Uruguay Country Brief - February 2009
Introduction/overview
Australia and Uruguay enjoy friendly relations based upon a number of shared interests and cooperation in a range of multilateral fora. Like Australia, Uruguay is a significant agricultural producer and exporter. Through membership of the Cairns Group, Australia and Uruguay cooperate in the World Trade Organization to advance global reform of agricultural markets.
We also work together on issues relating to the Antarctic, especially in efforts to address illegal fishing through the Convention on the Conservation of Antarctic Marine Living Resources (CCAMLR).
Australia’s Ambassador to Argentina has non-resident accreditation to Uruguay. Uruguay maintains an Embassy in Canberra.
Political Overview
Background
The Spanish first arrived in Uruguay in 1516, though fierce resistance from indigenous inhabitants helped postpone full Spanish settlement until the early 18th century. Following secession from Spain in 1811, Uruguay was annexed by Portugal to its Brazilian territories. In 1825, Uruguay declared independence from Brazil, and in 1828 the country became fully independent under the Treaty of Montevideo. During the rest of the 19th century there were a number of minor conflicts with neighbouring states, coupled with considerable inflows of (mainly European) immigrants.
Throughout much of the 20th century, Uruguay’s two main political parties, the centrist Colorado and National (Blanco) parties, have alternated in power. A military regime assumed control in 1973 – against a background of increasing social and economic turmoil – and remained in power until 1985. The legacies of twelve years of military rule included an economy in severe decline and lingering human rights issues. Democracy was re-installed in 1985, with the election of Colorado Party candidate Julio Sanguinetti. Successive administrations worked to consolidate democracy and stabilise the economy.
Since the return to democracy in 1985, successive governments have worked to consolidate Uruguay’s democratic institutions and stabilise the economy. Uruguay is divided into 19 "departments" with limited local self-government, and the political system is based on a strong central Executive branch, subject to legislative and judicial checks. No member of any branch of government can simultaneously perform official duties in another branch.
The Executive branch comprises the President, Vice-President and Cabinet of Ministers. The President and Vice-President are chosen by direct popular vote for one five-year term (consecutive re-election is not permitted), and the ministers are appointed by the President. The Legislative branch consists of a bicameral Parliament, comprising the Senate and the Chamber of Representatives. The Senate is made up of 30 senators selected by direct popular vote for a five-year term. The Chamber of Representatives is made up of 99 deputies, also chosen by direct popular vote for a five-year term.
In the Presidential elections of 31 October 2004, Tabare Vázquez, leader of the left-wing Encuentro Progresista – Frente Amplio (EP-FA) opposition coalition, won by a wide margin. Vázquez began his five-year term in March 2005. The EP-FA has a working majority in both chambers of the Uruguayan Parliament. However, tensions between the moderate and radical wings of the EP-FA coalition have resulted in dilution of some elements of the government’s ambitious program of economic and social reforms..
Uruguay’s historically close relationship with neighbouring Argentina has been tense in the last two years, as a result of the construction in Uruguay of a cellulose pulp mill by Finnish firm, Botnia. Argentina has claimed the mill would pollute border waters and has taken the issue to the International Court of Justice (ICJ) in 2006, arguing Uruguay breached the Treaty of the Río Uruguay, which requires prior consultation between the neighbours on activities affecting border waters. The pulp mill started operation in November 2007, and attention is now focused on waiting for the ICJ to make its ruling.
Political Outlook
President Vázquez, himself barred by Uruguay’s Constitution from seeking a third term in office, has publicly backed Daniel Astori as his successor in the lead-up to Presidential elections to be held in October 2009. Astori stepped down as Economy Minister in 2008 to launch his bid to be the FA’s presidential candidate. The other front-runner is former Agriculture Minister, José Mujica. President Vázquez has stated his support for a joint Astori-Mujica ticket.
Economic Overview
Uruguay’s economy is highly dependent on agriculture and the economic cycles of its close trading partners, Argentina and Brazil. Uruguay was severely affected by the crises in Brazil (1999) and Argentina (2001) and faced a painful recession in 2002‑2003.
Membership of regional trading bloc Mercosur provides Uruguay with preferential trade access to the markets of Brazil, Argentina, Paraguay and Venezuela (in addition to Chile, Colombia, Ecuador, Peru and Bolivia, which have associate membership of Mercosur). However, Uruguay has expressed dissatisfaction with the trading benefits that Mercosur has provided, and has mooted an FTA with the United States (an idea opposed by its Mercosur partners as inconsistent with Mercosur rules). Nevertheless, the current Uruguayan Government signed a Trade and Investment Framework Agreement with the US in January 2007, seen as possibly the first step towards negotiating an FTA.
Recovery since the 1999-2002 economic recession has been consistent and strong. Real GDP growth reached an estimated 10.5 per cent in 2008, led by consumption and investment. Public finances are in a healthy state. The local currency appreciated markedly in the first half of 2008 (before the advent of the international financial crisis), reflecting solid foreign investment inflows and export earnings. Foreign direct investment has increased substantially in recent years, particularly in agriculture, forestation and tourism.
Recent economic growth has been broadly based, and the commerce, agriculture and livestock sectors have recovered well following the 1999-2002 recession. Initially this was due to growth in Brazilian and Argentine import demand as these countries recovered from their own economic crises; however, more recently the sectors have been buoyed by growth in the volume and value of Uruguay’s agriculture and livestock trade with the United States. Tourism is also a growth industry, accounting for a significant proportion of Uruguay’s GDP and employment. The Botnia pulp mill, the largest foreign investment project in Uruguay’s history, is providing a significant boost to the national economy,. Establishment of a further large mill at another site is planned by the Spanish firm ENCE, and planning for several other similar projects is underway.
GDP growth is set to decelerate sharply in 2009-10 from an estimated high of 10.5 per cent in 2008. Growth is expected to ease to around 3.5 per cent in 2009, owing to the impact of the global financial turmoil, before recovering slightly in 2010. The recent falls in commodity prices are expected to have a mixed effect on Uruguay. Although declining international oil prices will benefit Uruguay (which imports all of its oil), falling commodity prices will reduce earnings from Uruguay’s agricultural exports, curbing private consumption and investment.
In 2009, annual inflation is expected to fall from 9.2 per cent back towards the 3 to 7 per cent target, as domestic demand growth slows. Producer price inflation has already started to ease (falling in both September and October 2008), and will continue to do so in line with declining commodity prices and easing domestic demand.
Economic and Trade Policy Directions
In December 2006, Uruguay fully repaid its outstanding debt to the IMF. Since then, the government has continued to follow the orthodox economic program it originally agreed in a three-year Stand-By Arrangement with the Fund in 2005.
In the short-term, economic policy is likely to focus on reducing exchange-rate volatility and safeguarding the Uruguayan economy from the worst of the global economic crisis. Both the government and the Banco Central del Uruguay (BCU, the Central Bank) are prepared to intervene to shore up credit markets, and the country is relatively well placed to avoid the worst of the economic turmoil. The government also plans to increase public-sector investment in 2009, particularly in infrastructure projects, to help offset the impact of a fall in private demand. Nevertheless, the sharp depreciation of the Brazilian Real against the US dollar since September 2008 and fears that Argentina's economy might again enter a period of crisis will raise domestic risks in Uruguay, with export volume growth and inward investment particularly at risk. Inflation will become less of an issue as food and fuel prices continue to moderate and as domestic demand growth softens.
Bilateral Relationship
The first bilateral Australian parliamentary delegation visit to Uruguay took place in July 2007 . The delegation – hosted by the Uruguayan Parliament –held discussions with the International Affairs Committee of the House of Representatives, and senior Uruguayan Government authorities, including the Foreign and Agriculture Ministers.
Recent bilateral cooperation and exchange has included an Australian expert from the Sustainable Minerals Institute in Queensland travelling to Uruguay to provide advice to the Uruguayan Mining and Environment Ministries, and a three-month internship with ABARE by an economist from the Uruguayan Rural Association. Both activities were supported by the Council on Australia Latin America Relations. Following severe flooding in Uruguay in mid-2007, the Australian Embassy in Buenos Aires donated US$50,000 at the request of the Uruguayan Government for relief efforts.
Bilateral Economic and Trade Relationship
Australian imports from Uruguay totalled around $A27 million in 2007-08 and included non-electric engines and motors, and food products. Exports to Uruguay totalled $A24 million in 2007-08 and mostly included leather, wool and raw hides and skins. Exports of simply transformed manufactures to Uruguay have increased in recent years.
Australia and Uruguay participate in the CER-Mercosur Dialogue, bringing together Australia, New Zealand, Brazil, Argentina, Paraguay and Uruguay. The dialogue was established in 1996 as a mechanism to strengthen cooperation on global trade policy issues and to promote inter-regional trade and investment.
Export Opportunities
Similarities in the primary exports of Uruguay and Australia present opportunities for the export of Australian agriculture-related technology and services. One strategy for Australian companies looking to invest and trade in Uruguay is to take advantage of existing interests they may have in Argentina and Brazil. The close commercial ties that these countries have with Uruguay, especially through Mercosur, may help facilitate entry into the Uruguayan market.
Other areas for potential Australian export growth include tourism and education.
Australian Investment Activity
Australian business presence in Uruguay is limited. There is Australian related investment in areas such as dairy products, entertainment and logistics services.
Hoyts has a joint venture with a local operator and has invested in two multiplex cinema complexes. Brambles Industries offers pallet and container pooling services through its local subsidiary, Chep.
The Uruguayan Government is pressing ahead with its plans to develop the country’s mining sector. In 2008, international companies operating in South America, including Australia’s Globe Uranium, responded to the Uruguayan’s call for expressions of interest in uranium exploration. After calling for tenders in late 2008, the government plans to commence offshore hydrocarbon exploration and production during 2009 - this may be of interest to Australian companies.
Rio Tinto has purchased 267 hectares of land along the border of the Uruguay River, for the purpose of building a minerals loading port. The Uruguayan Government has indicated support for the US$205 million project, and regulatory approval is expected to be finalised by early 2009. Rio Tinto plans to use the port to on-ship iron ore from the Corumbá deposit in Brazil, and estimates it would send some 20 million tons of mineral ore in barges from Brazil to Uruguay, where it would be reloaded onto special ore transport vessels to the rest of the world. The barges would return with coal shipments for a steel foundry project in Corumbá.
Richmond Dairies of New South Wales, together with Longley Farm of the United Kingdom, is building a frozen cream plant south of Montevideo to take advantage of the growing Uruguayan dairy industry, and with the Japanese and Chinese markets in mind.