MONTEVIDEO (Reuters) – Diego Labat, Uruguay’s central bank chief, is sitting pretty. Inflation is at the lowest level in nearly two decades, the currency is one of the region’s strongest, and the country is leading a regional pivot towards interest rate easing.
That’s a sharp contrast to just across the Rio de La Plata estuary in Buenos Aires, where inflation hit 124% in August, the highest since 1991, capital controls are barely holding back a fall in the currency, and net reserve levels are in the red.
It’s also a sign of a tectonic shift over years: strong, independent institutions and political stability helping Uruguay’s economy increasingly detach from its larger neighbor, where the two once rose and fell in tandem.
“Uruguay has done its homework,” Labat, 53, told Reuters at his office near the bustling port of Montevideo, adding that the country had been much more susceptible to economic shocks from Argentina just a few decades ago.
In 2002 the small farm-driven economy suffered bank closures, high unemployment and soaring poverty during a devastating financial crisis in Argentina, due to a direct “link” between the two financial systems that has weakened since.
“A problem in Argentina back then was a problem in Uruguay,” Labat said. Argentina was then Uruguay’s second biggest trading partner. Today it has fallen to number four, after China, Brazil and the European Union.
“Today a problem in Argentina is no longer a problem here.”
The opposing fortunes of the two countries is stark.
Uruguay’s annual inflation rate was 4.1% in August, the lowest since 2005 and less than a third of Argentina’s rate of 12.4% in the single month of August alone.
Uruguay’s peso, similarly valued to Argentina’s in 2018, now gets you almost 10 times as many dollars officially, and closer to 20 times in reality, with most Argentines trading on parallel markets as formal access to dollars is tightly limited.
Argentina’s net central bank reserves are also estimated to be in the red, hurting its ability to make payments as it battles to keep a $44 billion International Monetary Fund (IMF) program alive. Uruguay’s meanwhile have been stable at around $8 billion.
LEADING THE WAY ON RATE CUTS
Lower inflation in Uruguay and its currency stability has allowed the central bank to cut interest rates starting in April to 10% now, with another reduction likely at its next monetary policy meeting in October.
This should help ease a drought-linked slowdown, which saw activity contract 2.5% in the second quarter versus a year earlier. Labat is confident of an economic rebound in 2024.
Argentina’s benchmark interest rate meanwhile has soared to 118%, hindering growth and access to credit, and tipping the country towards recession.
Labat said that a “strong and growing Argentina” was better for Uruguay, but pointed to trends like a drop in the proportion of non-resident bank deposits – many of them from Argentina – in the country. Total non-resident deposits have fallen to 8%, from a peak of 41.5% in 2001, central bank data show.
That’s left Uruguay less exposed, even as it has built up its own institutions and credibility. Government borrowing costs are falling, with Uruguay edging out Chile this year as the region’s lowest-risk economy, a JPMorgan index shows.
“There is pessimism about Latin America,” Labat said. “But Uruguay is an example of how better institutions can change the economy.”
Source: Economy - investing.com