VZCZCXYZ0000
PP RUEHWEB

DE RUEHMN #0356/01 1681917
ZNR UUUUU ZZH
P 161917Z JUN 08
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC PRIORITY 8286
INFO RUCNMER/MERCOSUR COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS MONTEVIDEO 000356 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD UY
SUBJECT: URUGUAY CONTINUES TO EXPERIENCE STRONG ECONOMIC 
GROW AND REDUCES EXTERNAL VULNERABILITIES 
 
REF: MONTEVIDEO 230 
 
Summary 
-------- 
¶1. SUMMARY: Uruguay continued to experience exceptional 
economic growth in the first quarter of 2008, fostered by 
robust consumer spending, high commodity prices and the 
start-up of operations by Botnia's giant paper pulp mill. 
Over the past couple of months, Economy Minister Danilo 
Astori and Central Bank officials have repeatedly stressed 
that Uruguay is in a much better position to face external 
shocks than it was prior to the 2002 crisis.  While Uruguay 
is undoubtedly less dependent on regional developments, 
several structural weaknesses remain that make it vulnerable 
to a global downturn.  END SUMMARY. 
 
Continued exceptional growth 
---------------------------- 
¶2. Uruguay's economy continued to grow at an exceptional rate 
in the first quarter of 2008, with 10.9% GDP real growth 
vis-a-vis the first quarter of 2007.  Transportation and 
communications was the most vibrant sector, up 27%, while 
industry followed with a 13% hike, fostered by the start-up 
of operations by Finnish Botnia's paper pulp mill.  Private 
consumption increased 8% in real terms, fueled by higher 
employment and rising wages, and investment rose by 17%. 
Exports rose 12% in real terms (over 34% in dollar terms), 
thanks to increasing sales of paper pulp and the high prices 
of agricultural commodities.  In turn, imports stepped up 
11%, due to higher purchases of capital goods and raw 
materials (a reflection of strong growth) and of consumer 
goods (a result of higher employment, rising wages and a 
cheap dollar).  Measured in dollar terms, imports rose 54%, 
in large part because of the surge in oil prices. 
 
Positive developments 
--------------------- 
¶3.  Over the past couple of months, Economy Minister Astori 
and Central Bank officials have repeatedly stressed that 
Uruguay is in a much better position to face external shocks 
than it was prior to the 2002 crisis.  While some analysts 
highlight that rising public expenditure may pose a threat to 
fiscal accounts in the near future, the GOU currently runs a 
moderate fiscal deficit of under 0.5% of GDP.  The GOU has 
also implemented a successful debt management program that 
has lowered the debt/GDP ratio (down to 69% from a 2003 high 
of 110%), extended the debt's maturity (the share of total 
debt maturing in under five years dropped from 47% in 2002 to 
23% in 2007) and reduced risk by increasing the share of 
peso-denominated debt (from 4% in 2002 to 31% in 2007). 
 
¶4.  Central Bank reserves are at a historically high level of 
$5.3 billion, almost ten times higher than in the midst of 
the 2002 banking crisis.  Moreover, following the crisis, the 
Central Bank greatly improved its supervision policies and 
instated an explicit bank deposit insurance.  Local banks are 
in good shape with high liquidity, growing deposits and low 
exposure to neighboring Argentina.  Uruguay has also 
significantly reduced its trade dependency on the region, 
with its Mercosur partners now purchasing about 28% of 
Uruguay's exports, down from 55% in 1998. 
 
Inflation is rising but still under control 
------------------------------------------- 
¶5.  Inflation accelerated in 2007 but still remains under 
control at an annual rate of 7%-8%.  The GOU is trying to 
persuade basic foodstuff producers to supply some products at 
low prices, but has so far refrained from imposing mandatory 
price controls or restrictions on exports to control 
inflation.  Instead, it recently passed a comprehensive 
anti-inflation package that, among other measures, raised the 
mandatory reserves for banks, in order to cool the economy. 
This is meant to prevent further depreciation of the dollar, 
which would have resulted from an increase in 
peso-denominated interest rates. 
 
However, several weaknesses remain 
---------------------------------- 
¶6.  Some structural weaknesses remain, however, that make 
Uruguay vulnerable to a deceleration in global growth. 
Indebtedness remains high at 69% of GDP, and a major part of 
the decline in the debt/GDP ratio is due to the strong rise 
in GDP measured in dollar terms caused by the drop in the 
value of the dollar (the GDP rose 40% in constant terms in 
the 2002-2007 period, and 88% in dollar terms).  Public 
expenditures are rigid, as pensions, wages and interest 
payments account for 70% of total spending.  A low investment 
ratio at only 15% of GDP, a high concentration of exports in 
agro-industry (over two-thirds of total exports of goods), 
and a high dependency on oil imports (jumping from under $1 
billion in 2006 to an expected $1.5 billion in 2008) are 
 
other vulnerabilities. 
 
Comment:  In a strong situation, but still vulnerable 
--------------------------------------------- -------- 
¶7.  COMMENT:  Uruguay is certainly in a much better position 
to face external shocks than it was prior to its financial 
crisis of 2002.  It has also diversified its trade and become 
less dependent on its Mercosur neighbors than it once was. 
Still, the country's high debt level and high dependency on 
agricultural commodities exports and oil imports make it 
vulnerable to a global downturn. 
 
Baxter