VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0105/01 0511644
ZNR UUUUU ZZH
R 201644Z FEB 09
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 8828
INFO RUCNMER/MERCOSUR COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MONTEVIDEO 000105 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN UY
SUBJECT: CENTRAL BANK PRESIDENT LAYS OUT GOU'S ECONOMIC POLICY 
CONSIDERATIONS 
 
Ref A: 08 Montevideo 583 
Ref B: 08 Montevideo 627 
Ref C: 08 Montevideo 697 
Ref D: Montevideo 74 
 
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SUMMARY 
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¶1.  (SBU) SUMMARY:  Central Bank President Mario Bergara told the 
Charge d'Affaires that Uruguay remains relatively well-positioned to 
confront the worldwide economic slowdown -- its banking sector 
remains healthy, consumer spending is solid, and its fiscal house is 
in order.  While some in the business community have pleaded for 
greater government intervention, along the lines of stimulus 
packages seen in many other countries, the GOU sees this as a bad 
remedy for Uruguay and prefers to keep its economic policy arrows in 
the quiver for now.  During the week of February 16, the GOU did 
access a USD 200 million loan from the Andean Development 
Corporation and arranged a USD 400 million line of credit with the 
World Bank.  END SUMMARY. 
 
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BERGARA ASSESSES IMPACT ON THE ECONOMY 
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¶2.  (SBU) In a meeting with the Charge on February 12, Central Bank 
President Mario Bergara discussed recent GOU economic policy 
decisions made in light of the global crisis and showed he was well 
aware of, and comfortable responding to, public debate over the 
GOU's strategy.  Begara noted that GDP growth projections for 2009 
remain positive, but the dramatic drop from approximately 10 percent 
growth in 2008 to expected 1-3 percent growth in 2009 is 
reverberating throughout the economy and hitting some specific 
sectors hard.  Commodity prices had fallen, but remain at 
historically high levels similar to a year ago.  Bergara noted that 
the total value of exports (of which commodities or commodity-based 
industrialized goods represent over 70 percent of total merchandise 
exports) remained constant; Uruguay is actually exporting a higher 
volume of goods at a lower price and to more diverse markets than in 
the past.  He predicted that some affected sectors, such as leather 
upholstery for European-made luxury cars, would remain at the mercy 
of European and U.S. markets recovering in the future.  However, the 
economy is general was relatively well-positioned to weather the 
global downturn. 
 
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NO STIMULUS PACKAGE FOR URUGUAY 
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¶3.  (SBU) Bergara discussed comments made recently by some in the 
business community who have called for a stimulus package to help 
business and for the monetary policy to focus on competitiveness. 
The Central Bank recently raised its benchmark interest rate (from 
7.75 percent to 10 percent) in order to fight inflation, while 
others in the region were lowering theirs.  Bergara explained that, 
since the Uruguayan economy is highly dollarized, the 
peso-denominated interest rate is not a key variable locally as in 
Brazil, where most debt is denominated in reales.  Uruguay has a 
higher percentage of dollar-denominated debt and a more open 
economy, he added.  He also pointed out that domestic consumption 
remains solid and that many Uruguayan consumers have recently begun 
buying more after four years of strong growth, a trend noted in 
holiday sales figures, new car sales and private investments.  As 
the economy began to recover from the 2002 economic crisis, 
consumers initially paid down debts, were cautious with spending and 
saved more.  As a final point, Bergara explained that an injection 
of liquidity, while a common prescription elsewhere, would be a bad 
plan for Uruguay.  Such a measure would increase inflationary 
pressures, while noting that Uruguay has largely dodged the 
financial crisis due to its underdeveloped capital markets, so there 
has been no resulting loss of capital. 
 
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INFLATION VS. THE EXCHANGE RATE 
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¶4.  (SBU) Bergara acknowledged that the inflation rate in recent 
months has been too close to the GOU's self-imposed 10 percent limit 
to give the GOU room to maneuver.  If year-over-year inflation rises 
above 10 percent, it would trigger biannual salary and pension 
adjustments, costs which comprise a large portion of Uruguay's 
public expenditures.  These adjustments would put additional upward 
pressure on the inflation rate.  Bergara described the ten percent 
ceiling as a psychological barrier as well, stating that the 
government had to set an upward limit at some point and that 
Uruguayans had quickly become accustomed to single-digit inflation 
rates, compared to the often soaring inflation figures of the past. 
 
¶5.  (SBU) Some business leaders have criticized the government for 
focusing too much on fighting inflation at the expense of 
competitiveness through a weaker peso, a perspective Bergara 
described as myopic.  Instead, he argued that that price stability 
is essential to achieve competitiveness and that exchange rate 
fluctuations provide only an ephemeral advantage.  Brazil, however, 
can afford to depreciate and has the luxury that much of its 
consumer price index (CPI) basket of goods is domestically 
manufactured and priced in reales.  Nearly half of the items in 
Uruguay's CPI are tied to the U.S. dollar, making changes in the 
exchange rate a big problem - if the dollar goes up 10 percent, the 
CPI would automatically increase about 5 percent. 
 
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UPCOMING INTENATIONAL MEETINGS 
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¶6. (SBU) Bergara will attend the Inter-American Development Bank 
meeting in Medellin, together with Minister of Economy Alvaro 
Garcia, and looks forward to meeting USG officials in attendance. 
He said Garcia also plans to attend the World Bank and IMF meetings 
this spring.  Bergara also encouraged the new Treasury Secretary to 
continue meeting with "like-minded" Latin American ministers, 
meetings  he said would provide opportunities  for valuable 
exchange.  Peru, Colombia, Chile and even Mexico (despite having 
very different economic circumstances) were important partners, 
along with the international banks, for Uruguay to discuss economic 
policy. 
 
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URUGAUY TAPS INTO CREDIT LINES 
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¶7. (SBU) On February 16, Uruguay applied for a USD 200 million loan 
from the Andean Development Corporation (CAF in Spanish).  Central 
Bank contacts told Emboff the money would be used for debt 
management.  Uruguay pays an average of 9 percent interest on its 
foreign debt; the CAF loan is substantially lower at LIBOR minus 
points (currently about 1.2 percent).  At the same time, the GOU 
announced it has secured access to a USD 400 million line of credit 
with the World Bank. 
 
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COMMENT 
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¶8.  (SBU) COMMENT:  In November 2008, Bergara returned to the 
Central Bank from his previous role as Vice Minister of Economy, and 
has been intimately involved in GOU economic and fiscal policy.  He 
was comfortable addressing points of difference with the business 
community.  While he has no doubt that Uruguay will be further 
impacted by the global economic downturn, Uruguay's economic 
policies appear targeted to Uruguay's specific exposures.  Post 
believes high-level bilateral meetings with the Uruguayan economic 
team in Medellin and during the World Bank/IMF meetings in 
Washington will send a strong message to reinforce Uruguay's 
pragmatic policies.  End Comment. 
 
MATTHEWMAN