Uruguay Country Brief - December 2007
Introduction/overview
Australia and Uruguay enjoy friendly relations based upon a number of shared interests and cooperation in a range of multilateral fora. 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 has 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. In the early 20th century, elected President Jose Batlle y Ordóñez (of the Colorado Party) laid the foundations of Uruguay’s modern democratic development through a sweeping program of political, social and economic reforms. 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.
Political Outlook
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. Nonetheless, Vázquez’s alliance has acquired a loyal following in the main urban centres, as well as among younger voters seeking to break away from the traditional parties.
Uruguay’s relationship with neighbouring Argentina has recently been tense, as a result of the construction in Uruguay of a cellulose pulp mill by Finnish firm, Botnia, that Argentina claims will pollute border waters. Argentina took the issue to the International Court of Justice (ICJ) in 2006, to decide if Uruguay had breached the Treaty of the Río Uruguay, which requires prior consultation between the neighbours on activities affecting border waters. An attempted mediation to end the dispute by King Juan Carlos of Spain was stalled in November 2007, when the pulp mill started operation. Attention will now be focused on the ICJ, but the tribunal is not expected to make a ruling before the end of 2008.
Political System
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.
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. Uruguay lost its investment grade risk rating in early 2002 and the withdrawal of foreign investors resulted in a banking crisis. Throughout this process Uruguay demonstrated its commitment to an open financial system and has maintained a floating exchange rate. In 2005 the IMF completed its final review of the Stand-By Arrangement reached in 2002, under which disbursements to Uruguay totalled US$3.04 billion. The IMF review reflected favourably on Uruguay’s economic performance and fiscal reforms over those three years, noting that further reforms were needed to strengthen the tax system and tax administration, reform specialised pension funds, and improve the budgetary process.
The Government’s solid macro-economic and structural policies, aided by favourable external conditions, continue to produce good growth results. Uruguay’s GDP grew by 5.8% year-on-year in the first half of 2007, following seven per cent growth in 2006. Annual inflation remained in single digits, although it exceeded Central Bank targets in each of the first ten months of 2007, rising to 8.9% in October. Unemployment has declined considerably since the 2001 crisis, reaching 8.5% in August. Real wages have increased in line with productivity growth, but are still below pre-crisis levels.
Recent economic growth has been broadly based, and the commerce, agriculture and livestock sectors have recovered well following the crisis. 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 is expected to provide a significant boost to the Uruguayan economy, given that it is the largest foreign investment project in Uruguay’s history. Establishment of a further large mill at another site is planned by the Spanish firm ENCE.
Uruguay’s economy was substantially liberalised during the 1990s. Successive governments reduced the size and influence of the public sector by opening the economy to market forces in sectors which had been controlled by government monopolies. While these new directions have led to a more open economic and trading environment, investors and traders are still often faced with lengthy bureaucratic procedures.
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 has signed a Trade and Investment Framework Agreement with the US in January 2007, seen as possibly the first step towards negotiating an FTA.
Economic and Trade Policy Directions
In December 2006 Uruguay fully repaid its outstanding debt to the IMF. However, the Government has stated that it will continue to follow the orthodox economic program it originally agreed in a three-year Stand-By Arrangement with the Fund in 2005. With the recovery from the 2002 crisis well advanced, the Government is focusing on policies to sustain economic growth and reduce remaining vulnerabilities, including high public debt and dollarization. An adjustment of public expenditures has shifted the primary balance from large deficits during 1998-2001 to surpluses in recent years. The debt structure has been improved through longer maturities and a larger share of debt denominated in local currency. Pre-announced inflation target ranges, pursued by intervening in the foreign exchange market to sterilise capital inflows and slow down peso appreciation, have lowered inflationary expectations. Prudential norms have been tightened to internalise risks from high financial dollarization and exposure to regional contagion. Implementation of a comprehensive tax reform program – aimed at streamlining the tax system and introducing a personal income tax – began in July 2007.
Bilateral Relationship
A delegation of Federal Parliamentarians visited Uruguay from 9 to 13 July 2007 on the first bilateral Australian parliamentary visit to Uruguay. The delegation – hosted by the Uruguayan Parliament – was led by Barry Wakelin MP and held discussions with the International Affairs Committee of the House of Representatives, and senior Uruguayan government authorities, including the Foreign and Agriculture Ministers. The delegation also travelled outside Uruguay’s capital Montevideo to visit an agricultural research institute in Colonia and examine tourism infrastructure in Punta del Este.
A young economist from the Uruguayan Rural Association (ARU), Uruguay’s main nationwide farmers’ association, undertook a three month internship with ABARE from August to November 2007. His internship, which focused on economic analysis of agricultural and trade policy issues, was partly funded by the Council on Australia Latin America Relations (COALAR).
In June 2007, the Australian Embassy in Buenos Aires donated US$50,000 at the request of the Uruguayan Government towards relief efforts for victims of severe flooding which caused widespread damage in central and western Uruguay in May 2007.
Bilateral Economic and Trade Relationship
Australian imports from Uruguay totalled $A13 million in 2006-07 and included food products and animal feed. Exports to Uruguay totalled $A16 million in 2006-07 and mostly included leather, wool and crude vegetable materials. 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. A recent call for expressions of interest in uranium exploration has attracted responses from international companies operating elsewhere in South America, including Australia’s Globe Uranium.