with prices expected to rise 7 percent both this year and next.

The five-member policy committee, led by Bergara, today kept the benchmark rate at 8 percent.

Florencia Carriquiry, an economist at Deloitte Montevideo Research, said Bergara had good arguments to leave the benchmark rate unchanged.

“It would be more cautious to pause and wait a quarter to see whether the market turmoil impacts the local economy or not,” said Carriquiry in a phone interview.

Eight of 11 analysts surveyed by El Pais newspaper expected the bank to leave borrowing costs on hold after it raised them 150 basis points at its two meetings this year. The remaining three forecasted a rate cut after inflation reached 7.57 percent in August, above the upper limit of the bank’s target range of 4 percent to 6 percent.

Market Performance

Moody’s raised Uruguay’s rating to Ba1, one level below investment grade, in December 2010, putting the country in the same category as Guatemala and Morocco. Standard & Poor’s also rates them one notch below investment grade.

Leos said today that Moody’s will visit Uruguay to discuss their ratings outlook with officials in the final quarter of the year. Among Uruguay’s vulnerabilities are the economy’s small size, which magnifies the impact of any shock such as a drought, and still high levels of dollarized debt. No single factor is an impediment to a ratings upgrade, he added

“The crisis is a stress test for every country,´´ Leos said in an interview today alongside Lorenzo. “It’s probably going to be ugly and worse than we imagine now.´´

The Uruguayan peso has fallen 1.1 percent this year to 20.125 per dollar compared with a 9.7 percent plunge in the Brazilian real and a 5.4 percent fall in the Argentine peso.

Maintaining Growth

Lorenzo repeated today the government hopes the economy will expand 6 percent this year. Efforts in recent years to reduce public debt levels have prepared the economy well to withstand more turbulence in global financial markets, he said. If the global slowdown deepens, Uruguay’s exports could suffer more than they were during the 2008 global recession, he added.

“We don’t feel like we’re in a crisis but we know that in some way it may hit us,´´ Lorenzo said. “

Sandwiched between Brazil and Argentina, Uruguay also suffers the effects of decisions taken by its bigger neighbors and partners along with Paraguay in the Mercosur trade bloc.

Last week, El Pais reported that Effa Motors laid off 400 workers and closed its plant in San Jose after Brazil raised a tax on imported vehicles like the ones Effa assembles from China. On Sept. 27, after officials traveled to Brasilia to protest, the two countries reached an accord exempting Uruguay from the tax increase.

Dependence on Argentina

Since Argentina’s 2001 crisis, Uruguay has lessened its dependence on Argentina. The share of total exports going south across the Rio de la Plata has declined by half from a 26.8 percent average between 1996 and 2001, according to Moody’s. Trade with Brazil rose 82 percent to $3.1 billion from 2006 to 2010 compared with a 46 percent increase with Argentina to $1.9 billion over the same period.

Deposits by Argentines, who traditionally have taken advantage of Uruguay’s bank secrecy laws to evade taxes, have also shrunk to 15 percent of the financial system’s total, or $2.8 billion, from 40 percent in 2001, according to the central bank.

While the country has made great strides, its economy must be able to compete at a global level, said Leos.

The World Economic Forum this month ranked Uruguay 63rd on a list of 142 countries in terms of competitiveness, placing it behind countries including Iran, Mauritius and Sri Lanka.

“In the context of Latin America, they appear pretty good,” said Leos. “But what is relevant is the global comparison. If you are small you can be more flexible. They have to exploit the positive advantage of their small size.´´

--Editors: Joshua Goodman, Robert Jameson

To contact the reporter on this story: Lucia Baldomir in Montevideo at lbaldomir@bloomberg.net; Bill Faries in Montevideo at wfaries@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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