Uruguay: A Bastion Of Stability In A Chaotic Region

The country of Uruguay has maintained a growing economy despite the economic chaos that had roiled South America over the past decade. Unlike a number of neighboring countries, Uruguay was able to avoid recession in the global financial crisis. This was due to increased investment in infrastructure and higher overall public expenditures. Growth which had slowed to 2.9% in 2009, resumed to a rate that exceeded 7% by 2010.

Much of the economic success of Uruguay, is due to a strong export oriented agricultural sector. This has provided the nation with the income, to maintain high levels of social spending. One of the benefits of these elevated expenditures, was to develop a well educated and skilled work force.

Uruguay’s per capita income among its 3.4 million inhabitants, is among the highest in Latin America. The level of income inequality on the other hand, remains among the lowest.

Uruguay is tied with Chile, as the least corrupt country in Latin America.

The country regained investment grade status in 2012, and has experienced further upgrades since then.

Uruguay had an average rate of economic growth of 5%, in the mid to late 1990’s. The downturn that arrived in 1999 through 2002, was the result of problems that had originated with their large neighbors and major export markets of Argentina and Brazil.

It began with a devaluation of the real in Brazil. This resulted from the low commodity prices and the subsequent economic difficulties.

In 2001 and 2002, citizens from Argentina made mass withdrawals of American dollars that had been deposited in Uruguayan banks. This was the result of the Argentine government freezing bank accounts domestically.

The large amount of dollars leaving Uruguay, soon created a banking crisis. The plunge in the valuation of the Uruguayan peso, would lead to a sharp pull back in consumer spending and a rapid rise in prices. The economy subsequently contracted by 11%, with a dramatic rise in unemployment that reached 21%. The percentage of the population in poverty, soon topped 30%.

Real GDP (Gross Domestic Product) fell by 20% in those years and external debt doubled. Financial assistance from the International Monetary Fund (IMF) became necessary to stabilize the economy.

Uruguay was forced to restructure its external debt by 2003. Yet bond holders, were not asked to accept a diminution on the principal. This would keep the confidence of foreign investors. It would in turn, lay the ground work for the resumption of growth beginning in 2004.

For the next four years, the economy would expand by an average of 8%. This would only be interrupted, with the financial crisis of 2008 and 2009.

Political stability and social tolerance, are two key components of the success that is Uruguay. The citizenry are known to be quite supportive of democratic institutions. They are by far the most satisfied throughout Latin America, with the way democracy works in their country.

A new constitution presented by the military in 1980, was rejected in a popular referendum. After that a plan was announced for a return to civilian rule, with national elections in 1984. The military ran Uruguay from 1973 until 1985.

The first president after returning to civilian control, would be Julio Maria Sanguinetti from the Colorado Party. He would implement major economic reforms and further strengthen institutions, during his tenure lasting from 1985 to 1990.

Another major accomplishment was the passage of a controversial amnesty law, for the abuse of human rights during military rule. It was achieved through referendum and moved the country forward, in healing the political divisions within Uruguay.

Opposition candidate Luis Alberto Lacalle from the National Party, won the 1989 election. He would continue economic structural reforms. His successor would be former President Sanguinetti. Together, they had made progress in education, social security, and public safety.

A 1996 constitutional amendment would create a new electoral process, which would go into effect three years later. Colorado Party candidate Jorge Batlle, with the support of the National Party defeated the Broad Front candidate Tabare Vazquez.

The poor economic conditions aforementioned, paved the way for the election of Vazquez in 2004. His party also won a majority in both houses of Parliament. He would maintain many conservative principles of capitalism, despite his leftist leanings.

As commodity prices recovered and began to soar, with the rapid growth in China and other parts of Asia, Uruguay benefited enormously. President Vazquez presided over a tripling in foreign investment and a drastic reduction in unemployment. At the same time, the government was able to keep inflation under control. This in turn, helped reduce poverty.

Another major accomplishment of the Vazquez administration, was the reduction of the GDP to debt ratio from 79% to 60%.

The election of 2009, would continue with Broad Front dominance. Jose Mujica a former leftist militant, had spent a total of 15 years in prison during the rule of the military. As President, he would steer the legalization of abortion, cannabis and same-sex marriage. This was despite considerable opposition.

He was well known for his down to earth style. He refused to stay in the presidential palace, but rather remained on his humble farm, outside the capital city of Montevideo.

The 2014 election, witnessed the return of Tabare Vazquez as the Broad Front candidate, since the constitution prohibits consecutive terms for the office of the presidency. He was able to hold onto a slim majority in the Parliament as well. Final results gave him 52.8% of the vote compared with 41% for his opponent Lacalle Pou, of the right National Party.

Mr. Vasquez had pledged to boost social spending, but keep the economy in good shape. The main focus of his administration, was to try to reform education and increase the ongoing efforts in fighting crime.

Since coming into office, he is instead spending progressively more energy on the rapidly cooling economy.

Uruguay’s economy slowed substantially in 2015, growing only just 1.5% in 2015. This compares unfavorably to the 3.5% recorded for 2014.

Although the country has made progress toward greater diversification of the domestic economy, slowing growth in South America overall, is still having a major impact. The global decline in commodities, is having a major effect on the export market in Uruguay. This includes the major cash crops of soy, meat, milk, paper pulp, rice and wool.

Growth for 2016 is expected to be a relatively low rate of 1.4%, but the country will escape recession. Unemployment is still at a relatively high rate of 7%, but not excessive compared to other nations in the region.

In addition to a slowing economy, Uruguay is facing other challenges. Along with other major currencies in Latin America, the Uruguayan peso has depreciated significantly against the United States Dollar (USD) over the past year.

In response, the central bank has intervened in the foreign exchange market. This did forestall a further currency devaluation, but is resulting in a notable reduction in international reserves.

The decline of the peso has also led to a pick up in inflation. As of July of 2015, it has exceeded an annual rate of 9%.

This is why the government has been forced to make reducing inflation, a major policy priority. It will be the only way to move the country further away, from the heavy dependence on the American dollar. This is important if the country is to develop its own monetary policy, to help deal with external shocks.

An advantage of the recent devaluation and the flexible exchange rate, is that it has helped maintain competitiveness in international markets. This in turn, has kept the country out of recession.

Uruguay is benefiting from a decade of prudent debt management and a reduction in foreign currency denominated liabilities. Yet, state spending remains overly high.

Despite excellent banking services, an information sharing agreement with unstable Argentina has somewhat reduced confidence in Uruguay, as being a safe haven for financial assets.

The five year budget will continue to emphasize infrastructure development and social objectives. However, the slowing economy will force further reductions in government spending, as deficits rise. It will be the only way to maintain the confidence of investors, both domestic and foreign.

State involvement in the economy remains substantial and deregulation is needed in energy, public utilities and telecommunications. Yet the judiciary is mostly independent, so contracts are enforced. As a result, private property is secure and expropriations are rare.

Foreign and domestic investors are treated equal under the law. Recent reforms have considerably enhanced regulatory efficiency.

Future growth for Uruguay, will rely on specializing in higher value-added commodity production and processing. This will allow the country to develop its own corner, among Latin American exporters. It will also help foster greater diversification of export markets, making the country less dependent on individual countries and external difficulties. Innovations like this of course, will require significant upgrades to internal infrastructure, especially in transport.