By Scott B. MacDonald

Argentina has been hanging like a dark cloud over Latin America. It has raised questions throughout the Americas about the ability of other Latin American countries to escape being pulled down by a potential default and/or devaluation in Buenos Aires. Contagion remains a factor in analyzing the financing needs for the region. Although Argentina has already technically defaulted in the eyes of the ratings agencies with its last deal for a large portion of its $135 billion in external debt, the rest of the region thus far is coping. Investors in Emerging Markets are nervous, but appear to have decoupled Argentina from other countries. During the week of November 12, Uruguay came to the international bond markets and raised $300 million at a relatively good price of 310 bps over comparable U.S. Treasuries, which priced it similar to comparable Mexican bonds and well behind Chile.

While Uruguay is not a bad credit story, with ratings firmly locked in at the low BBB level, it sits between Argentina (in the process of defaulting) and Brazil (one of the largest Emerging Market debtors). This leaves it potentially vulnerable to any major regional economic crisis. With this in mind, it has weathered the Argentine crisis relatively well, though growth is down, unemployment is up and the fiscal picture has marginally deteriorated. In its Letter of Intent to the IMF, dated September 12, 2001, the government made note that: "The Uruguayan economy has again faced severe negative shocks in 2001." That said, Uruguay continues to have access to international capital markets. This reflects ongoing confidence in its ability not to be sucked into the Argentine crisis. Moreover, the recent bond issue provides it greater liquidity if conditions continue to worsen.

Uruguay at a Glance: Uruguay is one of the more developed economies in Latin America. It has the highest per capita income in South America at $6,500 (higher than the Czech Republic and just behind Korea). Real GDP is around $25 billion, which places it in the same range as the Slovak Republic, Romania and Uzbekistan. The economy is largely driven by services (including an offshore financial center), industry (food processing) and commodity exports (beef and cattle and wine). Tourism also plays a role.

Recent Economic Performance: Uruguay's recent economic performance has been dominated by the crisis in Argentina (a major trading partner), an outbreak of hoof-and-mouth disease among its cattle, and the energy crisis in Brazil (Uruguay’s number one trading partner, which accounts for 25% of all exports). Consequently, real GDP growth was -1.7% in 2000 and the outlook for 2001 is around 1%, with the IMF forecasting stronger growth forecast for 2002 at 2.5%. Inflation is around 5% (expected to end the year around 6-7%) and the current account balance of payments is manageable at around 3% of GDP. Total debt is also manageable at around $13.5 billion, equal to 65% of GDP. To deal with adverse economic conditions, the government increased the pace of depreciation in the currency by widening the band. This is helping in export competitiveness especially vis-a-vis the Argentines. It has also implemented further fiscal austerity measures to contain the fiscal deficit to around 3% of GDP, and moving to develop a new set of deregulation and anti-trust measures. A new more market-friendly labor law is also being drafted.

Pluses:

1. A diversifying export base.
2. A well-known and well-run offshore financial center.
3. Significant improvements in the structure of the economy.
4. An open political system and relatively broad consensus on the need to maintain market-friendly economic reforms.
5. A good working relationship with the IMF, World Bank and Inter-American Development Bank.

Concerns:

1. Geography is a major factor as Uruguay sits between South America's two largest economies, Argentina and Brazil. Because of this, it remains vulnerable to unpredictable, volatile swings in Argentina and Brazil. So far Uruguay has avoided contagion from Argentina, but the threat remains.
2. Uruguay is very tied to the international economy. It has a small domestic market and exports play a major role in its economy. The current global downturn hurts.
3. The need for structural reforms remains pressing -- especially as unemployment is at 16%.

Is Uruguay coping with the problems of Argentina? In many cases, the answer is yes. However, there can be no denying that 2001 was a difficult year and most likely 2002 will also be tough. Consequently, the government must maintain a degree of momentum on the reform path. In that regard, much of the same can be said for the rest of Latin America. There is little room for failure in terms of implementing economic reforms. The global economy is in a downturn, the most severe in over a decade. Global investors are still supportive of countries that seek to advance reforms. However, as the recession bites deeper and macroeconomic conditions put governments under pressure, their ability to access to international capital markets could come to an end. As Uruguay demonstrates, thus far -- the lines of credit are still there — for now.