VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0296/01 0871215
ZNR UUUUU ZZH
R 281215Z MAR 06
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 5599
INFO RUCNMER/MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

,UNCLAS MONTEVIDEO 000296 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC AND EB 
DEPT PASS USTR 
TREASURY FOR OASIA FOR DOUGLASS 
USDOC FOR ITA/MAC/WBASTIAN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ECIN UY
SUBJECT: URUGUAY GROWS STRONG FOR THIRD CONSECUTIVE YEAR 
 
 
¶1.  Summary:  In 2005, Uruguay met its key IMF targets and 
achieved a 6.6% growth rate, outpacing expectations and 
driving real GDP back to pre-crisis levels.  Still, 
despite the ongoing strong recovery, per capita GDP (in 
dollar terms), investment and several social indicators 
remained below pre-crisis levels.  Uruguay continued to 
diversify its exports away from Mercosur, with the U.S. 
now purchasing as much as the entire trade bloc.  Initial 
numbers for 2006 indicate that the U.S. has now overtaken 
Mercosur as Uruguay's first export destination.  Growth 
perspectives for 2006 are good, with mid-range estimates 
at 4.0%-4.5%, but foot-and-mouth disease in neighboring 
Argentina and a potential deterioration of the labor and 
investment climate are incipient dangers.  End Summary. 
 
--------------------------------------------- ------- 
Sound growth in 2005 drives GDP to pre-crisis levels 
--------------------------------------------- ------- 
 
¶2.  Uruguay's economy grew 6.6% in 2005, outpacing 
previous GOU forecasts and exceeding analysts' 
expectations of a 4.0% to 6.0% range.  After four years of 
deep crisis and three years of recovery, GDP (in real 
terms) is back to its pre-crisis levels.  Per capita GDP 
(in dollar terms) reached $5,200 --still under its 1998 
peak of $6,800-- and nominal GDP (also in dollar terms) 
reached $16.8 billion.  Growth was led by robust private 
sector investment, nevertheless below pre-crisis levels, 
and record-breaking exports.  Inflation fell from 7.6% in 
2004 to 4.9% in 2005. 
 
¶3.  Uruguay's trade deficit surged from $180 million in 
2004 to $474 million in 2005, as imports grew faster 
than exports (25% and 16% respectively).  Imports were 
driven by industrial raw materials, which mirrored the 
10% industrial growth.  Capital goods imports, which 
rose about 50% over 2004 following the economic 
recovery and a 24% growth in investment, accounted for 
about 23% of the increase in the import bill.  Oil 
imports accounted for another quarter of the increase. 
 
------------------------------------- 
High scores for the new economic team 
------------------------------------- 
 
¶4.  The transition to this left-of-center Frente Amplio 
administration was smooth, thanks to its solid economic 
team.  By implementing prudent monetary and fiscal 
policies, the GOU slightly outperformed its IMF primary 
surplus target of 3.5% of GDP and slashed its debt/GDP 
ratio from 101% in 2004 to 82% in 2005.  Tax revenues 
rose 13.7% in 2005, led by the continuing recovery, a 
major reform of the tax collection authority, and an 
aggressive tax collection campaign.  The GOU benefited 
from the positive emerging markets conjuncture to place 
three dollar-denominated issuances for $1.7 billion and 
an euro-denominated issuance for Eur300 million. 
 
¶5.  In its second review of a 2005 stand-by program, 
the IMF stated that the ""program is on track"" and that 
near-term vulnerabilities have declined.""  Still, the 
Fund warned that ""significant risks remain (...), 
public debt is still high, the financial system remains 
highly dollarized, and the fiscal program is subject to 
risks from spending pressures.""  The IMF program ""is 
designed to contain these risks"". 
 
¶6.  According to the IMF, ""monetary policy has been 
managed prudently, and needs to be focused on achieving 
the program's inflation objective.""  However, several 
local analysts have argued that the Central Bank has 
implemented an overly stringent policy that has 
appreciated the peso against the dollar and impacted on 
competitiveness. Following a 15% fall in the peso/dollar 
exchange rate, competitiveness (measured by the real 
exchange rate) dropped 10% in 2005, but remains at an 
adequate level. 
 
¶7.  The banking sector continued to recover from the 2002 
crisis.  Deposits rose 4% and, after several years of 
running deficits, most private banks showed positive 
results.  According to the IMF, ""financial sector reforms 
continue to progress well (...), including the Central 
Bank and supervisory authorities."" 
 
 
--------------------------------------------- ------- 
Social and labor indicators improved but remain weak 
--------------------------------------------- ------- 
 
¶8.  While social indicators improved in 2005, following 
the ongoing recovery, most remain below pre-crisis levels. 
Unemployment dropped from 13% in 2004 to 12% in 2005, but 
is still 20% above 1998.  After dropping five years in a 
row, real wages grew 4.5% in 2005, but also remain 20% 
below 1998 levels.  The latest official figures show a 
doubling of the poverty rate to about to one-third of the 
population from 1998 through 2004. 
 
--------------------------------------------- ------------ 
Uruguay continues to diversify exports away from Mercosur 
--------------------------------------------- ------------ 
 
¶9.  Uruguay continued to diversify its exports away from 
Mercosur, with the U.S. market absorbing an increasing 
share.  The U.S. became Uruguay's largest single export 
market in 2004.  In 2005, the U.S. absorbed the same share 
of Uruguay's exports as Argentina, Brazil and Paraguay 
(Mercosur) combined.  Initial numbers for 2006 indicate 
that the U.S. has by now overtaken Mercosur as Uruguay's 
lead export market.  On the other hand, the market share 
for U.S. exports to Uruguay continued to decline, from 
12.0% in 1998 to only 6.7% in 2005. 
 
 
--------------------------------------------- ------ 
Comment: Continued growth in 2006, but risks remain 
--------------------------------------------- ------ 
 
¶10.  While the GOU and the IMF expect 4.0% growth for 
2006, private analysts' forecasts range from 3.5% to 6.5%. 
The paper mills conflict between Uruguay and Argentina, 
which resulted in the extended blocking of bridges by 
Argentine protestors, has already had an impact on trade 
and tourism between the two countries.  It will likely 
have some negative effect on this year's GDP.  Other 
possible constraints to growth are the risks of contagion 
from an outbreak of foot-and-mouth disease in Argentina, 
only 250 miles away from the Argentine-Uruguayan border, 
and of a possible worsening of an already tense labor 
situation with the unions.  A deteriorating labor climate 
could affect investment and hinder further declines in 
unemployment.  End Comment. 
 
NEALON