VZCZCXYZ0000
RR RUEHWEB

DE RUEHMN #0002/01 0041254
ZNR UUUUU ZZH
R 041253Z JAN 10
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 0131
INFO MERCOSUR COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS MONTEVIDEO 000002 
 
SIPDIS 
STATE PASS TREASURY FOR BLINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV UY
SUBJECT: Uruguay: Economy Continues to Grow; GOU Seeks to Counter 
Falling Dollar 
 
REF: MONTEVIDEO 74; MONTEVIDEO 558; MONTEVIDEO 670 
 
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SUMMARY 
 
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¶1. SUMMARY: Uruguay's economy continued to grow in the third 
quarter of 2009, led by strong private consumption, exports, and 
countercyclical government spending.  The GOU expects GDP growth of 
2.0 percent and 4.0 percent for 2009 and 2010, respectively.  The 
sharp fall in the price of the dollar is impacting Uruguay's 
competitiveness, however.  Seeking to counter the dollar's 
depreciation, the Central Bank -- which continues to buy dollars -- 
implemented a sharp cut in interest rates and reduced banks' 
reserve requirements.  After a slight increase, the dollar soon 
resumed its downward trend vs. the Uruguayan peso.  END SUMMARY. 
 
 
 
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GDP EXPECTED TO GROW IN 2009 AND 2010 
 
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¶2. Uruguay's economy continued growing in the third quarter of 
2009, up 1.9 percent over the third quarter of 2008 and an 
accumulated 1.7 percent growth in the first three quarters (over 
the same period of 2008).  Third quarter growth was higher than 
forecast by private analysts and the GOU.  Consequently, the GOU 
revised its growth forecast for 2009 and 2010 up to 2.0 percent and 
4.0 percent, respectively.  Growth was led by strong private 
consumption, government spending and exports. Imports declined 
significantly.  A counter-cyclical increase in public sector 
investment (up 32 percent in the first three quarters of 2010) 
partially offset a drop in private investment (down 10 percent). 
 
 
 
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COMPETITIVENESS AFFECTED BY FALLING DOLLAR 
 
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¶3. The price of the dollar fell almost 20 percent from December 
2008 through December 2009 (from 24.0 pesos to 19.6 pesos), owing 
to factors including the global depreciation of the dollar, steady 
local growth perspectives, and carry trade operations prompted by 
high interest rates in pesos.  NOTE: Per Ref A, in February 2009, 
at a time when other developing countries were cutting their 
interest rates, the Central Bank sharply increased its own to 
control inflation.  END NOTE.  The decline in the dollar has 
negatively impacted Uruguay's global competitiveness, which has 
been fallen gradually since 2004.  Competitiveness is now at its 
lowest levels since 2002, when the GOU was forced to devalue its 
peso.  As Uruguay is more competitive outside the region than 
within, extra-regional competitiveness has deteriorated more 
rapidly.  Within the region, Uruguay remains competitive against 
Brazil (its top export market), but not against neighboring 
Argentina (its third largest export market after China).  Outside 
the region, Uruguay has lost significant ground against the United 
States, but remains competitive against Europe. 
 
 
 
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MAJOR CUT IN INTEREST RATES AND A NARROWER INFLATION TARGET 
 
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¶4. GOU officials say they are watching the price of the dollar and 
Uruguay's competitiveness closely, but claim not to be overly 
 
 
concerned about competitiveness.  Nevertheless, on December 21 the 
Central Bank cut interest rates by 175 basis points in order to 
counter the decline of the dollar.  The sharp cut (to 6.25 percent 
from 8.0 percent) was the most significant since September 2007, 
and surprised private analysts who were expecting a 50-100 basis 
point cut.  In order to attempt to keep positive interest rates in 
real terms, the Central Bank also lowered its inflation target to 5 
percent and narrowed its range to 4-6 percent from 3-7 percent). 
 
 
 
¶5. The interest rate cut had a minor and transitory effect on the 
price of the dollar, which rose slightly on the day interest rates 
were cut but soon resumed its downward trend.  While Central Bank 
President Mario Bergara said that the narrower inflation range is 
"an additional sign of responsibility," some private analysts think 
the recent measures will impose major challenges to the next 
administration's monetary and fiscal policies. 
 
 
 
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LOWER BANK RESERVE REQUIREMENTS 
 
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¶6.  In another expansionary measure, the Central Bank also decided 
to gradually reduce reserve requirements on bank deposits.  The 
reduction (to 15 percent from 25 percent for peso denominated 
deposits, and to 12 percent from 20 percent for dollar denominated 
ones) will allow banks to offer new credits of about $200 million. 
As in the case of the reduction of interest rates, the reduction of 
bank reserve requirement is a partial reversal from the sharp 
February 2009 monetary contraction taken to fight inflation. 
 
 
 
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CENTRAL BANK TO DEVELOP FORWARD MARKET FOR DOLLARS 
 
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¶7.  While implementing the measures above, the Central Bank 
continues to buy dollars and is considering the development of a 
forward market for dollars.  In November, a team of two experts 
from Treasury OTA's Debt Issuance and Management Team performed an 
initial assessment of the feasibility of providing technical 
assistance to the Central Bank on this issue (Ref B). 
SCHANDLBAUER