Uruguay Opinion In Translation: International commodity prices continue smiling on Uruguay

Commodity prices are falling, with the exception of cereals and soy, alleviating inflation without hurting trade

Food producing countries are always confronting a difficult problem. When food commodity prices rise it produces a bonaza which spills over into other sectors. However, this increase is accompanied by a jump in the consumer price index. For example, beef is not only a export product but a crucial piece in Uruguayan’s consumption basket; it is a source of inflationary pressure.

Today’s international price trends makes us smile. Commodity prices have generally fallen but grain prices have increased significantly, as a result of the drought in the United States and difficult conditions in other grain producing countries.

Soy and wheat combined passed meat as Uruguay’s top export. Higher prices for wheat and soy has encouraged their export and offset falls in meat, wood pulp, and other raw materials that Uruguay produces. However, in contrast to other commodities soy has a much smaller role in the consumption basket of the average Uruguayan so it does not have a significant impact on the Consumer Price Index (IPC).

The recent changes in world prices have not only helped Uruguayan exports. Uruguay’s principal import is petroleum and in the last four months its price fell 24%. Although gas is a fuel controlled by the Ministry of Economy and its price in Uruguay does not reflect a fall in the international price, the decreasing world prices have allowed ANCAP to restore its balances. Those were severely reduced when ANCAP delayed raising its prices the last time world prices rose.

But that is not all. The rise in soy prices has not only benefited Uruguay but Argentina to even more of a degree and delayed, for a few months at least, the return of the economic crisis in Argentina. A good part of that country’s public finances depend on the enormous tax revenue amount of tax revenue soy exports bring in.

That is not to say that the Argentinean government’s financial problems are going to disappear, but with soy prices 21% higher than at than the end of March the authorities to postpone the outcome- at this point inevitable- of a crisis of confidence caused by the balance of payments and an fiscal deficit which is unsustainable given Argentina’s inability to access markets of credit.

This Uruguay Business Reports opinion article is a translation of an article that appeared in the Uruguayan Newspaper El Pais. Uruguayan Business Reports translation by Donovan Carberry.

CERES says public spending will leave Uruguay vulnerable to the economic crisis

“The countries that were big winners will be the hardest hit” says expert Ernesto Talvi

The Uruguayan economy is passing through an exceptional moment: there is strong economic growth, drastically falling unemployment and a historic reduction in the level of poverty. This is not just the scenario in Uruguay; it is the scenario in all the countries categorized as “dynamic emerging markets”. It is not even unique in Uruguay’s history: it has happened before and it has never ended well.

This is how the academic director for the Center for Current Economic and Social Studies (CERES), Ernesto Talvi, referred to the current economic situation at a conference titled “The Global Economy, the Region, and Uruguay: Where are we now and what can we expect?” which took place yesterday at the Club de Golf.

According to the expert, Uruguay and the region are exposed to external conditions. A bad ending to the European debt crisis would expose Uruguay’s weaknesses as well as those of neighboring countries. “The hardest hit will be those [businesses] that gained the most” from weaker developed economies, the influx of cheap capital, and increasing demand for Uruguayan exports, he explained.

Vulnerabilities

The principal weakness detected by CERES is the structural imbalance in the public accounts. The latest Economy Ministry estimates show a fiscal deficit through March equivalent to 2.7% of GDP. However, considering the state’s income potential, and taking into account sustainable longterm economic growth levels, Talvi predicts that the deficit will shoot up to 6.1% of GDP.

“These silver sweet periods of high commodity prices are periods of euphoria, of exuberance, and a great sensation of wellbeing. We begin to think there is something good that we are doing now that we weren’t doing before” said Talvi.

He compared the effects of Lehman’s collapse with other earlier crises that had produced similar results in the region.

With regards to economic growth, currency exchange, inflation, public spending and poverty; the countries in the region behaved similarly during different periods of capital influx. One example is that in the exchange market, large depreciations against the dollar coincide with periods of large capital inflows.

Talvi explained that Uruguay “is pretty much aligned with the rest of the region” in terms of exchange rates. He added that “the largest devaluations are produced when there is strong misalignment” in the region and which he assured “is not the case today”.

The worst case scenario

If the euro falls apart and as a repercussion emerging countries have a liquidity problem, the period of abundant capital in the region will come to an end. And like in all the previous examples, it will have un desired consequences for Uruguay and the region, he explained.

In the past,  93% of the countries that had massive capital inflows eventually had to face a severe reversal in those flows. As a result economic activity in 69% of those was strongly affected and 77% faced severe depreciation. Additionally, 49% suffered banking crises and 33% were forced to restructure their debt. In fact 17% of these countries ended with a “quadruple crisis”. One of these was Uruguay. Talvi explained that today, before there is a reversal in the flow of investments, the country should correct its level of government spending and its exchange rate, but does not need to make changes to the banking system or public debt. “This is good news” he emphasized “a crisis in the those two can really kill countries”.

This Uruguay Business Reports article is a translation of a news story which appeared in the Uruguayan newspaper El Observador. That article, in Spanish, is available here. Uruguay Business Reports news translation by Donovan Carberry.

Opinion in translation: Scandal in the Martín García Canal

The [Uruguayan] government has been trapped in a tangled defeat on the issue of dredging the Martín García canal. It is not the bilaterally postponed dredging of the Martín García canal, committed to a few days ago in Montevideo by the Argentinean foreign minister Héctor Timerman and immediately locked in by their representatives in the Río de la Plata Adminstrative Comission (CARP), in a swift demonstration of the almost habitual hostility of the Kichner government towards Uruguay. The more serious issue is the scandal surrounding the renewal of the contract with Riova [a subsidiary of the Dutch company Boskalis International B.V.] for maintenance dredging in the middle of well founded claims of corruption. The questionable contract renewal was accepted by [the Uruguayan] government, causing millions of dollars in damage to the country.

The canal dredging is essential for larger ships to operate from the port serving the majority of our exports Nueva Palmira, the second biggest             port in the country. Argentina has delayed this work for years, in order to protect the competitiveness of their ports which use the other canal, the Mitre, to move Argentinean products. After the meeting with Uruguayan foreign minister Luis Almagro, Timerman assured him that the issue was solved and that finally he would call for the immediate bidding on the Martín García canal. Less than a week later, the Argentinean delegates in CARP put sticks in the wheel by requiring bureaucratic steps causing a new set of delays.

But not even this new blow is the worst of the story. While they were rejecting open bidding and postponing the dredging of the canal Argentina promoted the renewal of the current CARP maintenance dredging contract with Riovia at along with an increase from $12 million USD to $15 million USD in the annual fee paid by both countries. The additional cost was uselessly opposed by the Uruguayan delegation which had established on technical grounds that any increase should not exceed $1 million USD. The embarrassing final wound was the absurdity that CARP never even considered offering the contract to the other Dutch company, Van Oord, who offered to take over the dredging for $9 million USD, six less that what CARP  generously conceded to Riovia under Argentinean pressure.

The CARP decision has been followed by reports of giant bribes from Riovia, who will remain in charge of the work until whatever day CARP calls for open bidding to assign dredging and maintenance on the canal, something that could take two more years. Moreover given the level of corruption that permeated the whole episode it is unbelievable that [the Uruguayan] government could accept the Argentinean impositions in favor of Riovia without any apparent justification, just following head down behind the Kitchener regime and the irregularities of their representatives. A Uruguayan diplomat informed CARP and our foreign minister that he had been offered a million dollar bribe to support Riovia, something that Almagro failed to report as he should have. The foreign minister is trying to clear the confusion in the [Uruguayan] Parliament, which has convened to investigate this case. But it will be difficult to erase what appears to be a painful official setback.

This article appeared as an editorial in the Uruguayan newspaper El Observador. The original article (in Spanish) can be viewed here. Translation by Donovan Carberry.