VZCZCXYZ0000
PP RUEHWEB

DE RUEHMN #0583/01 2911354
ZNR UUUUU ZZH
P 171354Z OCT 08
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC PRIORITY 8529
INFO RUCNMER/MESUR COLLECTIVE

UNCLAS MONTEVIDEO 000583 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV UY
SUBJECT: GOU CONCERNS ABOUT GLOBAL FINANCIAL CRISIS; WAITING FOR THE 
SHOE TO DROP 
 
REF: A) MONTEVIDEO 356, B) MONTEVIDEO 468 
 
SUMMARY 
------- 
¶1.  (U) SUMMARY:  Remembering well their own devastating economic 
crisis of 2002, the GOU is anxiously watching how the current 
worldwide financial crisis will affect the previously booming 
Uruguayan economy.  The country is in a better position than before, 
but vulnerabilities remain.  In the first sign that the slowing 
economy will hit Uruguayan exports, beef sales to Russia and Europe 
dropped precipitously two weeks ago.  Prices are dropping for other 
key commodity exports such as rice, wheat and soybeans. 
Slaughterhouses and shoe manufacturers are starting to lay off 
workers and government officials believe that Uruguayan expatriates 
in Spain have begun to return due to the economic situation there. 
Local deposits have shot up as Uruguayan investors appear to be 
bringing their capital closer to home.  The country risk rating has 
increased from 376 to 512 basis points as of this writing.  The GOU 
so far has no plans to adjust public spending but is carefully 
watching currency moves in neighbor Brazil that would have an impact 
on regional competitiveness and tourism.  The GOU has lined up USD 
1.8 billion in contingency lines of credit from international banks. 
 END SUMMARY. 
 
COMMODITY PRICES AND BEEF EXPORTS 
--------------------------------- 
¶2. (U) Total Uruguayan exports, which grew vigorously from January 
to September, have slowed following the drop in commodity prices, 
affecting key export products rice, wheat and soybeans.  Although 
the price of beef (Uruguay's principle export product) remains above 
its 2007 average, it has fallen 23% in the last week.  Beef sales to 
Russia and Europe have dropped precipitously; slaughterhouses have 
run out of storage capacity and have temporarily laid off workers. 
In one bright spot, the GOU is benefiting from the sharp fall in oil 
prices, although the savings are not being fully transmitted to the 
consumer due to an increase in the dollar/peso exchange rate (see 
below). 
 
THE SHOE DROPS 
-------------- 
¶3.  (U) The long suffering shoe industry is another early victim of 
the economic downturn.  Alpargatas, a manufacturer of the typical 
gaucho slipper as well as uppers and heels used by its parent 
company in Argentina, has laid off 100 workers and reduced the hours 
of its remaining workforce.  Alpargatas in Argentina has suspended 
orders for shoe parts until further notice due to dropping demand. 
Other shoe manufacturers report they will also have to cut employees 
and close factories in the coming weeks, citing their inability to 
compete with low cost Chinese imports in the domestic market. 
 
 
DOLLAR HIKES IN FACE OF INCREASED UNCERTAINTY 
--------------------------------------------- 
¶4. (U) Economic uncertainty has boosted demand for the dollar, 
increasing its value 16% since early September.  This rise is a 
major reversal from the dollar's 11% drop from January through 
August.  Central Bank reserves fell by USD 150 million as it sold 
dollars to prevent sharper increases, but reserves remain above USD 
6 billion, an historical high.  On October 3, the Central Bank 
stopped making peso-denominated one-day loans to banks, which has 
created a shortage of pesos and prevented the dollar from rising 
further. 
 
GOU CLAIMS BANKING SYSTEM REMAINS SOUND 
--------------------------------------- 
¶5. (SBU) Superintendent of Financial Institutions Jorge Ottavianelli 
told emboffs that local banks are in good shape and have not 
suffered ill effects so far.  Local banks have higher liquidity and 
solvency than in the past.  Deposits rose 10% in 2008 and have not 
been hit by the recent turmoil.  In fact, reports indicate that 
there has been a significant inflow of deposits since June. 
Nevertheless, sight deposits still account for 74% of the total. 
The GOU insures up to $10,000 for peso-denominated deposits and 
$5,000 for dollar-denominated accounts. 
 
INCREASE IN COUNTRY RISK 
------------------------ 
¶6.  (U) Following the general trend in the Emerging Markets Bond 
Index Plus (EMBI+), Uruguay's country risk rose from 376 basis 
points (bp) in late September to 512 bp, its highest mark since 
mid-2004.  The increase is mainly due to the fall in the price of 
Uruguay's bonds as investors divest from them.  On average, the 
price of Uruguay's dollar-denominated global bonds has dropped 17% 
since early September.  Demand for local short-term bonds has dried 
up and the Central Bank has reduced its weekly issues. 
 
KEEPING AN EYE ON THE REGION 
---------------------------- 
¶7.  (U) While Uruguay has greatly diversified its export markets, it 
remains vulnerable to developments in neighboring Argentina and 
Brazil.  The GOU is closely following the value of the Brazilian 
 
real (which has depreciated sharply against the peso) as Brazil is 
not only Uruguay's major export destination, but a major source of 
tourism.  So far, the GOU has shown no intent to impose 
trade-restrictive policies vis-a-vis its Mercosur partners or the 
rest of the world. 
 
GOU PUBLIC STATEMENTS 
--------------------- 
¶8.  (U) President Vazquez and senior GOU officials have issued a 
steady stream of statements reassuring the public that the 
government is concerned about the crisis' effect on trade, but not 
alarmed, and that Uruguay is much better positioned economically now 
than in during the last crisis precipitated by Brazil's devaluation 
in 1999.  The President recalled that when the Brazilian Real 
devalued in 1999, Uruguay was dependent on Brazil and Argentina for 
67% of its exports.  Today those countries represent only 30%. 
Vazquez added that the GOU had secured a 1.8 billion dollars worth 
of lines of credit from the World Bank, the Andean Development 
Corporation and the International Development Bank, among others. 
This credit line is not needed at the moment, he said, but was 
available as a contingency. 
 
¶9.  (SBU) New Vice Minister of Economy Andres Masoller echoed the 
President's statements and emphasized Uruguay's reduced 
vulnerability to external shocks.  Masoller indicated that foreign 
investment remained at record levels.  Masoller reiterated these 
points privately during the Ambassador's initial meeting with him 
October 13.  At the meeting he acknowledged that internal GOU growth 
estimates for 2009 were between 3-4%, lower than the current public 
estimate of 4.5% and about half the level of 2008.  Opposition 
politicians have argued that planned increases in public spending 
for 2009 should be revisited in light of the crisis; however 
Masoller responded during the weekly cabinet meeting that the GOU's 
budget was completely financed and that the government has an 
obligation to protect the level of public support for its social 
policies. 
 
NO DEBT ISSUANCE UNTIL 2010 
--------------------------- 
¶10.  (U) Minister of Economy Alvaro Garcia touted that Uruguay has 
satisfied its financing needs until 2010, and that it has greatly 
improved its debt structure in recent years.  In effect, the GOU has 
reduced its exposure to risk by cutting the debt/GDP ratio, 
extending the debt's maturity and increasing the share of 
peso-denominated debt.  COMMENT: Despite the decrease, indebtedness 
remains relatively high at 69% of GDP, and a major part of the 
decline in the debt/GDP ratio has been due to the strong rise in GDP 
measured in dollar terms caused by the depreciation of the dollar 
(GDP rose 40% in constant terms from 2002 to 2007, and 88% in dollar 
terms).  END COMMENT. 
 
INFLATION STILL A CONCERN 
------------------------- 
¶11.  (U) While officials confide they are concerned about the 
slowing economy, recent actions suggest that the prospect of 
inflation (following unprecedented GDP growth of 13% in the first 
half of 2008) is a greater concern.  Inflation rose to 7.6% in 
January-September, above GOU's 3%-7% target range.  To try to 
alleviate inflationary pressures and keep inflation under 10%, the 
Central Bank raised its peso-denominated reference rate from 7.25% 
to 7.75% on October 3.  This rate increase also contributed to slow 
the dollar's rise. 
 
COMMENT 
------- 
¶12.  (SBU) Behind the measured caution in public statements, GOU 
officials have privately expressed heightened concern.  The 
government is circling the wagons to prepare for an undetermined 
economic fallout.  Uruguay has made great strides to reduce its 
vulnerability to external shocks by lowering its dependence on 
neighbors Brazil and Argentina, but we agree with President Vazquez 
that that Uruguay has reason for concern and should remain vigilant 
as this global crisis unfolds.  The country remains vulnerable to a 
global economic downturn as a high percentage of its exports are 
commodities. 
BAXTER