Tiny Uruguay outshines neighbor Argentina with investors

 

McClatchy Newspapers

For decades, Argentina treated its neighbor to the east, tiny Uruguay, as little more than a colonial outpost. In the eyes of much of the world, it endured a fate perhaps even worse: near-total obscurity.

But the long-overlooked South American nation, which lacks Argentina’s flair for political melodrama and Brazil’s clout and ambition, finally is emerging from their shadows, becoming a darling among investors and even a model for democracy.

Last year when famed Silicon Valley venture-capital firm Sequoia Capital, an early financier of Apple and Google, made its first South American investment, it chose not an Argentine or Brazilian technology company, but one based in sleepy Montevideo, Uruguay’s capital.

Oil companies also are taking notice. Argentina has scared them with the abrupt expropriation in April of Spanish oil company YPF/Repsol, but Uruguay’s state-run oil company, ANCAP, is striking deals, approving oil exploration contracts with four companies in August, including British giants BP and BG. Dallas-based based Schuepbach Energy also has a contract for exploration, and ANCAP is expecting soon to begin drilling the country’s first offshore well since 1976.

Uruguay’s breakthrough into a sought-after investment partner is largely a result of how it handled a devastating financial crisis 10 years ago, when unemployment was soaring, its growth rate was a negative 11 percent and its currency had lost 94 percent of its value. In July, the credit rating agency Moody’s upgraded Uruguay’s sovereign rating to investment grade for the first time since. This followed a similar move by Standard & Poor’s earlier this year that put Uruguay’s bonds five levels ahead of Argentina’s and on par with debt from Brazil, Mexico, Peru, Colombia and Chile.

Uruguay’s average annual growth of 6 percent from 2007 to 2011 surpassed that of Brazil, Colombia and Peru, South America’s heavyweights. Its growth forecast for this year also leads that pack.

It isn’t only economic indicators that are catching people’s attention. In the most recent annual Democracy Index – assembled by the Economist Intelligence Unit, a research firm with ties to The Economist magazine – Uruguay was the only South American country in the “Full Democracy” category. Its overall 17th rank was even ahead of the United States, at 19, and the United Kingdom, at 18.

Two other countries, Chile and Israel – often talked about as models of democracy by Washington pundits – ranked 35 and 36, respectively, relegating them to the “flawed democracy” category.

Uruguay surpassed the United States in the index in civil liberties, functioning of government, and electoral process and pluralism.

In a separate ranking, Reporters Without Borders, a journalism advocacy group, ranked Uruguay 32nd in press freedom; it ranked the United States 47th.

For sure, the country faces challenges, in particular with Mercosur, the South American trading block of Argentina, Brazil, Paraguay and Uruguay. It’s long felt bullied by larger members Argentina and Brazil.

Uruguay’s vice president, Danilo Astori, said in an interview with McClatchy that while relations with Brazil had improved a great deal, the country’s “most important problems” are with Argentina; he cited protectionism and unpredictability.

Astori also was critical of the process that allowed Venezuela to join the group over the summer. That decision came only after Paraguay, which had long objected to Venezuela’s joining, had its membership suspended because of the controversial impeachment of its president, Fernando Lugo.

“For me it was a surprise,” Astori said. “Mercosur is currently going through a very difficult moment.”

As a sign of its frustration with Mercosur, Uruguay has sought to diversify trade. Last month, President Jose “Pepe” Mujica announced that Uruguay has applied for observer status for a newer trade group, the Pacific Alliance, which includes Peru, Colombia and Chile.

“More and more we are trying to strengthen our links with these countries in order to compensate for the negative results we get from our neighbors,” Astori said.

Uruguay was forced to develop an independent streak after harrowing times a decade ago, when the economy was in free-fall and its currency practically worthless.

Dependence on Argentina’s economy was the immediate cause. Many Argentines held deposits in Uruguayan banks, and when Argentina’s economy began to tank, they began a bank run that depleted Uruguay’s stocks of capital.

But unlike its neighbor across the River Plate, Uruguay’s pending meltdown drew scant attention.

Carlos Steneri, the Uruguayan official in charge of debt negotiations at the time, recounted to McClatchy in a recent interview that he’d struggled just to get noticed by the International Monetary Fund, the world’s banker of last resort.

“The IMF was fatigued from Argentina,” he said, saying it took eight long months to get the IMF’s attention. When the multilateral bank finally noticed, it suggested that Uruguay confront its problems with standard austerity measures and a sharp haircut for international bondholders.

Uruguay refused, however, fearing that abandoning its financial obligations would shatter its credibility.

“A very small country does not have the luxury of committing errors,” Steneri said. “If Uruguay had gone bankrupt, who would care?”

Desperate, Uruguayan officials then went over the IMF’s heads, directly lobbying the United States, the fund’s largest shareholder. Here it unexpectedly found a friend in the George W. Bush administration, and in Treasury Undersecretary John Taylor.

Taylor, today a supporter of Republican presidential candidate Mitt Romney, convinced the IMF to support an experimental Bush plan to back dollar deposits in Uruguay, at a cost of $1.5 billion, and stop insisting on default and immediate and aggressive debt restructuring. The Wall Street Journal, for one, took the administration to task, opining against the move in an editorial titled “Back to Bailouts.”

But the gamble worked.

Today, Uruguay’s economy is praised, particularly in contrast to Argentina’s.

“Uruguay has distinguished itself from Argentina for its application of a more coherent and disciplined set of policies,” said Franco Uccelli, the executive director of emerging markets research at JPMorgan.

In contrast, in Argentina “policies appear to be implemented in a more ad hoc and inconsistent way,” he said. The result is a big difference in everything from credit ratings and inflation to access to financing and capital.

All the while, Uruguay remains a country where leftists have governed since 2004. Mujica, the president, is a former Tupamaro guerrilla.

Uccelli is unconcerned. “The Uruguayan model has served the country well.”

If anything, other analysts say, the importance of government involvement in the economy is one reason that Uruguay tries to make sure that it’s solvent, predictable and run efficiently.

“It is not a question of ideology,” said Alberto Bernal, with Miami-based Bulltick Capital. “You can be as much of a leftist as you want, but don’t change the rules of the game. If you say you are going to respect laws, then respect them.”

By contrast, with Uruguay’s neighbor, Bernal says, “There is no certainty in Argentina, because you know the rules of the game could change.”

Sreeharsha is a McClatchy special correspondent. Twitter: @vinodsreeharsha

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