Budget will not increase spending but will reallocate resources: The external crisis and a large deficit do not leave room to increase spending, says Economy Minister

Economy and Finance Minister, Fernando Lorenzo, warned during Monday’s cabinet meeting that the international economic situation still contains the high level of “uncertainty” that his office has assumed from the start of the year and because of this they will be more “prudent” in planning the budget and which priorities to carry out next year.

Official sources told El Observador that the economy minister hinted at  the idea of “maintaining” the same level of public spending as last years budget. Regardless the President will have to find a way to reassign funds to complete his 2013 priorities. Included in his agenda are health, education, reforming the state railway administration and the entry of retirees into FONASA. The president will count on a “cushion” of 140 million USD that will not be included in the budget this year.

During his presentation Lorenzo talked about that the energy cost over run that UTE (the state-owned utility company) is experiencing [because a drought is causing hydroelectric plants to under perform] and the Central Bank’s policy of maintaining liquidity to control the dollar’s impact on the fiscal deficit target of 1% projected for 2012, sources said.

Additionally, he also showed concern about the economic crisis in Europe and that protectionist trade practices will continue this year, Lorenzo included (for the first time) Argentina as “risk factor” given the possibility that the country will initiate an adverse economic cycle, government sources revealed to El Observador. Also, when the head of the Economy Ministry was explaining the rules which will guide the next budget, the president, Jose Mujica, interrupted him and suggested that idea be discussed in detail in a special cabinet meeting that will be sometime after today. President Mujica said two weeks ago that priorities for discretionary funds in the 2013 budget will health and education.

The presidential undersecretary, Diego Cánepa, who was one of spokesmen on the cabinet meeting, pointed out that the 2010 budget, off of which this budget is being based, only considered two “exceptions” to the limit on spending increases which were the ASSE (the Uruguay state health service and the military health services. “The minister (Lorenzo) evaluated the situation as highly uncertainty in an international context, the most [uncertain] we’ve seen in six months” admitted the presidential undersecretary.

For the Economy ministry the crisis affecting Europe indicates that they should have a “prudent” vision in order to maintain macroeconomic stability. Also they advised not to expect a change in the situation outside the country in the short-term. Also because of the ongoing crisis the protectionist trade measures that several countries have adopted as protection from the crisis would “persist”, like the ones initated by Uruguay’s regional partners (Brazil and Argentina). For now, the Economy ministry continues to expect 4% growth in the economy, sources said.

Private analysts that answered the Central Bank’s expectations survey lowered the average GDP growth forecast for 2012 from 4.5% in January to 4% in April.

ANALYSTS

Economic analysts consulted by El Observador agree with the pessimistic diagnosis of the global economy that Lorenzo gave at the cabinet meeting. According to Florencia Carriquiry from the Deloitte consulting group, the risk of the European crisis having a local impact are growing. “In Europe we see that we will have turbulence, particularly if Greece exits the euro zone” she said. According to thie scenario the euro will depreciate and the dollar will strengthen.

Aldo Lema from Vixion Consulting said the principal “threats” for Uruguay are a “hard” landing for the Chinese economy and that the European financial crisis drags another country out of the euro zone, along with Greece.

For these reasons PwC analyst Ramón Pampín’s opinion is that in addition to being “restrictive” with the next budget, the Uruguayan government should also reserve space to confront energy “contingencies”, such as an inability to generate hydroelectric power or the price of oil, which can affect the savings of public entities.

The experts recognize that a deceleration in the Argentinean economy will have a small effect and certainly hurt some sectors, but the degree of dependence on that country has been noticeably reduced recently. The service sector, particularly tourism, will be the sector most affected [by a slow down in Argentina] in Carriquiry’s view. Also she warned that a worsening in Europe’s economic problems would create downward pressure on the price of commodities exported by Uruguay.

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

MARTÍN GARCÍA CANAL CONFLICT: Uruguayan opposition asks to freeze tax treaty with Argentina as long as the canal dredging is delayed

The leaders of the opposition closed ranks after asking the government not to send the tax information exchange treaty with Argentina to parliament now that the neighboring government has decided to suspend the process of dredging the Martín García canal while they investigate reports of corruption surrounding it.

“We told them not to send the treaty because we won’t vote for it. We think it’s a very weak position to accept everything Argentina tells us when they don’t accept anything” Colorado senator José Amorín told EL PAÍS digital.

The senator believes that the letter sent by foreign minister Héctor Timerman to External Relations minister Luis Almagro is proof that the Argentinean foreign minister “is only interested in obstructing this [the dredging] and not moving forward, but this something that Uruguay needs”.

He saw that the parliament has to vote on a treaty that is of special interest to Argentina (it will stop Argentinean citizens from using Uruguay as a tax haven) and that this exchange treaty could be used as an element to pressure them in the same way that “they have been using the dredging”.

The same sentiment was shown by blanco senator and president of the National Party, Luis Alberto Heber, who told EL PAÍS digital that “Uruguay should not hurry to sign the tax office information exchange treaty and that we suggested to the executive office not to send it to parliament” he added that now “we will have to wait” to see what happens.

Nationalist senator Jorge Larrañaga told Subrayado (a Uruguayan tv program) that “it would be good to delay the treaty agreement in parliament as a signal to Argentina. It is very difficult to discuss this agreement when Argentina has postponed dredging the canal again”, he explained.

LETTER.

The opposition leader also closed ranks behind the government, to support the tone of the reply letter that Almagro sent to Timerman about the request to initiate an investigation into the alleged corruption.

“the note that Timerman sent to our foreign minister is unacceptable” said Heber and he emphasized that Almagro’s reply mentioned the publication of the proceedings and their dissemination to the public.

“No one doubts the honesty of Almagro and the delegates of the Rio de la Plata Administrative Commission (CARP) but we want to stand firm, we won’t vote on what they [Argentina] asked when they don’t do anything to honor our interests. We there to be feedback[sic]”.

This article is a translation of one that appeared in the Uruguayan Newspaper El Pais. The original news article can be found, in Spanish, here. 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.