EX-99.D 2 ex99-d.htm

Exhibit 99.D

Description of
República Oriental del Uruguay
June 6, 2008

D-1


TABLE OF CONTENTS

 

 

 

PAGE

INTRODUCTION

D-3

SUMMARY

D-4

REPÚBLICA ORIENTAL DEL URUGUAY

D-5

THE ECONOMY

D-9

GROSS DOMESTIC PRODUCT AND STRUCTURE OF THE ECONOMY

D-18

FOREIGN MERCHANDISE TRADE

D-31

FOREIGN SERVICES TRADE

D-36

BALANCE OF PAYMENTS

D-38

MONETARY POLICY AND INFLATION

D-42

THE BANKING SECTOR

D-46

SECURITIES MARKETS

D-55

PUBLIC SECTOR FINANCES

D-56

FISCAL POLICY

D-61

PUBLIC SECTOR DEBT

D-64

TABLES AND SUPPLEMENTAL INFORMATION

D-74

D-2


INTRODUCTION

          All references in this document to the “government” are to the government of the República Oriental del Uruguay (“Uruguay”) and references to the “central government” are to the central government of Uruguay (which includes governmental agencies and subdivisions and excludes financial and non-financial public sector institutions). All references in this document to the “consolidated public sector” are to the central government and financial and non-financial public sector institutions, excluding Banco de la República Oriental del Uruguay and Banco Hipotecario.

          The terms set forth below have the following meanings for the purposes of this document:

          • Gross domestic product, or GDP, means the total value of final products and services produced in Uruguay during the relevant period, using nominal prices. Real GDP instead measures GDP based on 1983 prices to eliminate distortions introduced by changes in relative prices.

          • Imports are calculated based upon (1) for purposes of foreign trade, statistics reported to Uruguayan customs upon entry of goods into Uruguay on a cost, insurance and freight included basis (referred to as CIF basis) and (2) for purposes of balance of payments, statistics collected on a free on board basis at a given departure location (referred to as FOB basis).

          • Exports are calculated based upon (1) for purposes of foreign trade, statistics reported to Uruguayan customs upon departure of goods from Uruguay on a free on board, or FOB, basis and (2) for purposes of balance of payments, statistics collected on a free on board, or FOB, basis.

          • Rate of inflation or inflation rate is measured by the December to December percentage change in the consumer price index or CPI, unless otherwise specified. The CPI is calculated on a weighted basket of consumer goods and services using a monthly averaging method. December to December rates are calculated by comparing the indices for the later December against the indices for the prior December.

          References herein to “US$,” “$,” “U.S. dollars” or “dollars” are to United States dollars. References herein to “Uruguayan pesos,” “pesos,” or “Ps.” are to the lawful currency of Uruguay. Unless otherwise stated, Uruguay has converted historical amounts translated into U.S. dollars or pesos at historical annual average exchange rates. References to “Euro” or “€” are to the lawful currency of the Member States of the European Union that have adopted the single currency in accordance with the treaty establishing the European Community, as amended by the Treaty on European Union. References to “JPY” or “yen” or “¥” are to Japanese yen. Translations of pesos to dollars, Euros or yen (or dollars to Euros or yen) have been made for the convenience of the reader only and should not be construed as a representation that the amounts in question have been, could have been or could be converted into dollars or yen at any particular rate or at all.

          The Federal Reserve Bank of New York does not report a noon buying rate for Uruguayan pesos.

          The fiscal year of the government ends December 31. Accordingly, all annual information presented herein is based upon January 1 to December 31 periods, unless otherwise indicated. Totals in some tables in this document may differ from the sum of the individual items in those tables due to rounding.

          Uruguay’s official financial and economic statistics are subject to a review process by Banco Central and the Uruguay National Statistics Institute. Accordingly, the financial and economic information in this document may be subsequently adjusted or revised. Certain of the information and data contained herein for 2006 and 2007 is preliminary, and subject to further adjustment or revision. The government believes that this practice is substantially similar to the practices of many industrialized nations. The government does not expect revisions to be material, but cannot assure you that material changes will not be made.

D-3


SUMMARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2002

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 


 

 

 

(in millions of US$, except as otherwise indicated)

 

THE ECONOMY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GDP (in millions of US$ at nominal prices)(2)

 

US$

12,295

 

US$

11,191

 

US$

13,216

 

US$

16,614

 

US$

19,308

 

US$

23,087

 

Real GDP (in thousands of constant 1983 pesos)(2)

 

Ps.

246,351

 

Ps.

251,709

 

Ps.

281,461

 

Ps.

300,104

 

Ps.

321,110

 

Ps.

344,939

 

% change from prior year

 

 

(11.0

)%

 

2.2

%

 

11.8

%

 

6.6

%

 

7.0

%

 

7.4

%

Consumer price index or CPI (annual rate of change)

 

 

25.9

%

 

10.2

%

 

7.6

%

 

4.9

%

 

6.4

%

 

8.5

%

Wholesale price index or WPI (annual rate of change)

 

 

64.6

%

 

20.5

%

 

5.1

%

 

2.2

%

 

8.2

%

 

16.1

%

Unemployment rate (annual average)

 

 

17.0

%

 

16.9

%

 

13.1

%

 

12.2

%

 

11.4

%

 

9.6

%

Balance of payments(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade balance (merchandise)

 

 

48

 

 

183

 

 

153

 

 

21

 

 

(460

)

 

(491

)

Current account

 

 

382

 

 

(87

)

 

3

 

 

42

 

 

(369

)

 

(186

)

Capital and financial account net

 

 

(280

)

 

431

 

 

72

 

 

752

 

 

433

 

 

1,224

 

Errors and omissions(4)

 

 

(2,429

)

 

1,037

 

 

379

 

 

(174

)

 

(79

)

 

(34

)

Overall balance of payments excluding impact of gold valuation adjustment

 

 

(2,328

)

 

1,380

 

 

454

 

 

620

 

 

(15

)

 

1,005

 

Change in Banco Central international reserve assets (period end)

 

 

2,328

 

 

(1,380

)

 

(454

)

 

(620

)

 

15

 

 

(1,005

)

Banco Central international reserve assets (period
end)(5)

 

 

772

(6)(7)

 

2,087

(6)(7)

 

2,512

(8)

 

3,078

(9)

 

3,091

(10)

 

4,121

(11)

 

PUBLIC FINANCE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Central Government revenue

 

 

2,483

 

 

2,286

 

 

2,666

 

 

3,365

 

 

3,959

 

 

4,588

 

Central Government expenditure

 

 

3,059

 

 

2,781

 

 

3,018

 

 

3,676

 

 

4,186

 

 

5,031

 

Central Government surplus (deficit)

 

 

(576

)

 

(495

)

 

(351

)

 

(311

)

 

(227

)

 

(443

)

Overall public sector surplus (deficit)(12)

 

 

(505

)

 

(359

)

 

(254

)

 

(142

)

 

(194

)

 

(134

)

 

PUBLIC DEBT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated public sector debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt with non-residents

 

 

8,299

 

 

9,558

 

 

10,206

 

 

10,177

 

 

9,311

 

 

10,993

 

Debt with residents

 

 

3,087

 

 

2,606

 

 

3,116

 

 

3,767

 

 

4,405

 

 

5,328

 

Total

 

 

11,386

 

 

12,163

 

 

13,322

 

 

13,949

 

 

13,717

 

 

16,321

 

As a % of GDP

 

 

92.8

%

 

108.7

%

 

100.8

%

 

83.9

%

 

71.0

%

 

71.0

%

Consolidated public sector debt service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizations

 

 

546

 

 

956

 

 

821

 

 

1,114

 

 

4,211

(13)

 

354

 

Interest payments

 

 

373

 

 

435

 

 

491

 

 

584

 

 

655

 

 

670

 

Total

 

 

920

 

 

1,391

 

 

1,312

 

 

1,698

 

 

4,866

 

 

1,024

 

As a % of exports of goods and services

 

 

34.1

%

 

45.6

%

 

30.5

%

 

33.4

%

 

83.9

%

 

15.0

%


 

 


(1)

Preliminary data.

(2)

Data for 2005 and 2006 subject to revision by Banco Central.

(3)

Calculated in accordance with the methodology set forth in the IMF Balance of Payments Manual (Fifth Edition).

(4)

Constitutes a residual item, which is periodically revised as additional information regarding the current and capital accounts becomes available.

(5)

As presented in this chart, gold reserves have been valued at their corresponding market prices as of December 31, 2002, 2003, 2004, 2005 and 2006.

(6)

This amount does not include US$507 million held by the Fondo de Estabilidad del Sistema Bancario, or FESB, at December 31, 2002 nor US$224 million at December 31, 2003.

(7)

This amount includes US$1,044 million of reserves and voluntary deposits of the Uruguayan banking system, including US$495 million of Banco de la República, with Banco Central.

(8)

This amount includes US$1,625 million of reserves and voluntary deposits of the Uruguayan banking system, including US$724 million of Banco de la República, with Banco Central.

(9)

This amount includes US$1,649 million of reserves and voluntary deposits of the Uruguayan banking system, including US$752 million of Banco de la República, with Banco Central.

(10)

This amount includes US$1,788 million of reserves and voluntary deposits of the Uruguayan banking system, including US$792 million of Banco de la República, with Banco Central.

(11)

This amount includes US$1,792 million of reserves and voluntary deposits of the Uruguayan banking system, including US$868 million of Banco de la República, with Banco Central.

(12)

Local governments not included.

(13)

Includes US$2 billion prepaid by Uruguay to the IMF between August and November 2006.

 

 

Source: Banco Central.

D-4


REPÚBLICA ORIENTAL DEL URUGUAY

Territory and Population

          Uruguay is located in the southern, subtropical zone of South America, bordering Argentina to the west and Brazil to the northeast. Its territory covers an area of approximately 176,000 square kilometers with a 500-kilometer coastline along the Atlantic Ocean and the Río de la Plata. Uruguay’s major cities are Montevideo, the nation’s capital and main port, Paysandú, Salto and Las Piedras.

          Uruguay’s population of approximately 3.4 million is primarily of European origin and has a literacy rate of 98%. Approximately 89% of the population lives in urban areas and about 42% of the population resides in the Montevideo metropolitan area. According to the most recent national census, the population growth rate averaged 0.6% per year for the period from 1985 to 1996, and is the lowest in South America. Uruguay is generally considered a middle-income developing country. The following table sets forth comparative GNP figures and selected other comparative statistics as of 2006 unless otherwise indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uruguay

 

Brazil

 

Chile

 

Venezuela

 

Mexico

 

United States

 

 

 


 


 


 


 


 


 

Per capita GNI(1) (2)

 

US$ 

5,310

 

US$ 

4,710

 

US$ 

6,810

 

US$ 

6,070

 

US$ 

7,830

 

US$ 

44,710

 

PPP GNI per capita(2) (3)

 

US$

9,940

 

US$

9,209

 

US$

11,300

 

US$

10,970

 

US$

11,990

 

US$

44,070

 

Life expectancy at birth(4)

 

 

76

 

 

72

 

 

78

 

 

74

 

 

74

 

 

78

 

Adult illiteracy rate(5) (6)

 

 

2.0

%

 

11.1

%

 

3.5

%

 

6.0

%

 

7.4

%

 

n.a.

 

Infant mortality per 1000 live births

 

 

14

 

 

19

 

 

8

 

 

18

 

 

29

 

 

6

 


 

 


n.a. = not available.

 

 

(1)

World Bank Atlas method.

(2)

2006 data.

(3)

Current US$, adjusted for purchasing power parity.

(4)

Years.

(5)

Percentage of people ages 15 and older.

(6)

2005 data.

 

 

Source: The World Bank — World Development Indicators 2007 and Cepal.

Constitution, Government and Political Parties

          Uruguay is organized politically as a republic and is geographically divided into 19 departments (districts). The 1967 Constitution, which was last amended in 2004, provides for a presidential system of government composed of three branches: executive, legislative, and judiciary. The president heads the executive branch and is chief of staff and commander of the armed forces. The president is elected by direct popular vote for a period of five years and may not seek re-election for consecutive terms. Under Uruguay’s electoral system established under the 1996 constitutional reform, each political party selects a single candidate for presidential elections. If no candidate wins more than 50% of the vote in the first round of elections, a run-off between the two leading candidates is held. The legislative branch is composed of a 31-member Senate and a 99-member Chamber of Deputies, which together constitute the Congress. Members of Congress are elected every five years by direct popular vote under a system of proportional representation. The Supreme Court is composed of five judges appointed for 10-year terms by the Congress. The Supreme Court has jurisdiction over selected constitutional matters and appellate jurisdiction over decisions rendered by lower courts. Uruguay’s judicial system consists of trial and appellate courts with jurisdiction in each case over civil, criminal, family and labor matters. In addition, Uruguay has an administrative court system with jurisdiction over a number of public sector matters.

          Uruguay has been a democratic country throughout most of its history since it became an independent nation in 1825. The country’s democratic tradition was interrupted twice during the last century: once briefly in the 1930’s and again during the period from 1973 to 1985. In June 1973, a military junta took over power, dissolved Congress, and suspended all voting activity. Military rule continued until November 1984, when democratic elections were held and voters elected Julio María Sanguinetti as president.

          Politics in Uruguay are dominated by three political parties: the Frente Amplio (Broad Front), the Partido Colorado and the Partido Nacional. Since appearing on Uruguay’s political landscape in 1971 as a coalition of, among others, the Christian Democratic, Socialist and Communist parties, the Frente Amplio gained increasing support and, in October 2004, won victories in the presidential and the congressional elections.

D-5


 

          Until the 2004 presidential and congressional elections, Uruguay’s two traditional political parties, the Partido Colorado and the Partido Nacional, had alternated holding the presidential office. Each of these two parties is composed of multiple political factions, typically with different political orientations, but without strong ideological differences. The Partido Colorado and the Partido Nacional, which were formed in the 1830s, are both market-oriented and favor trade liberalization and reducing the government’s role in the economy, although some factions within each of those parties favor moderate trade protection and some degree of government intervention. Traditionally, the Partido Nacional has had a strong rural constituency, while the Partido Colorado has drawn most of its support from urban areas. The Frente Amplio advocates a moderate social welfare platform. A fourth political party, the Partido Independiente, is a center-left group which split from the Frente Amplio prior to the 1989 elections.

          On October 31, 2004, Mr. Tabaré Vázquez of the Frente Amplio won the national presidential election in the first round of voting with a majority of approximately 51% of the votes cast. The Frente Amplio also captured a majority of both houses of Congress for the first time in the party’s history, in simultaneously held elections.

          The Congressional representation of each of the four parties for the 2005-2009 term is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senate

 

Chamber of Deputies

 

 

 


 


 

 

 

Seats

 

%

 

Seats

 

%

 

 

 


 


 


 


 

Frente Amplio

 

 

17

 

 

54.8

%

 

53

 

 

53.5

%

Partido Nacional

 

 

11

 

 

35.5

%

 

35

 

 

35.4

%

Partido Colorado

 

 

3

 

 

9.7

%

 

10

 

 

10.1

%

Partido Independiente

 

 

0

 

 

0

%

 

1

 

 

1.0

%

 

 



 



 



 



 

Total

 

 

31

 

 

100

%

 

99

 

 

100

%

 

 



 



 



 



 

          Political Transition

          Mr. Vázquez was inaugurated on March 1, 2005. Since 1984, Uruguay’s political transitions following presidential elections have not entailed major economic disruptions. Furthermore, for the first time in almost four decades, the same political party gained control of the executive branch of the government and held majorities in both houses of Congress. Mr. Vázquez, however, sought to reach consensus with the Partido Colorado, the Partido Nacional and the Partido Independiente with respect to key areas of government, including macroeconomic and social policies, education and foreign relations.

          Pursuant to an understanding reached with Uruguay’s principal political parties on February 16, 2005, the Frente Amplio set the following goals of economic policy for the 2005-2010 period:

 

 

 

 

reaching a sustainable level of economic growth supported by a steady development of Uruguay’s productive capacity and productivity;

 

 

 

 

reducing unemployment and improving the quality of employment; and

 

 

 

 

advancing the quality of life of the population, focusing on the urgent need to improve the living conditions of the poorest segments of the population.

          The Frente Amplio stated that it intended to pursue these objectives within a framework of fiscal responsibility.

 

D-6


Foreign Policy and Membership in International and Regional Organizations

          Uruguay has had no significant regional or international conflicts in recent years. The Republic has focused its foreign policy on international economic, political and legal issues and on the development of international arrangements aimed at improving economic cooperation among nations, conflict resolution and international law. Uruguay maintains diplomatic relations with 137 countries and is a member of 105 international organizations, including:

 

 

 

 

the United Nations (founding member), including many of its specialized agencies;

 

 

 

 

the Organization of American States;

 

 

 

 

the World Trade Organization;

 

 

 

 

the International Monetary Fund or the IMF;

 

 

 

 

the International Bank for Reconstruction and Development or the World Bank;

 

 

 

 

the International Finance Corporation;

 

 

 

 

the Multilateral Investment Guaranty Agency;

 

 

 

 

the International Centre for Settlement of Investment Disputes;

 

 

 

 

the Inter-American Development Bank or the IADB;

 

 

 

 

the Inter-American Investment Corporation; and

 

 

 

 

the Corporación Andina de Fomento.

          Uruguay maintains close ties to its neighboring countries and participates in several regional arrangements designed to promote cooperation in trade and investment. It has been the host country for the Latin American Integration Association, a regional external trade association that includes ten South American countries in addition to Mexico and Cuba since its creation in 1960.

          In March 1991, the governments of Argentina, Brazil, Paraguay and Uruguay signed the Mercosur Treaty. Under the Mercosur Treaty, these four countries originally pledged:

 

 

 

 

(1)

to create a full common market in goods, services and factors of production by eliminating or significantly reducing, in some cases over a period of years, import duties, tariffs and other barriers to trade among members; and

 

(2)

to establish common external tariffs for trade with non-members.

          In December 1994, the four members of Mercosur signed an agreement establishing January 1, 1995 as the deadline for the implementation of a common external tariff intended to transform the region into a customs union. However, it was also agreed that each member country would be entitled to take exceptions to the common external tariffs for a transitional period scheduled to end in 2008 for Argentina and Brazil, and in 2010 for Paraguay and Uruguay. Accordingly, the full implementation of a customs union has been deferred.

          Following the devaluation of the Brazilian currency in 1999, significant trade imbalances among Mercosur countries developed. These imbalances prompted discussions and negotiations which led to an understanding in December 2000 with respect to the setting of common macroeconomic targets intended to cause the national economies to converge. This understanding included common goals with respect to inflation, fiscal deficit, and public debt. However, in March 2001, Argentina unilaterally increased import tariffs on consumer goods to 35% and eliminated import tariffs on all capital goods, in each case for non-Mercosur products and on a transitional basis. In June 2001, Argentina modified its foreign exchange regime to subsidize exports and tax imports. In December 2001, Paraguay imposed a 10% duty on imports. In response to the imbalances created within Mercosur in 2001, in June 2001 Uruguay imposed a non-tariff 1.9% duty on imports (other than capital goods) regardless of their origin, which was subsequently increased to 2.5% in addition to any existing tariffs, and granted exporters additional tax reimbursements to improve their competitiveness. This import duty was eliminated effective July 1, 2007. Argentina’s crisis in 2001 adversely affected trade within Mercosur and with non-Mercosur countries and the timely implementation by Mercosur of the objectives set forth in the Mercosur Treaty of 1991, in particular the customs union. It also caused indefinite delays in Mercosur’s ability to achieve the macroeconomic coordination and stability sought by the December 2000 understanding on common macroeconomic targets. Uruguay continues to support the long-term objectives contemplated in the Mercosur Treaty and the December 2000 understanding, while pursuing measures intended to maximize access to export markets by Uruguayan products in the short and medium term.

D-7


          In December 1995, Mercosur and the European Union signed a framework agreement for the development of free trade between them. In 1996, Chile and Bolivia agreed to participate in the Mercosur arrangements pursuant to separate free trade agreements. On April 5, 2004, the Andean Community (a customs union among Venezuela, Ecuador, Colombia, Peru and Bolivia) concluded a free trade agreement with Mercosur. The agreement, which was originally agreed to in principle at a summit of the two trading blocs in July 2003, resulted in the creation of a South American free trade area. Mercosur and the European Union are currently engaged in the negotiation of a free trade agreement. While the parties have made progress in several areas, Mercosur has conditioned the agreement upon the European Union making significant concessions with respect to trade in agricultural products and the EU’s common agricultural policy, at least insofar as it impacts Mercosur. Mercosur and the United States, which had suspended negotiations in 2004, have resumed negotiations surrounding the hemisphere-wide Free-Trade of the Americas Agreement (FTAA) pursuant to the 1991 “Four Plus One” Agreement. The negotiations have revealed important differences between the parties, and there can be no assurance that an agreement will be reached within the near term, as originally contemplated. Also during 2004, Mercosur signed framework agreements for the development of bilateral trade with each of India and the Southern African Customs Union. In December 2005, the four original members of Mercosur admitted the Republic of Venezuela to the bloc, with a right to attend all presidential and ministerial level meetings but without the right to vote until all negotiations relating to the adoption by Venezuela of Mercosur’s common external tariff are completed. On December 8, 2005, Mercosur and Israel signed a three-year framework agreement to strengthen relations between the parties, promote the expansion of trade and provide the conditions and mechanisms to negotiate a free trade agreement.

          On May 19, 2004, the Uruguayan Congress unanimously approved a free trade agreement between Mexico and Uruguay, which entered into force on July 15, 2004. The agreement removes tariffs with respect to approximately 93% of the goods and services traded between the countries. On June 11, 2004, Uruguay and Iran signed a framework agreement to promote bilateral trade. In May 2005, business representatives from both countries agreed on the financing of development projects in Uruguay, with a focus on the agricultural sector. Uruguay also completed negotiations regarding a bilateral treaty with the United States to expand mutual investment, which came into force on November 1, 2006. On January 25, 2007, Uruguay and the United States entered into a Trade and Investment Framework Agreement, or TIFA, to foster a favorable environment for investment and business between the two nations. Under the agreement, the countries will monitor bilateral trade and investment, identify opportunities to liberalize trade and investment policy and work towards the removal of impediments to free trade. On April 26, 2007, the first meeting of the Council on Trade and Investments established by TIFA was held. In this meeting, both nations confirmed their commitment to liberalizing commerce and expanding investment in technology, communications and electronic commerce. On April 29, 2008, Uruguay and the United States signed an agreement for cooperation in science and technology, to facilitate the exchange of scientific results and provides protection of intellectual property rights.

          In April 2007, Uruguay and Chile formed a commission to analyze means of increasing trade and investments between the two countries.

D-8


THE ECONOMY

History and Background

          From the 1930’s through the mid-1970’s, Uruguay followed an import substitution policy coupled with extensive intervention by the government in the economic affairs of the country. The government imposed pervasive controls over domestic goods and financial markets in the form of high tariffs, quantitative trade barriers, price controls, subsidies, and exchange and interest rate restrictions. The government also controlled important areas of the economy, such as communications, railways, air traffic and oil refining and distribution, and developed a comprehensive social security system. Although the economy continued to grow, particularly between 1945 and 1955, the government’s import substitution policy and market controls ultimately distorted the allocation of resources, contributing to inflation and the stagnation of the Uruguayan economy during the second half of the period.

          In the mid-1970’s, in response to its poor economic performance, which was aggravated by a worldwide recession, Uruguay launched a series of reforms designed to reduce the government’s role in the economy, increase efficiency and reduce inflation. The government substantially reduced import quotas, price controls and subsidies. It eliminated certain personal income taxes and increased the emphasis on indirect taxation by expanding the coverage of value-added taxes. Most importantly, the government liberalized international financial transactions. Beginning in 1974, Uruguayan residents were permitted to hold foreign assets without restriction and exchange controls were eliminated, in effect making the peso a fully convertible currency. Free repatriation of profits and capital from Uruguay was instituted shortly thereafter.

          In response to the liberalization policies pursued from 1975 to 1980, Uruguay’s economy grew at an average annual rate of 4.5% for the period. Rapid growth, however, was accompanied by double-digit inflation. Uruguay’s exchange rate management, which set the monthly rate of devaluation of the Uruguayan peso with respect to the U.S. dollar in accordance with inflation differentials between Uruguay and its main trading partners, contributed to the persistence of high and variable monthly inflation rates. Seeking to reduce inflation, in October 1978, the government abandoned its passive crawling peg policy and introduced an “active” crawling peg policy. This policy consisted of pre-announced exchange rates for a period of six months, which were set at a decreasing rate of devaluation. A surge in private bank lending led to an increase in aggregate demand and to even greater inflation rates, which resulted in the overvaluation of the Uruguayan currency. The overvaluation of the peso and the debt overhang, coupled with a number of negative external developments (including the 1979 oil crisis, rising international interest rates, reduced external demand resulting from the worldwide recession and economic adjustments in Brazil and Argentina), led to loss of confidence in the sustainability of Uruguay’s exchange rate policy. This loss of confidence, given the openness of Uruguay’s financial markets, resulted in massive capital flight.

          In November 1982, the government abandoned its system of fixed and pre-announced devaluations and allowed the peso to float, prompting a further peso-to-U.S. dollar depreciation of over 140.0% in the period between November 1982 and March 1983. This depreciation increased the local currency value of U.S. dollar-denominated liabilities, further worsening the position of debtors (many of whose loans were denominated in U.S. dollars), and increasing the number of non-performing assets of the banking system. The increase in the non-performing assets of the banking system in turn resulted in the failure of many private banks and their de facto nationalization by the government. To improve the condition of the banking system, Banco Central purchased a significant portion of the banks’ non-performing loan portfolios, resulting in heavy losses to Banco Central and aggravating the overall deterioration of the public sector’s fiscal accounts. The consolidated public sector deficit (which includes the central government, Banco Central and the non-financial public sector) reached 12.2% of GDP in 1983. The deficit of Banco Central alone (including assistance provided to the state mortgage bank, Banco Hipotecario), was 8.1% of GDP.

          A severe recession followed this financial crisis, with real GDP falling by 16.0% in the 1982–1984 period. Moreover, heavy public sector borrowing, the rise in international interest rates and the global economic slowdown during the period resulted in a deterioration of Uruguay’s external debt situation. In 1982, Uruguay’s ratios of external indebtedness were relatively low: its external debt-to-GDP ratio was 45.0% and its external debt service-to-exports ratio was 50.0%. By 1985, its external debt-to-GDP ratio had risen to 104.0% and external debt service-to-

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exports ratio had reached 70.0%. Notwithstanding the size of Uruguay’s external debt, the Republic maintained its long-standing tradition of prompt debt service throughout the 1980’s. The country did, however, negotiate a rescheduling of its maturing debt obligations to commercial bank creditors three times during the 1980’s and a debt restructuring within the framework of the Brady Plan in 1991. For more information, see “Public Sector Debt—Debt Service and Debt Restructuring.”

          A modest economic recovery began in 1985, when real GDP grew by 1.5%. In the following two years, a strong recovery in investment fueled by lower interest rates resulted in real growth rates of 8.9% in 1986 and 7.9% in 1987. During 1988 and 1989, however, Uruguay’s real GDP growth slowed to an annual average of 0.6% due to limits in the operating capacity of the manufacturing sector, a severe drought from late 1988 through 1989 and the adverse impact of the hyperinflation affecting the economies of Argentina and Brazil at the time.

          In the early 1990’s, the government took steps to increase private sector involvement in the economy (including foreign investment in previously restricted areas), and reduced the size and influence of the public sector in the economy. Following a modest 0.9% increase in real GDP in 1990, a new recovery began in mid-1991, and real GDP increased steadily between 1991 and 1994 at an average cumulative annual rate of 5.2%.

          The economic liberalization policies of the 1990s, while stimulating improvements in productivity and economic growth, also increased the exposure of Uruguay’s economy to regional and international economic developments. The absence of capital controls facilitated a gradual dollarization of the assets and liabilities of the banking system. A loss of investor confidence in certain countries in the region, capital flight and a resulting contraction of economic activity followed the Mexican peso devaluation in December 1994. Argentina, one of Uruguay’s principal trading partners and sources of direct foreign investment, was particularly affected. The contraction in aggregate demand in neighboring countries, particularly Argentina, was coupled with a decrease in Uruguay’s private demand and public sector investment. In 1995, real GDP contracted by 1.4% as compared to 1994.

          Uruguay’s economy recovered with real GDP growth of 5.6% in 1996 and 5.0% in 1997. This improvement was mainly a result of the increased exports and growth in gross fixed investment, particularly private sector investment, which in turn stimulated private consumption. Improvement continued in 1998 with real GDP growth of 4.5%. Domestic private consumption increased slightly as a percentage of GDP in 1998, although it remained below 1994 levels. Gross fixed investment also increased as a percentage of GDP in 1998, slightly above 1994 levels. The rate of gross domestic savings as a percentage of GDP increased in 1998, compared to 1997, 1996 and 1995. For the period from 1994 to 1998, private gross fixed investment grew faster than GDP (except in 1994), increasing at an average annual rate of 10.5% from 1994 to 1998. During this period, the financial and insurance services sector grew in real terms and as a percentage of GDP.

The Mercosur Agreements

          The execution and implementation of Mercosur represented Uruguay’s single most important foreign trade endeavor, as it was expected to offer Uruguayan companies access to a common market of approximately 200 million people. On January 1, 2000, internal tariff rates among Mercosur countries were reduced to zero, with the exception of sugar and automobiles.

          With the establishment of the common external tariff in January 1995, the members of Mercosur agreed to cause a gradual convergence of their respective external trade regulations over a five-year period. A common external tariff became effective on January 1, 2001. However, each member of the Mercosur retained some degree of flexibility intended to gradually allow certain industries to enhance their competitiveness, and had the ability to take specific exceptions to the common external tariff (initially 300 each) over a transitional period. The transitional period is scheduled to end in 2010. Argentina and Brazil are currently entitled to 100 exceptions each and Paraguay and Uruguay are currently entitled to 225 and 649 exceptions, respectively. In the case of the telecommunications, capital goods and information technology products, the Mercosur agreed that Uruguay and Paraguay could take exception through 2010 from the common internal tariff (with rates of 0% and 2%, respectively) with respect to tariff imports of non-Mercosur origin. In addition, the Mercosur countries have agreed to coordinate policies in certain areas, including agriculture, industry, transport and trade in services, to reduce or eliminate imbalances, and several working groups are currently engaged in policy coordination negotiations.

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          In March 2001, Argentina unilaterally increased import tariffs on consumer goods to 35% and eliminated all import tariffs on capital goods, in each case for non-Mercosur products and on a transitional basis. In June 2001, Argentina further modified its foreign exchange regime to subsidize exports and tax imports. The devaluation of the Argentine peso in January 2002, and other measures taken by the Argentine government brought Argentina’s foreign trade to a virtual standstill in the first quarter of 2002. The Argentine crisis adversely affected trade within Mercosur and with non-Mercosur countries and the timely implementation by Mercosur of the objectives set forth in the Mercosur Treaty of 1991, in particular the customs union. Uruguay maintains certain duties affecting imports of certain Argentine products whose producers are entitled to regional or sectoral subsidies. It also caused indefinite delays in Mercosur’s ability to achieve the macroeconomic coordination and stability sought by the December 2000 understanding on common macroeconomic targets. Uruguay continues to support the long-term objectives contemplated in the Mercosur Treaty and the December 2000 understanding, recognizing the short and medium-term need to maximize access to other export markets by Uruguayan products.

          Certain barriers to the comprehensive regional integration initiated by Mercosur continue to exist. Agriculture border inspections and other bureaucratic border procedures still lack uniformity among Mercosur member countries and are onerous in many instances, causing delays in trade. Rules on intellectual property, antitrust and the environment, among other things, are different in each of the Mercosur countries, and while certain mechanisms for dispute resolution have been established, comprehensive mechanisms are still under development. In December 2002, Mercosur approved common antitrust procedures implementing a 1996 Antitrust protocol. This agreement constitutes a step towards the elimination of antidumping claims among members. Trade in services, such as financial and banking services, has not been uniformly liberalized, with countries like Uruguay having a financial system which is open to non-Uruguayan participants while countries like Brazil allow only limited participation of non-Brazilian banks in their financial system. Infrastructural development of roads, bridges and railways is also necessary to further facilitate trade. In December 1997, the Mercosur members agreed to a framework agreement for the liberalization of the provision of services, access to markets and freedom of establishment. The members of the Mercosur meet annually to negotiate the implementation of the 1997 framework agreement. A protocol regarding the provision of services entered into effect in December 2005 and was ratified by Argentina, Brazil and Uruguay. It contemplates the complete elimination of intra–Mercosur restrictions by 2015. The liberalization is effected gradually on the basis of negotiation rounds intended to result in eliminating restrictions by segments with a view to reaching complete liberalization by no later than 2015.

1999-2002: Recession and Crisis in the Banking System

          Between 1999 and 2002, a series of external factors, including most significantly the economic crisis that affected Argentina most severely in 2001 and 2002, had material adverse consequences for Uruguay’s economy.

          During 1999, Uruguay’s economy was adversely affected by the devaluation of the Brazilian currency, a strong recession in Argentina, which caused a contraction in Argentine demand for Uruguay’s products and tourism-related services, declining international prices for several of Uruguay’s commodity exports, an increase in the price of oil and derivative products, the appreciation of the U.S. dollar (to which the Uruguayan peso was linked), which caused Uruguay’s export products to become less competitive in several of its traditional export markets, increases in international interest rates, and a severe drought in the second half of 1999 that adversely affected the agricultural and related sectors.

          As a result of these circumstances, in 1999 real GDP decreased by 2.8%, domestic private consumption declined 1.5% and private gross fixed investment fell by 14.0%. Exports of Uruguayan goods and services also declined by 7.4%. The recession affected most sectors of the economy. The consolidated public sector deficit increased from 0.9% of GDP in 1998 to 3.6% of GDP in 1999, reflecting a decrease in public sector revenues (including social security revenues) and increases in public sector spending, attributable to a number of infrastructure projects undertaken by the government to mitigate the impact of the recession.

          During 2000, most of the adverse conditions that caused real GDP to contract in 1999 continued, including high oil prices, a strong U.S. dollar, Argentina’s recession and increases in international interest rates. Heavy rains in the last quarter of 1999 also adversely affected the agricultural sector. In 2000, real GDP declined by 1.4%, domestic private consumption decreased by 1.6%, private fixed investment declined 14.5%, and government consumption contracted by 0.3%. Inflation for 2000, as measured by the CPI, reached 5.1%, reflecting the impact of increasing international oil prices on the Uruguayan economy. However, the peso depreciated 7.8% in real terms with respect to the U.S. dollar. The consolidated public sector deficit in 2000 reached 3.8% of GDP, as public sector revenues contracted at a faster pace than public sector expenditures.

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          Adverse external factors continued through 2001. Argentina’s third year of recession and the slowdown in the rate of economic growth of industrialized nations adversely affected Uruguay’s economy. Virtually all sectors of the economy experienced the impact of the recession, with government and private consumption and fixed investments all contracting for a second consecutive year. The recession adversely affected public sector revenues, and the measures taken by the government to reduce expenditures were insufficient to prevent a further deterioration of public sector finances. Real GDP contracted by 3.4%. Domestic private consumption decreased by 2.0%, government consumption decreased by 2.9% and private fixed investment decreased by 8.8%. The consolidated public sector deficit for 2001 reached 3.9% of GDP. On June 19, 2001, Banco Central adjusted the rate of devaluation of the Uruguayan peso from 0.6% to 1.2% per month through December 31, 2001 and widened the band of fluctuation for the peso to U.S. dollar exchange rate from 3.0% to 6.0%. In spite of these adjustments, domestic inflation for 2001, as measured by the CPI, remained at 3.6%, and the peso depreciated 13.0% in real terms with respect to the U.S. dollar. Foreign trade also deteriorated in 2001, with exports contracting by 10.5% (measured in U.S. dollars) and 7.7% in real terms, and imports contracting by 11.7% (measured in U.S. dollars) and 8.8% in real terms, with respect to 2000. Nevertheless, the continued recession appeared not to undermine confidence in Uruguay’s banking system, which continued to attract deposits from residents and non-residents, particularly as volatility in Argentine increased. As of December 31, 2001, approximately 87.3% of total credit extended to the private sector and 91.3% of total deposits held in the private banking system were denominated in foreign currencies (principally the U.S. dollar).

          On December 1, 2001, the Argentine government froze deposits held with Argentine banks and introduced exchange controls restricting capital outflows. On December 23, 2001, the Argentine government announced its decision to default on Argentina’s foreign debt. Argentina suffered significant economic, political and social deterioration during 2002. In addition to the government, a significant portion of the country’s large corporate debtors defaulted on all or a substantial part of their financial liabilities. In response to the crisis, the Argentine government undertook a number of far-reaching initiatives, including a mandatory conversion of foreign currency-denominated debts and bank deposits into Argentine pesos and the devaluation of the Argentine peso after ten years of parity with the U.S. dollar.

          In 2002, Uruguay’s economy experienced its most significant setback since 1982, with real GDP contracting by 11.0%. The proximate causes of Uruguay’s 2002 economic crisis are associated with Argentina’s economic deterioration during that time. Uruguay’s fiscal imbalances, its dependence on Argentina and Brazil as its principal trading partners and sources of foreign revenues, and rigidities that limited the ability of the economy to absorb and adapt to external factors, added to the severity of the crisis.

          Uruguay’s banking system confronted its worst crisis since the 1982-83 crisis. At December 31, 2002, total U.S. dollar deposits of the non-financial private sector with the banking system (excluding off-shore institutions) were US$7,317 million (of which US$2,386 million were of non-residents), compared to US$14,246 million as of December 31, 2001 (of which US$6,592 million were of non-residents). Initially, the increase in deposit withdrawals affected primarily Banco de Galicia Uruguay, or BGU, and Banco Comercial, the country’s two largest private banks, both affiliated with Argentine banks. Banco Central took control of BGU on February 13, 2002, and suspended its operations. Banco Comercial was affected by the Argentine crisis and, to an even greater extent, by the implication of a former board member and shareholder in alleged fraudulent activities involving the bank and its Argentine affiliate, Banco General de Negocios, as well as Compañía General de Negocios, a Uruguayan affiliate. On February 28, 2002, Uruguay and Banco Comercial’s three other shareholders (JP Morgan Chase, Credit Suisse First Boston and Dresdner Bank) each contributed US$33 million to the bank in exchange for 25.0% of the bank’s equity and replaced management.

          The deposit outflow spread through the rest of Uruguay’s financial system in the second quarter of 2002 leading to the closure of Banco Montevideo/La Caja Obrera, Uruguay’s third largest private bank, in June 2002. Although the government received approximately US$500 million from the IMF on June 29, 2002, and provided liquidity assistance to the local banks, confidence in the Uruguayan financial system continued to erode.

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          The Uruguayan authorities sought the financial assistance of the IMF, the World Bank and the IADB for a program that would safeguard Uruguay’s payment and financial system. On August 4, 2002, Congress passed Law 17,523, known as the Law for the Strengthening of the Financial System. The law (i) provided for the establishment of a fund for the stability of the Uruguayan banking system, the Fondo de Estabilidad del Sistema Bancario, or FESB, (ii) extended to three years the maturities of all U.S. dollar-denominated time deposits held with Banco de la República and Banco Hipotecario, (iii) transferred foreign currency-denominated liabilities of Banco Hipotecario to Banco de la República, and (iv) facilitated the liquidation of insolvent banks.

          In furtherance of the program agreed with the IMF, in December 2002, Congress enacted amendments to the banking law aimed at strengthening the banking system. Following the enactment of these amendments, the government completed the reorganization of Banco Comercial, Banco Montevideo and La Caja Obrera into a new commercial bank, Nuevo Banco Comercial. The non-recoverable assets of the three liquidated banks are held by liquidation funds, and the proceeds have been earmarked to satisfy deposits of the liquidated banks that were not assumed by Nuevo Banco Comercial.

          Between January 1, 2002 and February 28, 2003, depositors withdrew approximately US$6,833 million from the Uruguayan banking system. Banks responded to depositors’ demands by withdrawing approximately US$1.1 billion in reserves and voluntary deposits held with Banco Central and reducing to practically none the availability of credit. The financial system received assistance for approximately US$2.0 billion from the Uruguayan authorities.

          In February 2002, the government adopted a series of initiatives intended to reduce the central government’s deficit for 2002 from 4.0% to 2.5% of GDP, and requested the rest of the public sector to proceed accordingly. On March 25, 2002, the Executive Board of the IMF approved a stand-by facility for up to Special Drawing Rights, or SDR, 594 million (approximately US$743 million), to shore up Banco Central’s international reserve assets with the expectation that confidence in the banking system would thereby be restored.

          In May 2002, the government announced its decision to adopt additional measures intended to reduce expenditures. These measures included limiting public sector wage increases, curtailing goods and services and capital expenditures, reducing overtime compensation, rationalizing spending on healthcare, and increasing revenues by obtaining the approval of Congress to increase taxes on pensions and wages and excise taxes, expand the application of the VAT to previously excluded goods and services, and further increase the corporate income tax rate to 35.0%.

          On June 25, 2002, Uruguay requested an increase of its stand-by facility with the IMF by SDR 1,158 million (approximately US$1.5 billion). The objective was to restore confidence in the banking system and build up Banco Central’s international reserve assets. The IMF disbursed SDR 386.1 million (approximately US$514 million) on June 28, 2002.

          On August 4, 2002, Uruguay and the IMF reached agreement on adjustments to Uruguay’s economic program, and Uruguay gained access to US$1,372 million of additional assistance from the IMF, the World Bank and the IADB, which were contributed by the government to the FESB.

          The 2002 economic crisis had profound effects on Uruguay’s monetary and exchange rate policy. The continued devaluation of the Argentine peso and growing uncertainties as to the future of the Brazilian economy increased the risk of a speculative run on the peso. On June 19, 2002, Banco Central allowed the peso to float, abandoning the “crawling peg” system. The devaluation of the peso accelerated in July 2002, dropping to its lowest value of Ps.32.33 per US$1.00 on September 10, 2002. As of December 2002, the peso had depreciated 94.0% in comparison to December 2001, although the year-to-year inflation rate for the same period only reached 25.9%. The depreciation of the peso in turn caused a further deterioration in the quality of the foreign currency-denominated loan portfolio of several financial institutions. It also caused Uruguay’s foreign currency-denominated debt to GDP ratio to rise to 89.1% as of December 31, 2002, while the foreign currency-denominated debt service to exports ratio for 2002 was 33.6%.

          The decrease in tax collections attributable to the reduction of GDP, together with the increase in debt service requirements (measured as a percentage of GDP) caused primarily by the devaluation (nearly all of Uruguay’s debt is denominated in foreign currency), practically neutralized the savings achieved by the Central Government during 2002. As a result, the consolidated public sector deficit for 2002 was approximately 4.1% of GDP. Nevertheless, by reducing expenditures (excluding interest payments), Uruguay’s public sector generated a primary surplus equal to 0.5% of GDP.

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2003-2007: Recovery and Economic Growth

          Uruguay’s economy stabilized during the second quarter of 2003 and began to recover during the balance of 2003, recording an annual real GDP growth of 2.2%. Growth accelerated in 2004, with real GDP increasing by 11.8%. This improvement was mainly a result of an increase in external demand driven primarily by Argentina’s economic recovery, an increase in the prices of commodities exported by Uruguay, the opening of the U.S. market to Uruguayan beef exports and a recovery in domestic demand spurred by improved consumer and investor confidence. GDP continued to grow at a rate of 6.6% in 2005, 7.0% in 2006 and 7.4% in 2007.

          In 2003, domestic private consumption represented 74.6% of GDP, an increase of 2.0% compared to 2002. In 2004, domestic private consumption represented 73.7% of GDP, an increase of 10.6% compared to 2003. In 2005, domestic private consumption represented 73.2% of GDP, an increase of 3.2% compared to 2004. In 2006, domestic private consumption represented 74.7% of GDP, an increase of 12.2% compared to 2005. In 2007, domestic private consumption represented 74.5% of GDP, an increase of 7.8% compared to 2006.

          Gross fixed investment, which in 2003 represented 9.4% of GDP, decreased by 11.4% compared to 2002, but recovered in 2004, growing at a rate of 30.2% compared to 2003 and accounting for 11.3% of GDP. In 2005, gross fixed investment increased by 24.5% compared to 2004, with private gross fixed investment increasing by 25.8%. In 2006, gross fixed investment increased by 18.9% compared to 2005, with private gross fixed investment increasing 24.2%. In 2007, gross fixed investment increased by 5.8% compared to 2006, with private gross fixed investment increasing 6.7%.

          The rate of gross domestic savings as a percentage of GDP decreased in 2003 to 10.3%, compared with 13.2% in 2002, but recovered in 2004 accounting for 12.6% of GDP, and 13.4% of GDP in 2005, 12.4% of GDP in 2006 and 13.2% of GDP in 2007.

          Exports of goods and services, which in 2002 had fallen by 10.3% compared to 2001, grew by 4.2% in 2003, by 30.4% in 2004, by 16.3% in 2005, by 8.0% in 2006 and by 9.7% in 2007. Imports of goods and services, which in 2002 had fallen by 27.9% compared to 2001, grew by 5.8% in 2003, by 26.8% in 2004, by 10.1% in 2005, by 18.3% in 2006 and by 10.3% in 2007.

          The successful reprofiling of the government’s foreign currency denominated debt in June 2003 assisted in reducing the uncertainties and volatility that had affected the Uruguayan banking system. The deposits held by the non-financial private sector with the banking system (excluding deposits held with offshore banks and financial houses), have recovered since the 2002 crisis and stood at US$7.7 billion at December 31, 2003, US$8.6 billion at December 31, 2004, US$8.2 billion at December 31, 2005, US$9.4 billion at December 31, 2006 and US$10.6 billion at December 31, 2007. Approximately 80% of those deposits were denominated in foreign currencies (primarily U.S. dollars), and 51.3% of those deposits were held with Banco de la República and Banco Hipotecario.

          During 2003, volatility diminished and the annual consumer price inflation rate dropped to 10.2% compared to 25.9% in 2002. At December 31, 2003, the peso had lost 7.8% of its nominal value with respect to the dollar compared to December 31, 2002, which nevertheless amounted to an appreciation of the peso in real terms. In 2004, annual consumer price inflation fell further to 7.6% in part reflecting the appreciation of the peso. The decline of the U.S. dollar in the international markets as well as the general improvement of the Uruguayan economy contributed to a significant appreciation of the peso in 2004. The downward trend in consumer price inflation continued in 2005, recording an annual rate of 4.9% during 2005, 6.4% during 2006 and 8.5% in 2007.

          During 2002 and 2003, Uruguay received assistance from the international financial institutions and applied the proceeds to overcome certain of the constraints on Uruguay’s foreign currency reserves imposed by the crisis affecting the banking sector.

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          Between March 2002 and December 2004, Uruguay received disbursements for a total of approximately US$3.8 billion from the IMF and other multilateral organizations, and made total principal payments to such entities of only US$744 million.

          Uruguay accessed IMF funds through several stand-by facilities, the most recent, initially agreed for a duration of three years in June 2005, for a total of SDR766.3 million (approximately US$1.1 billion) (the “2005 Stand-By Facility”). However, in August and November 2006 Uruguay made two prepayments to the IMF of SDR619.9 million (approximately US$916.4 million) and SDR727 million (approximately US$1.1 billion), respectively, thereby discharging in full all of Uruguay’s outstanding obligations to the IMF. Funds for the prepayment of the obligations were obtained by issuing bonds in the international capital markets as well as from reserves. Subsequent to the IMF’s completion of its final review under the 2005 Stand-By Facility on December 22, 2006, at the request of the Uruguay, the facility was terminated.

The Economic Policies of the Vázquez Administration

          The Vázquez administration has prioritized macroeconomic stability and adjusted existing policies to the extent needed to pursue its main objectives, which include:

 

 

 

 

maintaining a prudent fiscal stance, which it recognizes as a condition to long term fiscal sustainability;

 

 

 

 

preserving the value of the currency and introducing inflation targeting as its principal monetary policy; and

 

 

 

 

strengthening commercial and political relationships with the Mercosur member countries while continuing to promote opportunities for Uruguayan exports and foreign direct investment in Uruguay in the context of bilateral arrangements that are consistent with the Mercosur agreements.

          On December 19, 2005, the President signed into law the five-year budget for the period 2005-2009. The budget reflects the government’s priorities of achieving long-term growth and debt-sustainability balanced with increases in infrastructure and social spending. The 2005-2009 budget reflects the government’s medium-term macroeconomic program, and is based upon revenue projections and contains expenditure ceilings that are consistent with the economic program that formed the basis for the 2005 Stand-By Facility. See “Public Sector Debt—External Debt”.

          In an attempt to mitigate immediately social and economic marginalization, and in particular to offset the most severe repercussions of the 2002 crisis on Uruguay’s population, the Vázquez administration created a social assistance program called “Plan de Emergencia” (Emergency Plan) to cover the basic necessities of the poorest segments of the population. A Ministry of Social Development was created to further these policies and provide nutrition and health, housing, employment and education assistance to sectors of the Uruguayan population most affected by this crisis.

          The Government has earmarked US$530 million to be spent on the reduction of poverty and improvements in the access to the health system during 2009.

          In 2007, the Emergency Plan was succeeded by the implementation of the “Plan de Equidad” (Fairness Plan). This plan involves a long-term effort to provide for care and development of children and teenagers, by providing support to families in the lowest 20% of income distribution. The plan also envisages greater integration of this target population into the formal educational system as a means of combating poverty. The Fairness Plan furthermore provides support for impoverished elderly persons, seeks to improve medical support for the poor and to assist impoverished unemployed workers.

          A National Health Fund was created to finance the health coverage of private sector workers, workers from certain government units and the lowest income private sector retirees. In 2008, the coverage by the National Health Fund was extended to other public and private workers.

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Privatizations

          Privatizations have not been a major focus of Uruguay’s economic policy. Nevertheless, the government has divested or privatized certain state-owned enterprises, such as the gas company servicing Montevideo in 1993 and the national airline in 1995, and has taken measures to transfer certain activities, such as sewage, garbage collection, road maintenance and the administration of certain ports and airports, to the private sector through concessions and other similar arrangements. More recently, legislation has been enacted that enabled the government to open various components of the telecommunications and energy and gas sectors to private investment. Proceeds from privatizations have been immaterial to date.

          The government is committed to improving the competitiveness of the Uruguayan economy and encouraging private investment by continuing to open a number of areas of the economy previously reserved to public sector enterprises to private investment. In 1991, Congress passed a law authorizing the privatization of the local telecommunications company, Administración Nacional de Telecomunicaciones, or ANTEL. The law was subsequently repealed, however, by a public referendum in 1992. ANTEL has since implemented several revenue sharing arrangements with private companies for the installation and operation of certain new telecommunication facilities and is contemplating entering into additional similar arrangements in the future. In February 2001, Congress approved the licensing of cellular phone services and data transmission to private sector providers and opening the telecommunications sector (other than local fixed line services but including long distance) to private sector providers. In December 2002 and May 2004, licenses were granted to Movicom Bell South (now Telefónica) and America Móvil respectively, to provide mobile telephone services. The government has also approved the provision of long distance international telephone services by 18 companies in competition with ANTEL. Fourteen of those companies have commenced operations in Uruguay.

          The government also granted the Corporación Nacional Para el Desarrollo (CND), a state-owned investment corporation, overall responsibility for the administration of a program of public works to be undertaken between 2003 and 2018. CND currently owns the concessions as well as 100% of the shares of Corporación Vial del Uruguay S.A., a special-purpose company responsible for the projects. Corporación Vial del Uruguay S.A. and private companies have to date signed 50 contracts worth US$109 million for the construction of bridges and highways.

          At the beginning of 2002, Congress passed a law authorizing the national oil refinery, or ANCAP, to associate with private sector enterprises for the purpose of jointly carrying out oil refining and crude oil import activities, and doing away with the existing monopoly by 2006. However, the law was repealed in a plebiscite held on December 7, 2003. The government does not have any current intention to seek an amendment of the legal framework governing ANCAP’s activities, although it may still encourage ANCAP’s association with private sector firms in accordance with the current legal framework.

          In 2001, the government issued a decree approving the provision of postal services by private sector entities in competition with the state-owned postal service. There are numerous companies currently operating in the Uruguayan postal service market.

          In September 2003, the government granted a 30-year concession to Puerta del Sur S.A. for the management and administration of the Montevideo airport.

          In October 2004, a constitutional referendum was approved providing that only state-owned entities may provide services in the water and sewage sectors, however the state is permitted to employ private sector sub-contractors to complete portions of the work.

          In July 2007, the government sold 75% of the equity of Pluna Airlines to Leadgate Investment Corporation (45%) and to Sociedad Aeronáutica Oriental S.A. (30%), and holds the remaining 25% of the airline. The new company is called Pluna Líneas Aéreas S.A.

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          Although the complete privatization of any sector currently owned by the government is not contemplated, the government is considering alternative ways to foster increased private sector investment in those sectors. In this regard, the government also intends to invest in infrastructure projects.

Environment

          The principal environmental concerns in Uruguay consist of industrial and urban pollution of water and soil. The Uruguayan Constitution provides for the right to a clean environment and Congress has enacted enabling legislation for the protection of the environment, including legislation which created the Ministry of Housing, Zoning and the Environment (Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente) in 1990. Under a 1994 environmental law, potentially hazardous projects must be approved by the Ministry of Housing, Zoning and the Environment prior to their implementation. In addition to the Ministry of Housing, Zoning and the Environment, environmental supervision and regulation is carried out through many of the departments of the central government and state and municipal governments. In March 2000, Congress enacted a law creating a National System of Protected Natural Areas and granting the Executive Power the authority to incorporate, by decree, areas into this system and limit or prohibit certain activities within and around these protected areas.

          Uruguay has received assistance from the IADB for purposes of improving municipal infrastructure services for garbage collection and sewage treatment. The government presently requires environmental studies to be presented in connection with any proposals for construction and other projects. In addition, all projects financed by the IADB currently require environmental impact studies. Beginning in the late 1980’s, Uruguay also received a series of loans from the IADB to undertake cleaning up Montevideo’s coast, including the shoreline along the Río de la Plata.

          In May 2006, Argentina brought a claim to the International Court of Justice (“ICJ”) against Uruguay under the Treaty of the Uruguay River, alleging that by authorizing the construction of certain pulp mills in the Fray Bentos region, along the shores of the Uruguay river, Uruguay had acted in breach of its obligations under the treaty. Argentina claims that the pulp mills will irreparably harm the Uruguay river shore. Argentina sought an injunction, which the ICJ declined to grant. Evidence has been produced and allegations have been made, and a decision regarding the merits of Argentina’s claim is pending.

D-17


GROSS DOMESTIC PRODUCT AND STRUCTURE OF THE ECONOMY

          The following tables set forth information regarding GDP and expenditures for the periods indicated. The figures included in the table entitled “Gross Domestic Product by Expenditure” are based on current (nominal) prices for each year, whereas the percentage figures included in the table entitled “Change in Gross Domestic Product by Expenditure” are based on 1983 prices to eliminate distortions introduced by changes in relative prices.

GDP and Expenditures
(thousands of 1983 pesos, except as otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

GDP

 

Ps.

251,709

 

Ps.

281,461

 

Ps.

300,104

 

Ps.

321,110

 

Ps.

344,939

 

Imports of goods and services

 

 

98,237

 

 

124,540

 

 

137,074

 

 

162,158

 

 

178,895

 

 

 



 



 



 



 



 

Total supply of goods and services

 

 

349,946

 

 

406,001

 

 

437,178

 

 

483,268

 

 

523,834

 

Exports of goods and services

 

 

90,387

 

 

117,900

 

 

137,163

 

 

148,194

 

 

162,636

 

 

 



 



 



 



 



 

Total goods and services available for domestic expenditures

 

Ps.

259,558

 

Ps.

288,101

 

Ps.

300,014

 

Ps.

335,075

 

Ps.

361,198

 

 

 



 



 



 



 



 

Allocation of total goods and services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumption (public and private)

 

 

228,769

 

 

250,543

 

 

257,670

 

 

286,302

 

 

306,984

 

Gross investment (public and private)

 

 

30,790

 

 

37,559

 

 

42,344

 

 

48,773

 

 

54,214

 

 

 



 



 



 



 



 

Total domestic expenditures

 

Ps.

259,558

 

Ps.

288,101

 

Ps.

300,014

 

Ps.

335,075

 

Ps.

361,198

 

 

 



 



 



 



 



 

GDP growth (%)

 

 

2.2

 

 

11.8

 

 

6.6

 

 

7.0

 

 

7.4

 


 

 


(1)

Preliminary data.

Source: Banco Central.

Gross Domestic Product by Expenditure
(% of total GDP, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Government consumption

 

 

11.4

%

 

10.8

%

 

11.0

%

 

11.0

%

 

11.1

%

Private consumption

 

 

74.6

 

 

73.7

 

 

73.2

 

 

74.7

 

 

74.5

 

Gross fixed investment

 

 

9.4

 

 

11.3

 

 

13.1

 

 

14.5

 

 

13.9

 

Public sector (% of gross fixed investment)

 

 

2.2

 

 

2.0

 

 

2.3

 

 

2.6

 

 

2.5

 

Private sector (% of gross fixed investment)

 

 

7.3

 

 

9.3

 

 

10.8

 

 

11.9

 

 

11.4

 

Exports of goods and services

 

 

26.1

 

 

30.9

 

 

31.1

 

 

30.0

 

 

29.2

 

Imports of goods and services

 

 

24.6

 

 

28.5

 

 

28.5

 

 

30.8

 

 

29.9

 

Savings

 

 

10.3

 

 

11.8

 

 

13.4

 

 

12.4

 

 

13.2

 


 

 


(1)

Preliminary data.

Source: Banco Central.

Change in Gross Domestic Product by Expenditure
(% change from previous year except as otherwise indicated, 1983 prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Government consumption

 

 

(4.8

)%

 

2.5

%

 

0

%

 

3.5

%

 

3.0

%

Private consumption

 

 

2.0

 

 

10.6

 

 

3.2

 

 

12.2

 

 

7.8

 

Gross fixed investment

 

 

(11.4

)

 

30.2

 

 

24.5

 

 

18.9

 

 

5.8

 

Public sector (% of gross fixed investment)

 

 

(11.1

)

 

0.8

 

 

18.9

 

 

33.6

 

 

2.1

 

Private sector (% of gross fixed investment)

 

 

(11.5

)

 

40.4

 

 

25.8

 

 

24.2

 

 

6.7

 

Exports of goods and services

 

 

4.2

 

 

30.4

 

 

16.3

 

 

8.0

 

 

9.7

 

Imports of goods and services

 

 

5.8

 

 

26.8

 

 

10.1

 

 

18.3

 

 

10.3

 


 

 


(1)

Preliminary data.

Source: Banco Central.

D-18


Principal Sectors of the Economy

          The Uruguayan economy depends to a significant degree on services, including the commerce, restaurants and hotels sector, which involves a wide range of tourism services, the financial and insurance sector and the real estate and business services sector. In all, services accounted for approximately 60% of GDP in 2007. Manufacturing and agriculture, livestock and fishing also play an important role in the Uruguayan economy and accounted for 33% of GDP in 2007. During the 1990s and up to 2001, the share of GDP represented by services increased, while manufacturing and agriculture, livestock and fishing declined. Starting in 2001, the agriculture, livestock and fishing sector’s share of GDP increased from 6.1% to 10.1% in 2007. The manufacturing sector increased its contribution to GDP from 17.5% in 2002 to 22.8% in 2007. The improved performance of the manufacturing sector and the commerce, restaurants and hotels sectors was spurred by the real depreciation of the peso, which discouraged imports of consumer products, made Uruguayan products more competitive in export markets and rendered Uruguay an attractive tourism destination. High commodity export prices also supported the improved performance of the agriculture, livestock and fishing sectors since 2003.

          GDP increased by 7.4% in real terms in 2007, 7.0% in 2006 and by 6.6% in 2005, in each case as compared to the previous year. Growth in the Uruguayan economy in 2007 continued to be fueled by high commodity prices, liquidity in the international financial markets, external direct investment and a favorable regional economic climate. Although the peso appreciated in real terms in comparison to the U.S. dollar during 2007, the manufacturing sector on average grew as a result of increased productivity, while increased activity in the construction sector also fueled the continued growth of the economy as a whole. Commerce, restaurants and the hotels sector and the transportation, storage and communications sector also experienced growth during this year.

          The following tables set forth the components of Uruguay’s GDP and their respective growth rates for the periods indicated. The discussion of the various sectors follows the order in which the sectors are presented in the tables. The percentages and figures included in the table entitled “Gross Domestic Product by Sector” are based on current (nominal) prices for each period, whereas the percentage figures included in the table entitled “Change in Gross Domestic Product by Sector” are based on 1983 prices to eliminate distortions introduced by changes in relative prices.

Gross Domestic Product by Sector
(in millions of US$ and % of GDP, nominal prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Agriculture, livestock and fishing

 

US$

1,449

 

 

13.0

%

US$

1,579

 

 

12.0

%

US$

1,529

 

 

9.2

%

US$

1,772

 

 

9.2

%

US$

2,341

 

 

10.1

%

Mining

 

 

25

 

 

0.2

 

 

28

 

 

0.2

 

 

41

 

 

0.2

 

 

55

 

 

0.3

 

 

64

 

 

0.3

 

Manufacturing

 

 

2,078

 

 

18.6

 

 

2,822

 

 

21.3

 

 

3,740

 

 

22.5

 

 

4,484

 

 

23.2

 

 

5,258

 

 

22.8

 

Electricity, gas and water

 

 

547

 

 

4.9

 

 

612

 

 

4.6

 

 

822

 

 

4.9

 

 

901

 

 

4.7

 

 

1,111

 

 

4.8

 

Construction

 

 

387

 

 

3.5

 

 

457

 

 

3.5

 

 

638

 

 

3.8

 

 

818

 

 

4.2

 

 

953

 

 

4.1

 

Commerce, restaurants and hotels

 

 

1,342

 

 

12.0

 

 

1,714

 

 

13.0

 

 

2,163

 

 

13.0

 

 

2,534

 

 

13.1

 

 

3,114

 

 

13.5

 

Transportation, storage and communications

 

 

1,082

 

 

9.7

 

 

1,269

 

 

9.6

 

 

1,609

 

 

9.7

 

 

1,867

 

 

9.7

 

 

2,114

 

 

9.2

 

Real estate and business services

 

 

1,567

 

 

14.0

 

 

1,608

 

 

12.2

 

 

2,028

 

 

12.2

 

 

2,287

 

 

11.8

 

 

2,711

 

 

11.7

 

Financial and insurance services

 

 

1,201

 

 

10.7

 

 

1,238

 

 

9.4

 

 

1,337

 

 

8.0

 

 

1,474

 

 

7.6

 

 

1,594

 

 

6.9

 

Services of the government

 

 

957

 

 

8.6

 

 

1,070

 

 

8.1

 

 

1,398

 

 

8.4

 

 

1,606

 

 

8.3

 

 

1,942

 

 

8.4

 

Other community, social and personal services

 

 

1,084

 

 

9.7

 

 

1,207

 

 

9.1

 

 

1,547

 

 

9.3

 

 

1,748

 

 

9.1

 

 

2,037

 

 

8.8

 

Net adjustments for payments made by financial institutions and import tariffs

 

 

(528

)

 

(4.7

)

 

(388

)

 

(2.9

)

 

(238

)

 

(1.4

)

 

(238

)

 

(1.2

)

 

(153

)

 

(0.7

)

 

 



 



 



 



 



 



 



 



 



 



 

GDP (in millions of US$ at nominal prices) (2)

 

US$

11,191

 

 

100

%

US$

13,216

 

 

100

%

US$

16,614

 

 

100

%

US$

19,308

 

 

100

%

US$

23,087

 

 

100

%

 

 


















 



 



 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GDP per capita (2)

 

US$

3,388

 

 

 

 

US$

4,003

 

 

 

 

US$

5,026

 

 

 

 

US$

5,825

 

 

 

 

US$

6,946

 

 

 

 


 

 


(1)

Preliminary data.

(2)

Figures are not adjusted by purchasing power.

Source: Banco Central.

D-19


Change in Gross Domestic Product by Sector
(% change from previous year, 1983 prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Agriculture, livestock and fishing

 

 

10.6

%

 

10.6

%

 

4.6

%

 

8.3

%

 

2.5

%

Mining

 

 

14.1

 

 

7.2

 

 

4.4

 

 

15.0

 

 

1.1

 

Manufacturing

 

 

4.7

 

 

20.8

 

 

10.1

 

 

8.4

 

 

8.0

 

Electricity, gas and water

 

 

(7.4

)

 

1.8

 

 

5.8

 

 

(1.5

)

 

11.4

 

Construction

 

 

(7.1

)

 

7.5

 

 

4.2

 

 

14.0

 

 

2.5

 

Commerce, restaurants and hotels

 

 

(1.0

)

 

21.3

 

 

10.1

 

 

8.5

 

 

10.9

 

Transportation, storage and communications

 

 

3.1

 

 

11.5

 

 

11.1

 

 

12.0

 

 

12.3

 

Real estate, business, financial and insurance services

 

 

(5.3

)

 

(1.7

)

 

(3.5

)

 

1.9

 

 

(0.1

)

Other services(2)

 

 

0.7

 

 

3.2

 

 

1.4

 

 

1.5

 

 

3.5

 

Total GDP

 

 

2.2

%

 

11.8

%

 

6.6

%

 

7.0

%

 

7.4

%


 

 


(1)

Preliminary data.

(2)

Includes public sector services and other services.

Source: Banco Central.

Agriculture, Livestock and Fishing

          Uruguay’s territory consists primarily of vast plains, which, combined with its temperate climate, make the country well suited for agriculture and raising livestock. In 2004, the agriculture, livestock and fishing sector continued to grow, recording a 10.6% increase in real terms. Total agricultural products increased by 13.4%, mainly due to a 19.3% increase in oil products production and a 22.4% increase in cereals production, while total livestock production increased by 7.9%. However, in 2005 agricultural production grew at a rate of 3.9% in real terms, with livestock production increasing by 5.5% (the sector was affected by a contraction in wheat products). In 2006, the agriculture, livestock and fishing sector grew at a rate of 8.3% in real terms, driven primarily by cattle, dairy and cereals production. In 2007, this sector grew at 2.5% driven by cereal and oil production.

          Cattle production increased significantly between 1994 and 1998 as a result of greater investment and increased exports. Wool production, which increased during the 1980’s, was adversely affected by a sharp and protracted decrease in international prices and a reduction in the number of wool-producing sheep, and declined 65.9% between 1995 and 1999. The closing of markets to Uruguayan beef exports following outbreaks of foot and mouth disease during part of 2000 and 2001 adversely affected Uruguay’s livestock industry and exports. The government adopted a series of measures to prevent the spread of the disease, including vaccination. In late 2001, certain of Uruguay’s export markets, including Israel and the European Union, authorized imports of Uruguayan beef. Cattle production and exports of beef recovered significantly in 2002, although production of dairy products continued to decline. In 2003, total livestock production decreased slightly, primarily due to a drop in wool production, which more than offset increases in the production of dairy products, and continued growth in foreign demand for Uruguayan beef exports. In 2004, total livestock production recovered, recording a 7.9% increase compared to 2003, due to increases in the production of dairy products, wool and cattle. Total livestock production grew in 2005 by 5.5%, fueled by an increase in wool production of 22.6% and a 2.9% increase in cattle production compared to 2004. In 2006, total livestock production grew 3.4%, primarily due to increases in cattle production of 2.2% and in dairy products of 6.3% compared to 2005. In 2007, total livestock production decreased since the 1.2% increase in cattle production was not sufficient to offset decreases in dairy and wool production of 8.7% and 6.9%, respectively.

          The agriculture, livestock and fishing sector’s overall significance to the economy is substantially greater than its percentage of GDP suggests because the sector supplies the bulk of raw materials to Uruguay’s manufacturing industries and is a major exporter. In recent years, the Uruguayan government has taken a series of measures designed to reduce the tax burden on the sector and to facilitate solutions to the debt and productivity problems and recent increases in the purchase of farm machinery and other capital goods have helped to boost productivity in this sector.

D-20


          The following table sets forth the production of selected primary goods for the periods indicated.

Selected Primary Goods Production
(in millions of US$, except as otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007 (1)

 

 

 


 


 


 


 


 

Cereals

 

US$

392

 

US$

357

 

US$

290

 

US$

420

 

US$

566

 

Wheat

 

 

52

 

 

55

 

 

66

 

 

114

 

 

200

 

Rice

 

 

254

 

 

228

 

 

159

 

 

179

 

 

217

 

Oil products

 

 

124

 

 

119

 

 

147

 

 

209

 

 

337

 

Vegetables

 

 

36

 

 

44

 

 

54

 

 

54

 

 

102

 

Fruits

 

 

76

 

 

87

 

 

89

 

 

103

 

 

192

 

Other agricultural

 

 

246

 

 

262

 

 

290

 

 

356

 

 

439

 

Cattle

 

 

609

 

 

821

 

 

820

 

 

923

 

 

1,110

 

Wool

 

 

185

 

 

168

 

 

148

 

 

130

 

 

175

 

Milk

 

 

189

 

 

248

 

 

300

 

 

324

 

 

398

 

Other livestock

 

 

141

 

 

166

 

 

198

 

 

200

 

 

256

 

Fishing

 

 

63

 

 

71

 

 

83

 

 

105

 

 

90

 

 

 



 



 



 



 



 

Total

 

US$

2,062

 

US$

2,342

 

US$

2,417

 

US$

2,825

 

US$

3,666

 

 

 



 



 



 



 



 

Cattle (in thousands of heads slaughtered)

 

 

1,974

 

 

2,233

 

 

2,490

 

 

2,667

 

 

2,255

 

Milk (in millions of liters)

 

 

1,492

 

 

1,274

 

 

1,304

 

 

1,396

 

 

1,266

 

Wool (in tons)

 

 

34,992

 

 

36,042

 

 

44,197

 

 

43,234

 

 

41,862

 


 

 


(1)

Preliminary data.

   
Source: Banco Central.

          The following tables set forth percentage changes from prior years for livestock production and for agricultural production for the periods indicated, based on 1983 prices to eliminate distortions introduced by changes in relative prices.

Livestock Production
(% change from previous year, 1983 prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Cattle

 

 

4.7

%

 

7.6

%

 

2.9

%

 

2.2

%

 

1.2

%

Dairy products

 

 

6.3

 

 

9.4

 

 

2.2

 

 

6.3

 

 

(8.7

)

Wool

 

 

(11.1

)

 

3.0

 

 

22.6

 

 

(2.2

)

 

(6.9

)

Total livestock production

 

 

(0.2

)%

 

7.9

%

 

5.5

%

 

3.4

%

 

(3.2

)%


 

 


(1)

Preliminary data.

   
Source: Banco Central.

Agricultural Production
(% change from previous year, 1983 prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Cereals

 

 

26.0

%

 

22.4

%

 

(6.3

)%

 

12.6

%

 

5.5

%

Wheat

 

 

57.6

 

 

63.2

 

 

(11.3

)

 

30.7

 

 

15.1

 

Rice

 

 

15.1

 

 

13.8

 

 

3.9

 

 

(9.4

)

 

(2.1

)

Oil Products

 

 

48.5

 

 

19.3

 

 

16.1

 

 

23.5

 

 

19.9

 

Vegetables

 

 

10.1

 

 

(9.0

)

 

8.9

 

 

(5.4

)

 

(4.7

)

Fruits

 

 

6.2

 

 

3.5

 

 

9.3

 

 

(9.7

)

 

12.3

 

Other Agricultural

 

 

6.1

 

 

(2.4

)

 

13.5

 

 

10.3

 

 

(0.1

)

Total agricultural production

 

 

23.3

%

 

13.4

%

 

3.9

%

 

12.5

%

 

8.3

%


 

 


(1)

Preliminary data.

   
Source: Banco Central.

D-21


          Mining

          The mining sector mainly consists of stone and sand quarries. These products are used primarily in construction. Other contributors to the mining sector include smaller operations for the mining of gold and semi-precious stones, such as agate and amethyst. Mining has remained relatively constant as a percentage of GDP from 1997 through 2007 at around 0.3%. Uruguay has no known oil or natural gas reserves, although exploratory work has been undertaken in the coastal region. At present, several projects for the mining of nickel, copper and diamonds are being developed in Uruguay.

          Manufacturing

          Since the 2002 crisis, manufacturing has become an increasingly important sector of Uruguay’s economy, accounting for approximately 22.8% of GDP in 2007. The sector grew in the early 1990’s reflecting improved efficiency following a process of capital investment and reorganization of the sector during this period in response to increased competition from imports. Between the late 1990s and 2001, the manufacturing sector outsourced services such as administrative, maintenance and cleaning services, which increased the contribution to GDP of the services sectors in comparison with manufacturing. The adverse economic conditions affecting Uruguay and the other Mercosur countries between 1998 and 2002 focused a larger segment of Uruguay’s manufacturing sector on the export markets. During this period, the manufacturing sector’s share of GDP and its employment fell as a result of discontinued production in noncompetitive areas, including industries that traditionally supplied domestic demand. For example, machinery and textiles suffered cutbacks while production of certain foodstuffs continued to grow during this period.

          By 2001, the manufacturing sector, as a percentage of GDP, had declined, prompted by a contraction of domestic demand. In 2002, the manufacturing sector continued to decline as a result of a severe decline in exports to Argentina, the continued reduction in domestic demand and a decline in the availability of credit for manufacturers. Machinery, beverages and textiles were all strongly affected by the crisis. However, processed meats and leather goods were not affected by the downturn in 2002. Despite the contraction in real terms, the manufacturing sector decreased at a lesser rate than other sectors of the economy and therefore increased its share of GDP in 2002. Imports of capital goods declined rapidly between 2000 and 2002, to their lowest levels since 1991 and continued declining into the first half of 2003.

          In 2003, for the first time since 1998, the manufacturing sector showed signs of recovery, growing by 4.7% in real terms compared to 2002. The recovery of the manufacturing sector in 2003 also increased the sector’s contribution to GDP to 18.6%. The growth in the manufacturing sector since 2003 is attributable primarily to the impact of the real devaluation of the peso, which discouraged imports of consumer products and made Uruguayan products more competitive in the export markets. In 2004, the manufacturing sector grew by 20.8% in real terms, compared to 2003. In 2005, the manufacturing sector grew by 9.5%, increasing the sector’s contribution to GDP to 22.2%. In 2005, the most dynamic segments of the manufacturing sector were foodstuffs and machinery, which grew by 17.6% and 16.3% respectively in real terms, while tobacco and oil and refined products were the less dynamic segments, contracting by 17.4% and 4.2% respectively in real terms. In 2006, manufacturing grew by 7.1%, primarily due to an 11.2% increase in foodstuffs. In 2007, this sector increased 5.3% in real terms compared to 2006, driven by a 15.0% increase in chemical production, 10.9% increase in beverages and 5.1% increase in baked goods. The manufacturing sector continues to absorb a large share of agricultural and livestock production as raw material. Imports of capital goods began to recover in the second half of 2003 and continued to do so at a rate of 89.9% in 2004. Imports of capital goods further increased in 2005, 2006 and 2007 by 53.4%, 21.0% and 36.5%, respectively (measured in current U.S. dollars).

D-22


         The following tables set forth information regarding goods production for the periods indicated.

Selected Manufacturing Goods Production
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Foodstuffs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Processed meats

 

US$

797

 

US$

1,156

 

US$

1,362

 

US$

1,605

 

US$

1,636

 

Dairy products

 

 

264

 

 

323

 

 

394

 

 

409

 

 

521

 

Wheat and rice mills

 

 

281

 

 

319

 

 

324

 

 

365

 

 

481

 

Baked goods

 

 

115

 

 

126

 

 

161

 

 

192

 

 

267

 

Other foodstuffs

 

 

434

 

 

560

 

 

9,147

 

 

1,613

 

 

1,718

 

 

 



 



 



 



 



 

Total foodstuffs

 

 

1,890

 

 

2,484

 

 

3,189

 

 

4,185

 

 

4,623

 

Beverages

 

 

276

 

 

341

 

 

460

 

 

509

 

 

643

 

Tobacco

 

 

108

 

 

141

 

 

143

 

 

142

 

 

178

 

Textiles

 

 

323

 

 

358

 

 

373

 

 

361

 

 

421

 

Leather goods

 

 

304

 

 

365

 

 

400

 

 

440

 

 

497

 

Chemicals

 

 

485

 

 

626

 

 

822

 

 

1,026

 

 

1,353

 

Oil and refined products

 

 

1,053

 

 

1,621

 

 

2,061

 

 

2,161

 

 

2,009

 

Machinery

 

 

369

 

 

529

 

 

687

 

 

843

 

 

1,086

 

Other industries

 

 

485

 

 

624

 

 

784

 

 

730

 

 

1,170

 

 

 



 



 



 



 



 

Total

 

US$

5,295

 

US$

7,089

 

US$

8,919

 

US$

10,397

 

US$

11,979

 

 

 



 



 



 



 



 


 

 


(1)

Preliminary data.

Sources: Estimates based on data of Banco Central and the National Statistics Institute.

Manufacturing Production
(% change from previous year, 1983 prices)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

Foodstuffs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Processed meats

 

 

 

6.2

%

 

 

 

23.1

%

 

 

 

12.5

%

 

 

 

7.4

%

 

 

 

(13.9

)%

 

Dairy products

 

 

 

7.0

 

 

 

 

11.1

 

 

 

 

6.3

 

 

 

 

3.9

 

 

 

 

5.1

 

 

Wheat and rice mills

 

 

 

(0.4

)

 

 

 

13.9

 

 

 

 

9.9

 

 

 

 

0.9

 

 

 

 

0.8

 

 

Baked goods

 

 

 

(12.6

)

 

 

 

5.9

 

 

 

 

6.8

 

 

 

 

11.3

 

 

 

 

9.7

 

 

 

 




 

 




 

 




 

 




 

 




 

 

Total foodstuffs

 

 

 

4.3

 

 

 

 

20.3

 

 

 

 

18.9

 

 

 

 

11.2

 

 

 

 

4.0

 

 

Beverages

 

 

 

(3.2

)

 

 

 

17.0

 

 

 

 

11.4

 

 

 

 

3.6

 

 

 

 

10.9

 

 

Tobacco

 

 

 

(24.1

)

 

 

 

19.7

 

 

 

 

(17.4

)

 

 

 

(3.7

)

 

 

 

2.6

 

 

Textiles

 

 

 

16.8

 

 

 

 

15.6

 

 

 

 

5.8

 

 

 

 

(2.6

)

 

 

 

3.3

 

 

Leather goods

 

 

 

5.3

 

 

 

 

18.0

 

 

 

 

7.2

 

 

 

 

3.7

 

 

 

 

(1.3

)

 

Chemicals

 

 

 

10.8

 

 

 

 

23.1

 

 

 

 

8.5

 

 

 

 

12.7

 

 

 

 

15.0

 

 

Oil and refined products

 

 

 

22.8

 

 

 

 

23.5

 

 

 

 

(4.1

)

 

 

 

(8.0

)

 

 

 

(12.6

)

 

Machinery

 

 

 

3.2

 

 

 

 

32.8

 

 

 

 

16.3

 

 

 

 

17.1

 

 

 

 

14.0

 

 

 

 




 

 




 

 




 

 




 

 




 

 

Total

 

 

 

7.0

%

 

 

 

20.5

%

 

 

 

9.8

%

 

 

 

7.1

%

 

 

 

5.3

%

 

 

 




 

 




 

 




 

 




 

 




 

 


 

 


(1)

Preliminary data.

Source: Banco Central.

          Electricity, Gas and Water

          The electricity, gas and water sector declined slightly in 2002, and, in 2003, experienced the full impact of the 2002 economic crisis, contracting by 7.4% in real terms, although the economy as a whole was starting to show signs of recovery. In 2004 and 2005, this sector began to follow the general economic recovery growing 1.8% and 5.8%, respectively, in real terms. In 2006, however, this sector contracted by 1.5% primarily as a result of decreases in the electricity sector that were only partially offset by increases in the gas and water sectors. In 2007, this sector grew 11.4% in real terms driven by a generalized increase in all items, in particular the electricity sector, which improved its performance compared to 2006 due to increased production of hydroelectric energy, sold in the domestic market as well as abroad.

D-23


          Energy consumption in Uruguay consists of oil and gas, electricity and wood. Electricity is produced primarily from hydroelectric sources and is provided by Usinas y Transmisiones Eléctricas or UTE, a state-owned entity. Electricity can be imported freely. The country imports all of its oil and gas supplies from various international sources and has a state-owned oil refining company, ANCAP. Uruguay’s economy is therefore vulnerable to increases in international oil prices, and the government is considering measures that would contribute to reduce consumption of energy by the public sector to mitigate that exposure. Natural gas can be imported freely, and its distribution and transportation have been opened to private investment. For more information, see “—Role of the State in the Economy; Privatizations.”

          Construction

          In 2002, the construction sector was adversely affected by the economic recession and the restructuring of Banco Hipotecario, which prior to its reorganization had been a significant source of financing for the sector. In 2003, the construction sector contracted by 7.1% in real terms compared to 2002, reflecting public sector budget constraints and the ongoing impact of the 2002 economic crisis on domestic demand. In 2004, the construction sector recorded growth for the first time since 1999, expanding by 7.5% in real terms compared to 2003. This increase was largely due to greater private sector activity, including public works projects undertaken by private companies. In 2005, the construction sector grew at an annual rate of 4.2%. In 2006, the construction sector increased 14.0%, primarily driven by the construction of a paper pulp mill in Fray Bentos and growth in construction in Maldonado. During 2007, the construction sector continued growing at a rate of 2.5% in real term compared to 2006, fueled by public sector works as well as the private sector.

          Commerce, Restaurants and Hotels

          The commerce, restaurants and hotels sector, which includes retail business and captures a portion of Uruguay’s gross tourism receipts, decreased during 2002 and 2003, reflecting a decrease in domestic demand as well as the adverse condition of the economies of neighboring Argentina and Brazil. The sector continued to experience negative growth in 2003, contracting by 1.0% compared to 2002. In 2004, the sector rebounded, growing by 21.3% in real terms compared to 2003. This growth primarily reflects the improved conditions of the Argentine economy, and the resulting increase in Argentine tourist arrivals in Uruguay, as well as increased tourist inflows from other regions, including Europe, and the recovery of domestic demand. During2005, this sector grew at an annual rate of 10.1%, mainly reflecting increased expenditures by tourists coming from outside the region. In 2006, the commerce, restaurants and hotels sector grew 8.5% in real terms, primarily due to the recovery of the commercial activities. In 2007, this sector expanded by 10.9%, driven by an increase in the average expenditure by tourist as well as by demand for these services by local households.

          The overall number of tourists visiting Uruguay declined during 2002, partly as a result of decreased tourism from Argentina following its freeze on bank deposits and the devaluation of the Argentine peso, but the decline abetted in 2003. In 2004, the trend was reversed. Gross tourism receipts increased by 43.2% and the number of tourists increased by 24.1% in 2004 compared to 2003. In 2005, the number of tourists grew only by 2.5%, but tourism receipts (measured in U.S. dollars) increased by 20%, mainly due to the increase of per capita expenditures by tourists coming from outside the region. In 2006, in spite of a 5% decrease in the number of tourists, tourism receipts (measured in U.S. dollars) remained stable. In 2007, the number of tourists declined by 0.5% compared to 2006, although tourism receipts (measured in U.S. dollars) grew 35%.

          The interruption of border traffic between Argentine and Uruguay by Argentina demonstrators opposed to the construction of a paper mill in the Fray Bentos region adversely affected the flow of tourism from Argentina during the summer season in 2005, 2006 and 2007. As a consequence, in 2006 tourists coming from Argentina decreased by 12.1%, while visitors coming from Brazil and outside the region increased 15.5% and 17.3% respectively. In 2007, the number of tourists coming from Argentina further decreased by 6.9%, while the number of visitors coming from Brazil and outside the region increased 25% and 6.9%, respectively.

          Transportation, Storage and Communications

          The transportation, storage and communications sector grew in real terms by 3.1% in 2003 and continued to expand in 2004, growing 11.5% in real terms compared to 2003. In 2005, the sector grew by 11.1%, as a result of communications activities and in 2006 this sector grew by 12.0%, due to a generalized growth in all segments. In 2007, this sector grew by 12.3%, primarily by the increase in demand for services by cellular phone providers and the transportation of merchandise.

D-24


 

          ANTEL, a state-owned company, supplies domestic and international long distance telephone service in Uruguay and a significant portion of the country’s cellular telephone services. However, except for fixed local telephony services, the sector has recently been opened to private sector investment. See “The Economy—Privatizations.” Despite this liberalization, the communications sector contracted in each of 2002 and 2003 as a result of decrease in domestic demand. Growth since 2004 has been fueled by an increase in domestic demand and the expansion of wireless communications.

          Increases in merchandise transportation also contributed to the growth in the sector through 2001. Uruguay has been chosen by several regional transportation firms as both an operational base and a location for their headquarters. For example, most of the ferry lines connecting Argentina and Uruguay are owned by Uruguayan firms. In addition, the growth of tourism since the 1980s furthered the expansion of the transportation sector. In 2003, transportation and storage services grew by 3.1% due primarily to growth in the agriculture, livestock and fishing sector as well as to stronger exports and imports generally. Transportation and storage services continued to expand since 2004primarily due to transportation and storage of agricultural and imported goods.

          Real Estate and Business Services

          The real estate and business services sector grew in real terms and as a percentage of GDP in both 2000 and 2001. This growth was driven by the business services segment and was a result of a trend in the manufacturing sector to sub-contract administrative, maintenance and cleaning services. Increases in lending for residential mortgages, and an increase in residential construction, rentals and occupancy rates also supported growth in real estate services during the period 2000-2001. Real estate is also driven by tourism rentals and purchases and increased after 1995, in part due to the increase in tourism during this period. The segment was adversely affected by a decrease in tourism-related revenues in 2002 and 2003, decreasing by 0.9% and 5.3% respectively. In 2004 and 2005 this trend continued as rentals decreased, and the sector decreased by 1.7% and 3.5% respectively. In 2006, the real estate and business services began grew 1.9% in real terms compared to 2005. In 2007, this sector registered a slight fall of 0.1% in real terms compared with 2006.

          Financial and Insurance Services

          Uruguay established a strong reputation as a regional financial center in the early 1980’s, primarily due to its free foreign exchange and capital markets, which were liberalized in 1974, its banking and tax reporting secrecy legislation, and its low tax rates. During periods of economic turmoil in the region, such as 1995, 1998 and 2001, Uruguay’s financial sector saw deposits from foreign sources increase as depositors sought a safer haven for their savings. Non-resident deposits reached approximately US$6.5 billion as of December 31, 2001. As of December 31, 2001, approximately 87.3% of total credit extended to the private sector and approximately 91.3% of total deposits held in the private banking system were denominated in foreign currencies, principally U.S. dollars.

          Beginning in 2002, Uruguay’s financial sector was significantly affected by Argentina’s crisis. Uruguay’s two largest private banks were branches of Argentine-based banks and experienced significant deposit withdrawal that later spread through the rest of the Uruguayan financial system. Large withdrawals of deposits during 2002 significantly exceeded the liquidity of four private banks (including the two largest private banks), which ceased to operate and entered a liquidation stage. The non-recoverable assets of three of these banks (Banco Comercial, Banco Caja Obrera and Banco Montevideo) are held by liquidation funds managed by Banco Central, while the recoverable assets were transferred to Nuevo Banco Comercial, a new commercial bank initially owned by the government. Proceedings for the liquidation of Banco de Crédito, the fourth bank, commenced on February 28, 2003, and continue. Through multilateral financial support from the IMF, the World Bank and the IADB, the government was able to provide the necessary liquidity to government-owned banks and to Banco Comercial, Banco Montevideo and Banco Caja Obrera y Crédito to honor sight deposits existing as of July 30, 2002, thereby mitigating to some extent the impact of the crisis of the banking sector on the economy as a whole.

D-25


          The financial and insurance services sector’s contribution to gross GDP declined from 11.4% in 2002 to 6.9% in 2007. Foreign currency deposits by the non-financial domestic private sector with Uruguayan banks increased from US$4.9 billion as of December 31, 2002 to US$6.8 billion at December 31, 2007. With respect to total deposits held with the banking system, foreign currency-denominated deposits had declined to approximately 79% as of December 2007, compared to 91% at December 2002. See “The Banking Sector—Uruguay’s Banking System following the 2002 crisis.”

Role of the State in the Economy

          The government continues to participate in the economy through state ownership of certain companies. The government, however, has emphasized its willingness to prepare state-owned companies for competition, as it takes measures to reduce further barriers to trade and to deregulate markets. It has also stated its intention to draw clearer distinctions between the role of the state as a regulator and as a shareholder or owner of commercial enterprises. In that respect, a number of regulatory entities were created to monitor the telecommunications, water, electricity, railway freight, oil and sanitation sectors. Since 1999, legislation has been passed to allow the private sector to participate in the provision of telephone (other than fixed line) and railroad services, in the administration of maritime ports, in the importation and distribution of natural gas and in certain other areas of the economy previously restricted to the public sector.

          At present, the government owns:

 

 

 

 

 

 

1.

the local telecommunications company (ANTEL);

 

 

 

 

 

 

2.

the oil refinery company (ANCAP);

 

 

 

 

 

 

3.

the electric power utility (UTE);

 

 

 

 

 

 

4.

the water and sewage authority, Obras Sanitarias del Estado (OSE);

 

 

 

 

 

 

5.

Administración Nacional de Puertos (ANP), which operates most of Uruguay’s ports;

 

 

 

 

 

 

6.

Administración de Ferrocarriles del Estado (AFE), which operates railway freight services;

 

 

 

 

 

 

7.

Banco de la República and Banco Hipotecario (state-owned financial institutions);

 

 

 

 

 

 

8.

Banco de Seguros del Estado (an insurance company); and

 

 

 

 

 

 

9.

Administración Nacional de Correos, a postal services company that competes with several private sector companies.

          UTE provides electric power and services to Uruguay. With the exception of Salto Grande, a binational hydroelectric facility jointly owned by the Uruguayan and Argentine governments, UTE owns and operates all of the hydroelectric generation plants in Uruguay. It also owns and operates several thermoelectric and gas facilities and all of Uruguay’s electricity transmission assets. UTE currently provides all of the domestic electricity services in Uruguay, although under recent legislative measures and presidential decrees the private sector may engage in generation activities and industrial consumers should soon be able to purchase energy directly from foreign sources taking advantage of interconnection arrangements with Brazil and Argentina.

          ANTEL has been the traditional provider of domestic and international long-distance telephone services in Uruguay. The company also provides basic telephone service in localities outside major urban areas, and has developed rural telephone services.

          OSE is Uruguay’s largest water company, providing water and sanitation services to most of the country and sewage services outside Montevideo.

D-26


          ANCAP is the national oil refinery, responsible for processing the crude oil imported by Uruguay and marketing refined products.

          Uruguay imports all the natural gas it consumes. Privately owned companies run the gas transportation and distribution business within a regulatory framework based on the granting of concessions contracts and decrees of the Government.

          For a description of the functions and operations of Banco de la República and of Banco Hipotecario, see “The Banking Sector.”

          During the last eight years, non-financial state-owned enterprises have in the aggregate recorded operating profits. The combined surpluses of non-financial public-sector enterprises as a percentage of GDP ranged from 0.4% in 1999 to 1.5% in 2004, compared to a deficit of 0.3% in 1994. In 2005, the combined surplus of the non-financial public-sector enterprises declined to 0.9% of GDP mainly due to the impact of the increase in the price of crude oil on ANCAP’s operations and the negative effect of the 2005 drought on UTE’s balance sheet. In 2006, the non-financial public-sector enterprises in the aggregate generated limited revenues for the government, as their profits were adversely affected by the drought and the increased prices of oil and the government’s decision not to fully pass on the cost to retail prices.

          In 2006 Pluna Airlines, reverted to state ownership. However, in July 2007 the government sold 75% of the airline’s equity. See “República Oriental del Uruguay—Privatizations.” At this time the government has no plans to privatize any public sector enterprises. In 2007, the combined surplus of the non-financial public-sector enterprises represented 1.0% of GDP. The recovery with respect to 2006 is attributable to greater sales by UTE, including exports to Argentina, as a result of increased hydroelectric generation as well as increased sales reflecting improved levels of activity in the national economy.

          The following table sets forth selected financial data for the principal state-owned enterprises as of the dates and for the periods indicated.

Principal Public Sector Enterprises
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

Total Liabilities

 

Net Profits

 

Percentage of
State Ownership

 

 

 


 


 


 


 

ANCAP(1)

 

 

 

1,055

 

 

 

 

472

 

 

 

 

(4

)

 

 

 

100

%

 

ANP(1)

 

 

 

403

 

 

 

 

34

 

 

 

 

7

 

 

 

 

100

%

 

AFE(1)

 

 

 

173

 

 

 

 

23

 

 

 

 

(17

)

 

 

 

100

%

 

ANTEL(1)

 

 

 

1,011

 

 

 

 

190

 

 

 

 

90

 

 

 

 

100

%

 

OSE(1)

 

 

 

846

 

 

 

 

177

 

 

 

 

30

 

 

 

 

100

%

 

UTE(1)

 

 

 

3,034

 

 

 

 

560

 

 

 

 

(47

)

 

 

 

100

%

 


 

 


(1)

Data as of and for the year ended December 29, 2006. Converted into U.S. dollars at the rate of Ps.24.47 per US$1.00, the market rate on December 29, 2006.

Source: Financial statements of each public enterprise.

Employment, Labor and Wages

          Employment

          From 2000 to 2002, the severe contraction of economic activity led to a rise in the nationwide unemployment rate. This increase reflected the incidence of layoffs as well as the growth in the labor supply, as sectors of the population responded to falling average household income by seeking employment opportunities. Having peaked in 2002, the unemployment rate began to decline in 2003 and, by December 2004, it had receded to 2000 levels. The employment rate fell from 49.1% in 2002 to 48.3% in 2003, before rebounding to 50.9% in 2004, rising to 51.4% in 2005, and reaching 60.9% in 2006 and 62.7% in 2007. The unemployment rate rose to 17.0% in 2002, but declined to 16.9% in 2003, to 13.1% in 2004, to 12.2% in 2005, to 11.4% in 2006 and to 9.6% in 2007.

D-27


          The sectors that were most seriously affected by the rise in unemployment in 1999 were the manufacturing industry, trade and general services, which are more sensitive to short-term variations in demand. Beginning in the last quarter of 1999, the government reduced spending on public sector works, consistent with its fiscal policy adjustments, which led to an overall increase in unemployment during 2000. The increases in the unemployment levels from 2000 to 2002 affected most sectors of the economy, including the financial sector, were largely attributable to the effects of the recession that Uruguay experienced from 1999 to 2003. The manufacturing, agriculture, livestock and fishing, and commerce, restaurants and hotels sectors accounted for the larger portion of the employment gains in 2003, while in 2004 the services sector contributed principally to employment recovery. The continued recovery of economic activity in Uruguay since 2003 explains the continued decrease in the nationwide unemployment rate to date. Manufacturing, electricity, gas and water, construction services and other services were the principal sectors that contributed to the recovery of employment.

          The following table sets forth certain information regarding employment and labor in Uruguay as of the dates indicated.

Employment and Labor
(% by population)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 


 


 


 


 


 

Nationwide:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participation rate(1)(2)

 

 

 

58.1

%

 

 

 

58.5

%

 

 

 

58.5

%

 

 

 

60.9

%

 

 

 

62.7

%

 

Employment rate(3)

 

 

 

48.3

%

 

 

 

50.9

%

 

 

 

51.4

%

 

 

 

54.1

%

 

 

 

56.7

%

 

Unemployment rate(4)

 

 

 

16.9

%

 

 

 

13.1

%

 

 

 

12.2

%

 

 

 

11.4

%

 

 

 

9.6

%

 

Montevideo:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participation rate(1)(2)

 

 

 

59.6

%

 

 

 

59.8

%

 

 

 

59.1

%

 

 

 

61.7

%

 

 

 

64.0

%

 

Employment rate(3)

 

 

 

49.7

%

 

 

 

52.0

%

 

 

 

52.1

%

 

 

 

55.1

%

 

 

 

58.4

%

 

Unemployment rate(4)

 

 

 

16.7

%

 

 

 

12.9

%

 

 

 

11.8

%

 

 

 

10.6

%

 

 

 

8.6

%

 


 

 


Data as of December 31, except as otherwise indicated.

 

 

 

 

 

(1)

To be considered employed, a person above the minimum age requirement (14 years old) must have worked at least one hour with remuneration or fifteen hours without remuneration during the preceding week.

(2)

Labor force as a percentage of the total population above the minimum age requirement.

(3)

Employment as a percentage of the total population above the minimum age requirement.

(4)

Unemployed population as percentage of the labor force.

Sources: National Statistics Institute and Banco Central.

          The sectoral composition of employment in Uruguay generally mirrors the sectoral composition of the GDP. The following table sets forth information regarding the percentage of the labor force by sector of the economy for the periods indicated.

Labor force (1)
(% by sector)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

2005

 

2006

 

2007

 

 

 


 


 


 


 

Agriculture, livestock, fishing and mining

 

 

 

5.1

%

 

 

 

4.6

%

 

 

 

4.8

%

 

 

 

5.2

%

 

Manufacturing, electricity, gas and water, and construction services

 

 

 

21.5

 

 

 

 

21.8

 

 

 

 

22.1

 

 

 

 

22.5

 

 

Services(2)

 

 

 

73.5

 

 

 

 

73.6

 

 

 

 

73.0

 

 

 

 

72.3

 

 

Total

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 


 

 


(1)

Refers to population in cities over 5,000 inhabitants.

(2)

Includes first-time job seekers and people that have been unemployed for more than a year.

Source: National Statistics Institute.

D-28


          Unionized labor in Uruguay is concentrated primarily in the public sector and industrial, construction and banking areas of the economy. Since Uruguay’s return to democratic rule, unions have declined in power and importance. Nonetheless, strikes and other actions by unions have occurred on occasion, normally in the form of general, one-day strikes. In cases of strikes which threaten to have a material adverse effect on private or public sector functions, the government can declare that the labor functions which are the subject of the strike provide “essential services” to the country, thereby making the strike illegal. In various instances during the past ten years, the government has threatened to disband or in fact disbanded strikes on the basis that the services provided were essential to the country. During 2007, labor unions have increased their demands for improvements in salaries and working conditions.

          Wages

          The following table sets forth information about wages for the periods indicated.

Average Real Wages
(annual average % change from previous year,
unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 


 


 


 


 


 

Average real wages

 

 

 

(12.4

%)

 

 

 

(0.1

%)

 

 

 

4.6

%

 

 

 

4.4

%

 

 

 

4.8

%

 

Public sector

 

 

 

(12.0

)

 

 

 

2.6

 

 

 

 

5.7

 

 

 

 

3.3

 

 

 

 

5.2

 

 

Private sector

 

 

 

(12.8

)

 

 

 

(1.5

)

 

 

 

4.0

 

 

 

 

5.0

 

 

 

 

4.6

 

 


 


Source: National Statistics Institute.

          Average real wages declined between 2000 and 2004, while levels of unemployment increased through 2003, evidencing the impact that the protracted recession and the crisis in 2002 produced on Uruguay’s economy and population. As part of its efforts to reduce the deficit and close its financing gap, the government did not adjust public sector wages during 2002 and set the public sector wage increase for January 2003 at 3.0%, despite the increase in inflation in 2002. In 2003, public sector wages increased nominally by 9.4% from December 31, 2002 to December 31, 2003, but the average wage level declined 12.0% in real terms in 2003, compared to 2002. Public sector wages increased nominally by 13.4% from December 31, 2003 to December 31, 2004 and the average public sector wage level for 2004 increased by 2.6% in real terms compared to 2003. Private sector wages, however, lost ground in real terms in 2004. The increase in real wages in the private sector that started during the third quarter of 2004 continued in 2005 and 2006. During 2006, real wages increased by 4.4% compared with 2005. The real wage increase in the public sector during 2006 was 3.3%, whereas the real wage increase for the private sector was 5.0%. In 2006, real wage increases for the private sector were discussed within the context of a collective bargaining mechanism involving the principal sectors of the economy, with government participation in the negotiations. During 2007, the increase in real wages in the public sector was 5.2% and real wage increases for the private sector was 4.6%. Under the collective bargaining rules, which were not followed during the 1990s, each sector of the economy negotiates wage increases twice a year.

Poverty and Income Distribution

          Poverty levels in Uruguay have decreased sharply in recent years due to the economic recovery. According to the National Statistics Institute, the percentage of Uruguayan urban households with an income below the minimum amount needed to purchase essential food and non-food requirements was 23.1% in 2007 compared with 30.7% in 2003.

          While Uruguay has disparities in the distribution of wealth and income, which increased in recent years, such disparities are of a lesser magnitude than those of other Latin American nations such as Brazil, Colombia, Chile, Argentina, Mexico and Venezuela. As set forth in the table below, in 2005, 27.8% of the national income in Uruguay was concentrated in the hands of the top 10.0% of the economically active population as compared to 44.6% of the national income for Brazil, 41.0% for Colombia, 37.2% for Chile, 34.1% for Argentina, 35.4% for Mexico and 30.8% for Venezuela.

D-29


          The following table outlines the data on income distribution for the periods indicated.

Evolution of Income Distribution of Urban Households
Population of Uruguay 1997- 2002
(% of national income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Group

 

1990

 

1997

 

1999

 

2002

 

2004

 

2005

 


 


 


 


 


 


 


 

Lowest 40%

 

 

 

20.1

 

 

 

 

22.0

 

 

 

 

21.6

 

 

 

 

21.6

 

 

 

 

21.3

 

 

 

 

21.6

 

 

Next 30%

 

 

 

24.6

 

 

 

 

26.1

 

 

 

 

25.5

 

 

 

 

25.4

 

 

 

 

24.8

 

 

 

 

25.0

 

 

Next 20%

 

 

 

24.1

 

 

 

 

26.1

 

 

 

 

25.9

 

 

 

 

25.6

 

 

 

 

25.4

 

 

 

 

25.6

 

 

Highest 10%

 

 

 

31.2

 

 

 

 

25.8

 

 

 

 

27.0

 

 

 

 

27.3

 

 

 

 

28.6

 

 

 

 

27.8

 

 

Total

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 

100.0

%

 

 

 


 


 


 


 


 


 


 


Source: CEPAL.

          Poverty in Uruguay has been linked to unemployment and underemployment and the increasing disparity in income between skilled, educated workers and the unskilled and relatively less educated. More recently, increases in poverty were the result of the contraction of the Uruguayan economy. One of the principal causes of poverty being poor education, Uruguay has taken steps to improve the country’s educational system. In spite of its high literacy rate, as well as other social development indicators placing Uruguay among the top countries in Latin America, Uruguay’s traditional educational system suffers mainly from lack of resources, out of date curricula and inadequate teacher training.

          The government has also addressed problems relating to poverty through health care accessibility and other measures. Uruguay has a public health system that gives access to services on a sliding-scale basis, where fees are based on a citizen’s ability to pay, and guarantees medical care for workers. The government also maintains funds for the extraordinary medical expenses of the needy.

D-30


FOREIGN MERCHANDISE TRADE

          Uruguay’s exports have traditionally been commodities (farm products) and semi-manufactured goods, although the government has implemented policies designed to stimulate diversification into non-traditional goods and to non-traditional markets.

          Merchandise exports in 2004 increased by 32.9% (measured in U.S. dollars) compared to 2003, reflecting continued increases in the price and quantity of exported goods, particularly meat. In 2005, merchandise exports increased by 16.2% (measured in U.S. dollars) compared to 2005, largely as a result of an increase in exported quantities of primary products. In 2006, merchandise exports increased by 17.1% (measured in U.S. dollars), largely as a result of continued increases in exports of meat and other traditional products. In 2007, merchandise exports increased by 12.8% (in U.S. dollars) compared to 2006, driven by the increase in exports of chemical and meat products.

          A significant portion of Uruguay’s merchandise trade has involved trade with its neighbors and principal trading partners, Argentina and Brazil, particularly since the consolidation of the Mercosur. This regional concentration has subjected Uruguay’s economy to the volatility that has characterized the economies of Uruguay’s neighbors. To mitigate the adverse impact on Uruguay’s foreign trade resulting from imbalances that develop within Mercosur, the government has actively promoted Uruguayan exports in markets both within and outside Mercosur. The increased competitiveness of Uruguayan exports since 2002 initially resulted in exports to the region becoming less significant as a percentage of Uruguay’s total exports. In addition to its bilateral free trade agreement with Mexico, which became effective on July 15, 2004, on June 11, 2004 Uruguay and Iran signed a framework agreement to promote bilateral trade. Uruguay will also seek to take advantage of any opportunities to increase its exports that may arise from the agreements reached by Mercosur with each of Israel and Venezuela in 2005. In 2007, however, exports to Argentina and Brazil accounted for 26.0% of total exports, compared to 22.3% in 2006.

          Following the drop in domestic manufacturing activity and consumption attributable to the recession that affected Uruguay through part of 2003, imports of goods fell by 35.8% (measured in U.S. dollars) in 2002 but recovered by 11.5% (measured in U.S. dollars) in 2003. In 2004, total imports of goods rose by 42.2% (measured in U.S. dollars) compared to 2003, primarily due to a general increase in the domestic demand for consumer, intermediate and capital goods.

          Merchandise imports increased by 24.6% (to US$3,879 million) in 2005 compared with 2004. A significant portion of the increase in imports in 2005, however, was attributable to higher international prices for oil, of which Uruguay is an importer. The increase of merchandise imports was also fueled by imports of capital goods. In 2006, merchandise imports increased by 23.1% (to US$4,775 million) compared to 2005, primarily due to the significant increase in imports of intermediate goods. Also in 2007, merchandise imports grew 17% compared to 2006, to US$5,589 million. The increase in imports of capital goods was 36.5% in this period.

          During the 1990’s Uruguayan trade was concentrated in the region. With the initial consolidation of the Mercosur in the 1990’s, Brazil and Argentina became Uruguay’s principal trading partners. By 1998, those two countries together accounted for more than 50% of Uruguay’s exports.

          The disparity between exports and imports to and from its neighbors in recent years is attributable primarily to the impact of the economic crisis suffered by the countries in the region, including currency fluctuations, which caused demand for Uruguayan products and tourism services to decrease substantially and adversely affected the competitiveness of Uruguayan exports in the region. In 2000, Brazil and Argentina together accounted for 41.0% of Uruguay’s exports and 43.3% of its imports. Merchandise exports to Argentina declined significantly after 2000. Merchandise exports to Brazil accounted for 23.1% of total merchandise exports in 2000 and merchandise exports to Argentina accounted for 17.9% of total merchandise exports in 2000. While exports to Brazil and Argentina recovered (measured in U.S. dollars) since 2005, the government has sought to reduce the dependence of Uruguay’s foreign trade on its neighboring countries by seeking to develop new markets for Uruguayan exports.

          In 2003, Europe accounted for 26.1% of Uruguay’s merchandise exports and 26.9% of its merchandise imports, compared to 24.0% and 14.4% of exports and imports in 2007, respectively. Merchandise exports to Asia have fluctuated slightly remaining below 10.0% over the past five years, accounting for 9.6% of Uruguay’s total merchandise exports in 2003 and 8.6% of total merchandise exports in 2007.

D-31


 

          The United States is another of Uruguay’s major trading partners. While Uruguay’s merchandise imports from the United States have fluctuated since 2002 (as a percentage of total imports) first decreasing to 6.7% in 2005 and recovering to 7.4% in 2007, the United States attracted an increasing percentage of Uruguay’s total merchandise exports after the 2002 crisis reaching a historical record of 22.4% of total exports in 2005, and accounting for 11.0% of total exports in 2007.

          Uruguay has diversified and increased substantially its merchandise exports over time, from US$200 million in the early 1970’s to approximately US$2.8 billion in 1998. Merchandise exports decreased to US$1.9 billion in 2002, primarily due to the impact of the uncertainties affecting the Brazilian economy and the recession affecting Argentina. Merchandise exports began to recover in 2003, increasing to US$2.2 billion in 2003, primarily due to the improved competitiveness created by the real devaluation of the peso and further increased to US$2.9 billion in 2004, mainly as a result of increased demand for Uruguayan exports and elevated prices for several of Uruguay’s commodity exports. The real appreciation of the peso during 2005 did not adversely impact exports. In 2005, exports reached US$3.4 billion, mainly due to the growth in export sales of meat, rice and diary products. In 2006, exports totaled US$3.9 billion, due to an increase in exports of traditional products and one year later, in 2007, merchandise exports amounted US$4.5 billion driven by a significant increase in non traditional exports.

          Merchandise exports have historically been concentrated on agriculturally based traditional and manufactured products, such as wool, meat, rice and textiles. Uruguay’s traditional exports are meat and wool, which in 2007 accounted for approximately 26.3% of total merchandise trade, compared to 29.7% in 2006. Uruguay was first declared free of foot and mouth disease in 1995. This measure granted Uruguay access to broader markets and allowed it to obtain higher prices for its beef. However, an outbreak of foot and mouth disease in Uruguay in 2000 severely affected meat exports during the last quarter of 2000. Although the outbreak was temporarily controlled and Uruguay’s beef exports resumed in the first quarter of 2001, a new outbreak of the disease affected a larger portion of the Uruguayan countryside. The government responded by implementing a vaccination program aimed at preventing the spread of the disease. Exports of Uruguayan beef to Uruguay’s traditional export markets, including Brazil, Chile, Israel and the European Union, which were closed following the outbreak of foot and mouth disease in 2000 and 2001, resumed during the last quarter of 2001. By late 2002, Canada, Chile and certain other countries had also recognized Uruguay as free from foot and mouth disease and, in 2003, beef exports regained access to the United States market as well. Exports of Uruguayan beef (in U.S. dollars) increased by 66.7% in 2004 compared to 2003, by 22.5% in 2005 compared to 2004, and by 26.9% in 2006 compared to 2005. However, beef exports decreased by 15.2% in 2007 compared to 2006.

          Imports into Uruguay have increased over time and become more diverse due to a combination of factors, including increased production and economic activity and the reduction of tariff and non-tariff import barriers. In 2003, total imports consisted of consumer goods (18.8%), intermediate goods (73.2%) and capital goods (8.1%). In 2004, driven primarily by improved general economic conditions and the recovery of domestic demand, total imports increased further by 42.2% (US$924 million), of which 71.1% represented intermediate goods, 18.1% consumer goods and 10.8% capital goods. In 2005, total imports increased by 24.6% and consisted of consumer goods (18.6%), intermediate goods (68.1%) and capital goods (13.3%). Oil imports account for 27.2% of the increase in imports recorded in 2005. In 2006, total imports increased by 23.1%, of which 18.4% represented consumer goods, 68.6% intermediate goods and 13.0% capital goods. This trend continued in 2007 with an increase of 17.1%, which 21.5% represented consumer goods, 65.5% intermediate goods and 13.0% capital goods.

D-32


          The following tables set forth information on exports and imports for the periods indicated.

Merchandise Trade
(in millions of US$ and % of total exports/imports)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

EXPORTS (FOB)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional:

 

US$

614

 

 

27.8

%

US$

869

 

 

29.6

%

US$

1,012

 

 

29.7

 

US$

1,270

 

 

31.9

%

US$

1,185

 

 

26.4

%

Wool

 

 

146

 

 

6.6

%

 

132

 

 

4.5

%

 

135

 

 

4.0

%

 

77

 

 

1.9

%

 

94

 

 

2.1

%

Meat

 

 

390

 

 

17.7

%

 

643

 

 

22.0

%

 

786

 

 

23.1

%

 

433

 

 

10.9

%

 

595

 

 

13.2

%

Other

 

 

78

 

 

3.5

%

 

93

 

 

3.2

%

 

92

 

 

2.7

%

 

759

 

 

19.0

%

 

496

 

 

11.0

%

Non-traditional:

 

 

1,592

 

 

72.2

%

 

2,062

 

 

70.4

%

 

2,392

 

 

70.3

%

 

2,716

 

 

68.1

%

 

3,311

 

 

73.6

%

Rice

 

 

141

 

 

6.4

%

 

180

 

 

6.1

%

 

200

 

 

5.9

%

 

218

 

 

5.5

%

 

281

 

 

6.2

%

Textiles

 

 

84

 

 

3.8

%

 

105

 

 

3.6

%

 

117

 

 

3.4

%

 

196

 

 

4.9

%

 

214

 

 

4.8

%

Chemicals

 

 

94

 

 

4.2

%

 

131

 

 

4.5

%

 

152

 

 

4.5

%

 

182

 

 

4.6

%

 

237

 

 

5.3

%

Other

 

 

1,273

 

 

57.7

%

 

1,646

 

 

56.2

%

 

1,924

 

 

56.5

%

 

2,121

 

 

53.2

%

 

2,580

 

 

57.4

%

 

 



 



 



 



 



 



 



 



 



 



 

Total exports

 

US$

2,206

 

 

100.0

%

US$

2,931

 

 

100.0

%

US$

3,405

 

 

100.0

%

US$

3,986

 

 

100.0

%

US$

4,496

 

 

100.0

%

 

 



 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMPORTS (CIF)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer goods

 

US$

411

 

 

18.8

%

US$

564

 

 

18.1

%

US$

722

 

 

18.6

%

US$

966

 

 

20.2

%

US$

1,202

 

 

21.5

%

Intermediate goods

 

 

1,602

 

 

73.2

%

 

2,214

 

 

71.1

%

 

2,642

 

 

68.1

%

 

3,277

 

 

68.6

%

 

3,661

 

 

65.5

%

Capital goods

 

 

177

 

 

8.1

%

 

335

 

 

10.8

%

 

514

 

 

13.3

%

 

532

 

 

11.1

 

 

726

 

 

13.0

%

 

 



 



 



 



 



 



 



 



 



 



 

Total imports

 

US$

2,190

 

 

100.0

%

US$

3,114

 

 

100.0

%

US$

3,879

 

 

100.0

%

US$

4,775

 

 

100.0

%

US$

5,589

 

 

100.0

%

 

 



 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise trade balance:

 

US$

16

 

 

 

 

US$

(183

)

 

 

 

US$

(474

)

 

 

 

US$

(789

)

 

 

 

US$

(1,093

)

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 


 

 


(1)

Preliminary data.

Source: Banco Central.

D-33


Geographical Distribution of Merchandise Trade
(in millions of US$, unless otherwise indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

 

 


 


 


 


 


 

EXPORTS (FOB)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Argentina

 

US$

155

 

 

7.0

%

US$

223

 

 

7.6

%

US$

267

 

 

7.8

%

US$

302

 

 

7.6

%

US$

441

 

 

9.8

%

Brazil

 

 

471

 

 

21.3

 

 

484

 

 

16.5

 

 

458

 

 

13.5

 

 

584

 

 

14.7

 

 

728

 

 

16.2

 

United States

 

 

234

 

 

10.6

 

 

577

 

 

19.7

 

 

764

 

 

22.4

 

 

523

 

 

13.1

 

 

493

 

 

11.0

 

Other

 

 

380

 

 

17.2

 

 

487

 

 

16.6

 

 

568

 

 

16.7

 

 

670

 

 

16.8

 

 

780

 

 

17.4

 

 

 



 



 



 



 



 



 



 



 



 



 

Total Americas

 

 

1,240

 

 

56.2

 

 

1,771

 

 

60.4

 

 

2,058

 

 

60.4

 

 

2,079

 

 

52.3

 

 

2,443

 

 

54.3

 

 

 



 



 



 



 



 



 



 



 



 



 

Europe:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

European Union:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

France

 

 

20

 

 

0.9

 

 

33

 

 

1.1

 

 

31

 

 

0.9

 

 

33

 

 

0.8

 

 

36

 

 

0.8

 

Germany

 

 

145

 

 

6.6

 

 

152

 

 

5.2

 

 

143

 

 

4.2

 

 

165

 

 

4.2

 

 

206

 

 

4.6

 

Italy

 

 

89

 

 

4.0

 

 

89

 

 

3.0

 

 

93

 

 

2.7

 

 

112

 

 

2.8

 

 

101

 

 

2.2

 

United Kingdom

 

 

79

 

 

3.6

 

 

91

 

 

3.1

 

 

85

 

 

2.5

 

 

96

 

 

2.4

 

 

120

 

 

2.7

 

Other EU

 

 

173

 

 

7.8

 

 

205

 

 

7.0

 

 

236

 

 

6.9

 

 

258

 

 

6.5

 

 

348

 

 

7.7

 

Total EU

 

 

506

 

 

22.9

 

 

570

 

 

19.5

 

 

587

 

 

17.3

 

 

664

 

 

16.6

 

 

811

 

 

18.0

 

EFTA(2) and other

 

 

70

 

 

3.2

 

 

77

 

 

2.6

 

 

112

 

 

3.3

 

 

341

 

 

8.6

 

 

269

 

 

6.0

 

 

 



 



 



 



 



 



 



 



 



 



 

Total Europe

 

 

576

 

 

26.1

 

 

647

 

 

22.1

 

 

699

 

 

20.5

 

 

1,005

 

 

25.2

 

 

1,079

 

 

24.0

 

 

 



 



 



 



 



 



 



 



 



 



 

Africa

 

 

64

 

 

2.9

 

 

62

 

 

2.1

 

 

103

 

 

3.0

 

 

182

 

 

4.6

 

 

149

 

 

3.3

 

Asia

 

 

211

 

 

9.6

 

 

234

 

 

8.0

 

 

275

 

 

8.1

 

 

360

 

 

9.0

 

 

385

 

 

8.6

 

Middle East

 

 

78

 

 

3.5

 

 

123

 

 

4.2

 

 

162

 

 

4.8

 

 

179

 

 

4.5

 

 

160

 

 

3.5

 

Other

 

 

37

 

 

1.7

 

 

93

 

 

3.2

 

 

107

 

 

3.1

 

 

182

 

 

4.6

 

 

281

 

 

6.3

 

 

 



 



 



 



 



 



 



 



 



 



 

Total

 

US$

2,206

 

 

100.0

%

US$

2,931

 

 

100.0

%

US$

3,405

 

 

100.0

%

US$

3,986

 

 

100.0

%

US$

4,496

 

 

100.0

%

 

 



 



 



 



 



 



 



 



 



 



 

IMPORTS (CIF)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Argentina

 

US$

572

 

 

26.1

%

US$

687

 

 

22.0

%

US$

786

 

 

20.3

%

US$

1,079

 

 

22.6

%

US$

1,235

 

 

22.1

%

Brazil

 

 

460

 

 

21.0

 

 

677

 

 

21.7

 

 

825

 

 

21.3

 

 

1,078

 

 

22.6

 

 

1,078

 

 

19.3

 

United States

 

 

166

 

 

7.6

 

 

220

 

 

7.1

 

 

259

 

 

6.7

 

 

326

 

 

6.8

 

 

413

 

 

7.4

 

Other

 

 

103

 

 

4.7

 

 

142

 

 

4.6

 

 

426

 

 

11.0

 

 

799

 

 

16.7

 

 

1,102

 

 

19.7

 

 

 



 



 



 



 



 



 



 



 



 



 

Total Americas

 

 

1,300

 

 

59.3

 

 

1,726

 

 

55.4

 

 

2,295

 

 

59.2

 

 

3,282

 

 

68.7

 

 

3,829

 

 

68.5

 

 

 



 



 



 



 



 



 



 



 



 



 

Europe:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

European Union:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

France

 

 

51

 

 

2.3

 

 

52

 

 

1.7

 

 

68

 

 

1.7

 

 

82

 

 

1.7

 

 

84

 

 

1.5

 

Germany

 

 

62

 

 

2.8

 

 

83

 

 

2.7

 

 

88

 

 

2.3

 

 

99

 

 

2.1

 

 

112

 

 

2.0

 

Italy

 

 

50

 

 

2.3

 

 

66

 

 

2.1

 

 

76

 

 

2.0

 

 

82

 

 

1.7

 

 

94

 

 

1.7

 

United Kingdom

 

 

25

 

 

1.1

 

 

29

 

 

0.9

 

 

34

 

 

0.9

 

 

46

 

 

1.0

 

 

43

 

 

0.8

 

Other EU

 

 

106

 

 

4.8

 

 

130

 

 

4.2

 

 

142

 

 

3.7

 

 

160

 

 

3.3

 

 

223

 

 

4.0

 

Total EU

 

 

293

 

 

13.4

 

 

360

 

 

11.6

 

 

407

 

 

10.5

 

 

469

 

 

9.8

 

 

555

 

 

9.9

 

EFTA(2) and other

 

 

296

 

 

13.5

 

 

380

 

 

12.2

 

 

346

 

 

8.9

 

 

90

 

 

1.9

 

 

249

 

 

4.5

 

 

 



 



 



 



 



 



 



 



 



 



 

Total Europe

 

 

589

 

 

26.9

 

 

741

 

 

23.8

 

 

753

 

 

19.4

 

 

559

 

 

11.7

 

 

805

 

 

14.4

 

 

 



 



 



 



 



 



 



 



 



 



 

Africa

 

 

73

 

 

3.3

 

 

170

 

 

5.4

 

 

334

 

 

8.6

 

 

172

 

 

3.6

 

 

55

 

 

1.0

 

Asia

 

 

207

 

 

9.5

 

 

332

 

 

10.7

 

 

471

 

 

12.1

 

 

603

 

 

12.6

 

 

860

 

 

15.4

 

Middle East

 

 

7

 

 

0.3

 

 

129

 

 

4.1

 

 

13

 

 

0.3

 

 

142

 

 

3.0

 

 

16

 

 

0.3

 

Other

 

 

15

 

 

0.7

 

 

16

 

 

0.5

 

 

13

 

 

0.3

 

 

17

 

 

0.4

 

 

25

 

 

0.4

 

 

 



 



 



 



 



 



 



 



 



 



 

Total

 

US$

2,190

 

 

100.0

%

US$

3,114

 

 

100.0

%

US$

3,880

 

 

100.0

%

US$

4,775

 

 

100.0

%

US$

5,589

 

 

100.0

%

 

 



 



 



 



 



 



 



 



 



 



 


 

 


(1)

Preliminary data.

(2)

European Free Trade Association.

   
Source: Banco Central.
   

D-34


          In 1989, import tariffs ranged from a maximum of 40.0% to a minimum of 10.0% (certain capital and intermediate goods were exempt from tariffs). The government began reducing tariffs gradually on its own account in 1990 and, since 1991, the government has generally reduced tariffs in accordance with regional Mercosur initiatives. Since January 1995, tariffs on raw materials not produced domestically have ranged from 2.0 to 6.0%, tariffs on intermediate goods from 8.0% to 16.0% and tariffs on consumer goods from 10.0% to 20.0%. More importantly, the government has substantially reduced non-tariff barriers, including the reference and minimum import prices on which tariffs are applied. Since 1989, the government has reduced the number of goods subject to reference prices from 423 to zero and, currently, there are no reference or minimum prices on any imported goods. Other outstanding barriers have also generally been lowered. Quantitative import restrictions were eliminated in the mid-1970s. In response to economic developments affecting several Asian economies, Mercosur member states implemented a transitional measure, effective January 1, 1998, increasing the common external tariff on all products by 3.0% through December 31, 2000. The rate was later reduced to 2.5% and the tariff was eliminated completely as of January 1, 2004. While tariffs on intra-Mercosur trade were reduced to zero effective January 1, 2000 (except for automobiles and sugar), in response to the imbalances created within Mercosur during 2001, Uruguay imposed a 1.9% non-tariff duty on imports (other than capital goods) regardless of their origin, which was subsequently increased to 2.5%, in addition to any existing tariffs. This duty, which was reduced to 1% on July 1, 2007, was eliminated on December 31, 2007.

D-35


FOREIGN SERVICES TRADE

          Uruguay’s services trade has traditionally been heavily concentrated in Argentina and Brazil and has been driven principally by tourism, transportation and financial services.

          Gross tourism receipts generally declined steadily between 1997 and 2003, dropping by 42.6% in 2002 compared to 2001 and by 1.7% in 2003 compared to 2002. This trend was reversed in 2004 and 2005, when gross tourism receipts increased by 43.2% and 20.2%, respectively. After increasing only by 0.4% in 2006, gross tourism receipts increased by 35.5% in 2007 in spite of the fact that the number of tourist arrivals decreased by 0.5%. A higher per capita level of expenditures and a longer average length of stay more than offset this decrease.

Revenues from Tourism

 

 

 

 

 

Number of
Tourist Arrivals

 

Gross Tourism
Receipts

 


 


 

(in thousands)

 

(in millions of US$)

 

2003

1,508

 

345

2004

1,871

 

494

2005

1,917

 

594

2006

1,824

 

597

2007

1,815

 

809


 

 


Source: Banco Central.

          During the 1990s, Uruguay’s tourism sector benefited from the improving economic situation in the region, particularly in Brazil and Argentina, and the increased sophistication of the services offered, including increased and diversified offerings of cultural, social and sports activities. There was an increase in repeat weekend travelers to Punta del Este, and through 1997 an increase in ownership of houses and apartments in this beach area by Argentines. New tourism services in regions outside of Punta del Este have also developed, in particular in the northern part of Uruguay where there are several thermal baths and tourist “estancias,” or ranches, which attract tourists from regional and urban areas and from Europe and the United States during Uruguay’s low season in winter. The total number of tourist arrivals increased by 11.4%, 24.1%, 2.5% in 2003, 2004 and2005, respectively. The total number of tourists declined in 2006 and 2007. Tourism from, as well as trade with or transiting through, Argentina in 2006 and 2007 was adversely affected by the interruption of international traffic caused by Argentine demonstrators opposing the construction of two pulp mills in the Fray Bentos region. See “Balance of Payments—Foreign Investment.”

          The following table sets forth the percentage of tourist arrivals from Argentina, Brazil and other countries for the periods indicated.

Tourist Arrivals
(% by country)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 


 


 


 


 


 

Argentina

 

 

57.5

%

 

 

59.3

%

 

 

57.8

%

 

 

53.4

%

 

 

50.0

%

 

Brazil

 

 

10.0

 

 

 

10.0

 

 

 

10.3

 

 

 

12.5

 

 

 

15.8

 

 

Other

 

 

32.5

 

 

 

30.7

 

 

 

31.9

 

 

 

34.1

 

 

 

34.2

 

 

 

 

 


 

 

 


 

 

 


 

 



 

 

 


 

 

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

 


 

 

 


 

 

 


 

 



 

 

 


 

 


 

 


Sources: Banco Central and the Ministry of Tourism.

 

D-36


          Until the 2002 banking crisis, financial and insurance services, primarily banking and corporate services, contributed to the growth in services exports. Uruguay’s bank secrecy laws and ability of companies to issue bearer shares attracted foreign funds. Deposits by non-residents with the financial sector totaled approximately US$6.6 billion at December 31, 2001. In 2002, deposits by non-residents with the financial sector decreased significantly to less than US$2.3 billion at December 31, 2002, including approximately US$1.2 billion held with Banco Galicia Uruguay, Banco de Crédito, Banco Montevideo and Banco Comercial, all of which had their operations suspended and, with the exception of Banco Galicia Uruguay, have since been liquidated. Following the banking crisis in 2002, deposits by non-residents began to recover, reaching US$1.9 billion as of March 31, 2008, representing 15.6% of total deposits held by the non-financial public and private sectors with the Uruguayan banking system (excluding deposits held with banks in liquidation).

 

D-37


BALANCE OF PAYMENTS

          In 2007, Uruguay’s balance of payments registered an overall surplus of US$1,005 million compared to a deficit of US$15 million in 2006, a surplus of US$620 million in 2005, a surplus of US$454 million in 2004 and a surplus of US$1,380 million in 2003. Banco Central’s international reserve assets stood at US$4,993 million at March 31, 2008, compared to US$4,121 million at December 31, 2007, US$3,091 million at December 31, 2006, US$3,078 million at December 31, 2005, US$2,512 million at December 31, 2004 and US$2,087 million at December 31, 2003.

Balance of Payments(1)
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(2)

 

2007(2)

 

 

 


 


 


 


 


 

Current account:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exports

 

US$

2,281

 

US$

3,145

 

US$

3,774

 

US$

4,407

 

US$

5,063

 

Imports

 

 

(2,098

)

 

(2,992

)

 

(3,753

)

 

(4,867

)

 

(5,554

)

Services, net

 

 

135

 

 

326

 

 

372

 

 

406

 

 

513

 

Interest and dividends

 

 

(488

)

 

(588

)

 

(494

)

 

(441

)

 

(342

)

Current transfers(3)

 

 

83

 

 

113

 

 

144

 

 

126

 

 

134

 

 

 



 



 



 



 



 

Total current account

 

 

(87

)

 

3

 

 

42

 

 

(369

)

 

(186

)

 

 



 



 



 



 



 

Capital account:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct investments

 

 

401

 

 

315

 

 

811

 

 

1,400

 

 

876

 

Portfolio investments(4)

 

 

(311

)

 

(422

)

 

806

 

 

1,686

 

 

1,172

 

Other medium-and long-term capital

 

 

582

 

 

73

 

 

(185

)

 

(2,983

)

 

7

 

Other short-term capital

 

 

(246

)

 

101

 

 

(684

)

 

323

 

 

(834

)

Capital transfers

 

 

4

 

 

5

 

 

4

 

 

7

 

 

4

 

 

 



 



 



 



 



 

Total capital account, net

 

 

431

 

 

72

 

 

752

 

 

433

 

 

1,224

 

 

 



 



 



 



 



 

Errors and omissions

 

 

1,037

 

 

379

 

 

(174

)

 

(79

)

 

(34

)

 

 



 



 



 



 



 

Total balance of payments

 

US$

1,380

 

US$

454

 

US$

620

 

US$

(15

)

US$

1,005

 

 

 



 



 



 



 



 

Change in Banco Central international reserve assets(5)

 

US$

(1,380

)

US$

(454

)

US$

(620

)

US$

15

 

US$

(1,005

)

 

 



 



 



 



 



 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold(6)

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

SDRs

 

 

(3

)

 

(3

)

 

5

 

 

(6

)

 

(1

)

IMF position

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange

 

 

479

 

 

1,299

 

 

(145

)

 

146

 

 

1,008

 

Other holdings

 

 

905

 

 

(842

)

 

760

 

 

(156

)

 

(2

)

 

 



 



 



 



 



 

Total assets

 

US$

1,380

 

US$

454

 

US$

620

 

US$

(15

)

US$

1,005

 

 

 



 



 



 



 



 


 

 


(1)

Calculated in accordance with the methodology set forth in the IMF Balance of Payments Manual, Fifth Edition.

(2)

Preliminary data.

(3)

Current transfers consist of transactions without a quid pro quo, many of which are gifts.

(4)

Includes public bonds, commercial paper, notes and commercial banks’ foreign portfolio investment.

(5)

Change in Banco Central international reserve assets does not reflect adjustments in the value of gold.

(6)

As presented in this chart, gold reserves have been valued at their corresponding market prices as of December 31 of each year.

Source: Banco Central.

          Current Account

          Uruguay’s current account consists of the merchandise trade balance, non-financial services, net, interest and dividend payments, and current transfers.

          With respect to non-financial services, Uruguay has maintained surpluses, with inflows generated primarily by tourism and international freight revenues, including revenues from transportation services provided by trucks and ships. In 2002, the severe outflow of capital and the contraction of domestic demand reduced imports of goods by more than US$1.0 billion. Exports of goods also contracted in 2002, although by a significantly smaller percentage, leading to a surplus in the merchandise trade balance, which, coupled with a net inflow in interest and dividends, produced a US$382 million surplus in Uruguay’s current account.

D-38


          In 2003, Uruguay’s current account recorded a deficit of US$87 million. This deficit was mainly due to large increases in net interest and dividend payments, which resulted from the substantial indebtedness incurred by the government in connection with the crisis of the banking sector, and the normalization of remittances of corporate profits following the heavy losses experienced in 2002.

          In 2004, merchandise imports and exports grew at approximately the same pace, inflows generated by non-financial services increased significantly reaching levels comparable to those recorded prior to the economic crisis of 2002, and interest and dividend payments continued to increase. Uruguay’s current account recorded a surplus of US$3 million in 2004.

          In 2005, the current account recorded a surplus of US$42 million. Uruguay is a net importer of oil and in 2005, Uruguay’s oil imports (in U.S. dollars) increased by approximately US$208 million with respect to the previous year affecting its current account position.

          In 2006, the current account recorded a deficit of US$369 million. The deficit was mainly attributable to the rapid growth in imports, which exceeded 2005 levels by US$1,114 million. Imports of consumer and capital goods increased 65% and 61% respectively, during 2006, while imports of intermediate goods grew 24%.

          In 2007, the current account recorded a deficit of US$186 million. This improvement in the current account balance was mainly attributable to the improvement in inflows generated by non-financial services, net, due to increased receipts from a higher stock of international reserves and lower interest payments to non-residents.

          Capital Account

          Uruguay’s capital account includes direct investments, portfolio investments, and short-, medium- and long-term indebtedness, and capital transfers.

          Between 2000 and 2001, the government took steps to increase significantly Banco Central’s international reserve assets (primarily by incurring indebtedness). The government’s efforts to bolster Banco Central’s reserves were undermined in 2002 by the banking crisis and the massive withdrawal of U.S. dollar-denominated deposits from the Uruguayan financial system and the resulting short-term capital outflows. In 2002, capital outflows exceeded the unprecedented level of long-term capital inflows, consisting primarily of borrowings by the government, mainly from the multilateral financial institutions. Uruguay’s capital account registered a deficit of US$280 million in 2002.

          In 2003, Uruguay’s capital account recorded a surplus of US$430 million. The gradual stabilization of the banking sector and the successful reprofiling of Uruguay’s external debt in mid-2003 helped create an environment that allowed for continued net inflows of capital. In 2003, after completing the reprofiling of Uruguay’s external debt, the government raised approximately US$300 million in the international capital markets and received net disbursements from multilateral institutions of approximately US$675 million. These borrowings, coupled with foreign direct investments of US$401 million, which resulted from a sharp increase in real estate purchases by Argentine and Brazilian investors, more than offset a net outflow in portfolio investments of US$311 million attributable to the enlargement of the Uruguayan banking system’s international holdings.

          In 2004, Uruguay’s capital account recorded a surplus of US$72 million. Net capital inflows resulting from additional borrowings by the government from international financial institutions and the international capital markets, as well as foreign direct investments totaling US$314 million, were offset by capital outflows attributable to foreign portfolio investments by the financial sector, including by Banco de la República.

          Capital inflows increased significantly in 2005 as foreign direct investment reached a historical record of US$811 million, and the government took advantage of favorable international capital market conditions to borrow with a view to funding in part its financing needs for 2006. Uruguay’s capital account recorded a surplus of US$752 million in 2005.

          In 2006, Uruguay’s capital account recorded a surplus of US$433 million. An unprecedented level of foreign direct investment, amounting at US$1.4 billion, in addition to US$1.7 billion in borrowings by the government from the international capital markets, allowed the Banco Central and the government to cancel loans for US$2.4 billion, including the early repayment of outstanding obligations with the IMF.

D-39


          In 2007, Uruguay’s capital account recorded a surplus of US$1.2 billion, mainly related to private capital inflows. After financing the current account deficit, the difference represents net funding for the public sector, which in turn increases the foreign currency position of the public sector.

          International Reserves

          As of December 31, 2007, international reserve assets of Banco Central stood at US$4,121 million, compared to US$3,091 million at December 31, 2006. The following table shows the composition of the international reserve assets of Uruguay’s Banco Central and the banking system at each of the dates indicated.

International Reserve Assets of the Banking System(1)
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

As of March 31, 2008(2)

 

 

 


 


 


 


 


 


 

Banco Central

 

US$

2,087

(3,4,5)

US$

2,512

(3,6)

US$

3,078

(7)

US$

3,091

(8)

US$

4,121

(9)

US$

4,993

(10)

Of which gold represents

 

 

4

 

 

4

 

 

4

 

 

5

 

 

7

 

 

8

 

Banco de la República

 

 

912

 

 

1,487

 

 

1,701

 

 

1,377

 

 

2,091

 

 

2,208

 

Private banks

 

 

2,717

 

 

3,217

 

 

3,093

 

 

3,062

 

 

2,945

 

 

3,263

 

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International reserve assets

 

US$

5,716

 

US$

7,216

 

US$

7,873

 

US$

7,529

 

US$

8,314

 

US$

10,463

 

 

 



 



 



 



 



 



 


 

 


Data as of December 31, except as otherwise indicated.

 

 

(1)

All figures are at market value as of the date indicated.

(2)

Preliminary data

(3)

This amount does not include US$224 million held by the FESB at December 31, 2003.

(4)

This amount includes US$1,044 million of reserves and voluntary deposits of the Uruguayan banking system, including US$495 million of Banco de la República, with Banco Central.

(5)

This amount includes US$1,625 million of reserves and voluntary deposits of the Uruguayan banking system, including US$725 million of Banco de la República, with Banco Central.

(6)

This amount includes US$1,650 million of reserves and voluntary deposits of the Uruguayan banking system, including US$753 million of Banco de la República, with Banco Central.

(7)

This amount includes US$1,601 million of reserves and voluntary deposits of the Uruguayan banking system, including US$719 million of Banco de la República, with Banco Central.

(8)

This amount includes US$1,748 million of reserves and voluntary deposits of the Uruguayan banking system, including US$792 million of Banco de la República with Banco Central.

(9)

This amount includes US$1,795 million of reserves and voluntary deposits of the Uruguayan banking system, including US$868 million of Banco de la República with Banco Central.

(10)

This amount includes US$1,714 million of reserves and voluntary deposits of the Uruguayan banking system, including US$840 million of Banco de la República with Banco Central.

Source: Banco Central.

          As of March 31, 2008, Banco Central’s international reserve assets totaled approximately US$4,993 million, including US$1,714 million in reserves and voluntary deposits of the Uruguayan banking system, of which US$840 million were claims of Banco de la República.

          The voluntary deposits and reserves held with Banco Central by the Uruguayan banking system can be withdrawn by banks at any time. Changes in Banco Central’s policies and other external factors, including interest rates, affecting the banks’ medium- and long-term portfolio decisions could cause and, in the past, have caused the banks to withdraw these voluntary deposits. Variations in commercial bank reserves and voluntary deposits of the Uruguayan banking system with Banco Central, cause Banco Central’s international reserve assets to fluctuate from time to time.

          

D-40


Foreign Investment

          Uruguay has a legislative framework that ensures equal treatment of foreign and local investors and foreign access to all economic sectors. Foreign investments in Uruguay generally do not require prior governmental authorization, and foreign investors are not required to register investments with the government and can freely remit their profits and capital investments abroad. Investment in certain sectors, including financial services, requires prior authorization on the same terms as domestic investors. Foreign investment in Uruguay has been traditionally directed towards the construction and tourism sectors. In 2004, however, European pulp manufacturers announced investments in that industry in Uruguay in the range of US$950 million over a two-year period. Since 2005, Argentine demonstrators have opposed to the construction of the wood pulp mills repeatedly obstructed international traffic to Uruguay and into Argentina, which flows through two bridges on the Uruguay River that link Argentina with Uruguay. Uruguay sought to initiate dispute resolution proceedings contemplated in the Mercosur framework for Argentina’s failure to ensure free access to the bridges and uninterrupted flow of international traffic to and from Uruguay. No agreement with respect to Uruguay’s claims was reached within the terms contemplated in Mercosur’s dispute resolution framework. In May 2006, Argentina brought a claim to the ICJ against Uruguay under the Treaty of the Uruguay River, alleging that by authorizing the construction of certain pulp mills in the Fray Bentos region, along the shores of the Uruguay River, Uruguay had acted in breach of its obligations under the treaty. Argentina claims that the pulp mills will irreparably harm the Uruguay River shore. Argentina sought an injunction, which the ICJ declined to grant. Evidence has been produced and allegations have been made, and a decision regarding the merits of Argentina’s claim is pending. Uruguay, in turn, requested that the International Court of Justice issue a preliminary injunction directing Argentina to ensure the free flow of international traffic and prevent demonstrators from obstructing traffic across the bridges. The request for a preliminary injunction was denied by order of the court dated January 23, 2007.

          In each of 2003, 2004, 2005, 2006 and 2007, estimated foreign direct investment accounted for US$401 million, US$315 million, US$811 million, US$1,400 million and US$876 million, respectively, of Uruguay’s balance of payments.

D-41


MONETARY POLICY AND INFLATION

          Banco Central was established in 1967 and is in charge of issuing currency, managing foreign exchange reserves of Uruguay, regulating the financial and insurance system, as well as pension funds and the securities market, and evaluating and advising the government regarding the establishment of new banks. Banco Central has the principal responsibility for the implementation of monetary policies, intervening in the money market and advising the government on monetary and credit matters in accordance with general objectives set by the government. In addition, it trades in the foreign exchange market and is responsible for the observance of foreign exchange regulations.

          The Board of Directors of Banco Central is composed of three members, each serving a five-year term. Each new president of Uruguay is entitled to appoint a new Board of Directors with ratification by the Congress required.

          Banco Central’s current charter, which was enacted in 1995, defines Banco Central’s monetary and foreign exchange management capacity and its supervisory powers. Under its charter, Banco Central cannot finance the activities of the government except to the extent that it may hold government securities having an aggregate principal amount of up to 10.0% of the central government’s previous year’s expenditures net of interest payments (currently somewhat less than 2.0% of GDP). However, Banco Central can serve as a financial agent of the government under article 50 of its charter and has a duty under article 3 to ensure the orderly functioning of the payments system.

          In December 2005, the government submitted a proposal to Congress to reform the charter of Banco Central and create a Corporación de Protección al Ahorro Bancario or Corporation for the Protection of Bank Savings as an agency independent of Banco Central. The bill is intended to increase Banco Central’s autonomy, strengthen the supervision and regulation of the financial sector and remove Banco Central’s responsibility for the administration of the mandatory deposit insurance program introduced in 2002. To increase Banco Central’s autonomy, the bill proposes among other measures, to enlarge Banco Central’s board of directors to five members, who will serve eight-year staggered terms, which will ensure that fewer appointments coincide with the political cycle, and to make monetary policy and inflation control Banco Central’s clear mission. To strengthen the supervision and regulation of the financial sector, the bill proposes to combine under a single division, the Superintendencia de Servicios Financieros, the supervisory and regulatory authority currently entrusted to the Superintendencia de Instituciones de Intermediación Financiera, which regulates the banking sector, and the Superintendencia de Seguros, Fondos de Pensión y Mercado de Valores, which regulates insurance companies, the stock market and pension funds. The bill also enhances Banco Central’s power to regulate the financial market. Currently this bill is being considered by the Congress.

          Monetary Policy

          Until June 2002, Banco Central managed Uruguay’s inflation stabilization policy by setting a peso/U.S. dollar exchange rate band that drifted at a present monthly rate of devaluation and allowed the peso/U.S. dollar exchange rate to fluctuate within a band without prompting Banco Central intervention in the foreign exchange markets. The system was designed to allow for adjustments in the relative prices of Uruguayan products without requiring deflation of domestic prices. This “crawling peg” system provided an anchor for the stabilization plan and succeeded in reducing inflation from a rate of 129.0% (as measured by the CPI) in 1990 to 3.6% in 2001. In June 2001 and January 2002, Banco Central widened the band and accelerated the rate of devaluation of the peso in an attempt to mitigate the ongoing adverse effects on Uruguay’s economy, first of Brazil’s devaluation in 1999 and subsequently of Argentina’s devaluation in January 2002. Inflation targets were administered through a foreign exchange policy.

          Sensitive to the risk of a run on the currency and to avoid the need to adopt exchange controls and restrict capital flows, Uruguay completed its transition to a fully floating exchange system and floated the peso effective June 20, 2002. Since the peso was allowed to float, Banco Central pursued interventions solely to ensure the orderly operation of the foreign exchange market. As of December 2002, the nominal exchange rate had risen 94.0% in comparison to December 2001. The year-to-year inflation rate for the same period was 25.9%.

D-42


          Having relinquished the use of exchange rate policies to determine inflation objectives, Banco Central adopted the peso monetary base as a nominal anchor and committed to a monetary base increase consistent with the inflation objective set for the period. During 2007, the monetary base increased by 45.5%, as compared to December 2006, the annual rate of inflation was 8.5% and the peso/U.S. dollar exchange rate marked its lowest point for the year at Ps.21.50 per US$1.00 and its highest point at Ps.24.45 per US$1.00.

          Based on the government’s annual inflation target range of 4% to 6% over an 18 months horizon, in October 2007 Banco Central shifted from monetary aggregates to interest rate management as the main instrument of monetary policy.

          The target monetary policy rate for short-term interbank lending was set at a level of 7%, defining a band ranging from 6% to 8% between deposit and lending facilities of the Banco Central. In November 2007, in light of continuing inflationary pressures, the short-term interbank lending rate was set at 7.25%. In January 2008, the short-term interbank lending rate was kept constant, but the tolerance of the inflation target range was enlarged up to 3% to 7% in recognition of the difficulties to keep a close track of this target in a context of high volatility in commodity and asset prices.

          To regulate liquidity in the market, Banco Central conducts periodic auctions of Banco Central notes in domestic currency. The ability of Banco Central to implement an effective monetary policy is curtailed by the high degree of dollarization of the Uruguayan economy. As of December 31, 2007, approximately 79% of all deposits held with the banking system were denominated in foreign currencies, primarily U.S. dollars.

          Liquidity and Credit Aggregates

          The following tables set forth the composition of Uruguay’s monetary base (expressed in terms of Banco Central’s monetary liabilities) as of the dates indicated.

Monetary Base (1)
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

As of April 30,

 

 

 


 


 

 

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008(1)

 

 

 


 


 


 


 


 


 

Currency, including cash in vaults at banks

 

US$

418

 

US$

538

 

US$

717

 

US$

904

 

US$

1,145

 

US$

1,144

 

Others

 

 

70

 

 

63

 

 

303

 

 

207

 

 

322

 

 

569

 

 

 



 



 



 



 



 



 

Monetary base

 

US$

488

 

US$

601

 

US$

1,020

 

US$

1,111

 

US$

1,467

 

US$

1,713

 

 

 



 



 



 



 



 



 


 

 


(1)

Preliminary data.

Source: Banco Central.

          The following tables show selected monetary indicators and liquidity and credit aggregates for the periods indicated.

Selected Monetary Indicators
(percentage change based on peso-denominated data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

2004

 

2005

 

2006

 

2007

 

Three months
ended March 31,
2008(1)

 

 

 


 

 


 


 


 


 


 

M1 (% change)(2)

 

 

34.4

%

 

 

 

14.2

%

 

 

 

 

34.0

%

 

 

 

24.1

%

 

 

32.0

%

 

 

 

20.7

%

 

 

M2 (% change)(3)

 

 

29.4

 

 

 

 

13.5

 

 

 

 

 

27.2

 

 

 

 

22.1

 

 

 

31.0

 

 

 

 

22.2

 

 

 

Credit from the financial system (% change)

 

 

(12.4

)

 

 

 

(3.4

)

 

 

 

 

10.5

 

 

 

 

29.2

 

 

 

22.1

 

 

 

 

17.2

 

 

 

Average annual peso deposit rate

 

 

25.5

%

 

 

 

6.1

%

 

 

 

 

2.7

%

 

 

 

2.2

%

 

 

3.1

%

 

 

 

3.7

%

 

 


 

 


(1)

Preliminary data.

(2)

Currency in circulation plus peso-denominated demand deposits.

(3)

M1 plus peso-denominated savings deposits.

Source: Banco Central.

D-43


Liquidity and Credit Aggregates
(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2004

 

2005

 

2006(1)

 

2007(1)

 

Four months
ended April 30,
200
8(1)

 

 

 


 


 


 


 


 


 

Liquidity aggregates (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency, excluding cash in vaults at banks

 

US$

322

 

US$

410

 

US$

553

 

US$

661

 

US$

879

 

US$

827

 

M1(2)

 

 

802

 

 

1,018

 

 

1,493

 

 

1,830

 

 

2,740

 

 

2,866

 

M2(3)

 

 

1,043

 

 

1,317

 

 

1,831

 

 

2,208

 

 

3,283

 

 

3,573

 

M3(4)

 

 

6,733

 

 

7,255

 

 

7,928

 

 

8,742

 

 

10,292

 

 

10,973

 

 

Credit aggregates (at period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private sector credit

 

 

4,415

 

 

4,218

 

 

4,408

 

 

4,847

 

 

6,177

 

 

6,462

 

Public sector credit

 

 

361

 

 

632

 

 

303

 

 

347

 

 

72

 

 

(64

)

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total domestic credit

 

US$

4,775

 

US$

4,850

 

US$

4,711

 

US$

5,195

 

US$

6,249

 

US$

6,398

 

 

 



 



 



 



 



 



 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uruguayan Peso deposits

 

 

721

 

 

907

 

 

1,279

 

 

1,547

 

 

2,404

 

 

2,746

 

Foreign currency deposits

 

 

7,914

 

 

8,428

 

 

8,393

 

 

8,851

 

 

9,648

 

 

10,251

 

 

 



 



 



 



 



 



 

Total deposits

 

US$

8,635

 

US$

9,335

 

US$

9,672

 

US$

10,497

 

US$

12,052

 

US$

12,997

 

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits of non-residents

 

US$

2,224

 

US$

2,490

 

US$

2,296

 

US$

2,416

 

US$

2,638

 

US$

2,851

 


 

 


(1)

Preliminary data.

(2)

Currency in circulation plus peso-denominated demand deposits.

(3)

M1 plus peso-denominated savings deposits.

(4)

M2 plus deposits of residents in foreign currency, principally U.S. dollars.

Source: Banco Central.

     Inflation

          The following table shows changes in the CPI and the WPI for the periods indicated.

 

 

 

 

 

 

 

 

 

Percent Change from
Previous Year at Period End

 

 

 


 

 

 

Consumer
Prices

 

 

Wholesale
Prices

 

 

 


 

 


 

2003

 

 

10.2

%

 

 

 

20.5

%

 

2004

 

 

7.6

 

 

 

 

5.1

 

 

2005

 

 

4.9

 

 

 

 

2.2

 

 

2006

 

 

6.4

 

 

 

 

8.2

 

 

2007

 

 

8.5

 

 

 

 

16.1

 

 

For the 12 months ended April 30, 2008

 

 

7.1

%

 

 

 

17.9

%

 


 


Source: National Institute of Statistics.

          The inflation rate decreased significantly in 2001, in part, due to the economic recession that affected Uruguay and the region. Despite the exchange rate adjustments effected by Banco Central on June 19, 2001, domestic inflation for 2001 (3.6%) was at the lower end of the target range of 3.5% to 5.5% agreed with the IMF. As a result of the adjustment in relative prices following the decision to float the peso in June 2002, inflation increased in 2002, finishing the year at 25.9%. In 2003, consumer price inflation declined significantly to 10.2%, largely due to the stabilization of the value of the peso. Inflation declined to 7.6% in 2004, mainly as a result of a more restrictive monetary policy and the appreciation of the peso. In 2005 inflation fell below the 5.0% to 7.0% target range agreed with the IMF reaching 4.9%, primarily as a result of the strong appreciation of the domestic currency against the U.S. dollar. In 2006, the annual rate of inflation increased to 6.4% and in 2007, it peaked at 8.5%. The monetary measures implemented in the fourth quarter of 2007 started to show their effects during the first quarter of 2008, and the inflation rate for the 12-months ended April 30, 2008 stood at 7.1%.

          The weighted average interest rate for 91 to 180 day term deposits in U.S. dollars in the banking system increased from 1.3% in December 2004 to 1.6% in December 2005 and to 1.8% in December

D-44


          The weighted average interest rate for 91 to 180 day term deposits in U.S. dollars in the banking system increased from 1.3% in December 2004 to 1.6% in December 2005 and to 1.8% in December 2006 and December 2007. The weighted average interest rate for 91 to 180 day term deposits in pesos in the banking system decreased from 7.4% in December 2004 to 2.6% in December 2005 and to 2.3% in December 2006. In December 2007, this rate had increased to 2.9%, mainly as a consequence of the measures to contain monetary growth adopted by of the monetary authority. The decrease in the level of deposits held with the Uruguayan banking system and the uncertainties affecting the economy in 2002 and early 2003 resulted in significant increases in loan default rates and insolvencies with virtually no credit being extended to local businesses by local financial institutions. Since the beginning of 2003, the number of loan defaults and insolvencies has abated. Nevertheless, local financial institutions have remained cautious in extending new credit. Gross credit extended by banks to the private sector only expanded by US$1,530 million, or 38.9%, between 2003 and 2007, though this process accelerated in 2007. The increase between 2006 and 2007 was 31.1%. For a discussion of Uruguay’s past policies regarding inflation see “The Economy—History and Background,” “—1999-2002: Recession and Crisis in the Banking System” and “—2003-2007: Recovery and Economic Growth,” and for a discussion of Uruguay’s current monetary policy, see “Monetary Policy and Inflation—Monetary Policy.”

          Foreign Exchange

          Between 1990 and June 2002, the Uruguayan peso was devalued relative to other currencies on a gradual basis. This exchange rate policy was applied to inflation without inducing sharp changes in relative prices. Banco Central allowed the peso/U.S. dollar exchange rate to fluctuate within a band of its value (initially set at 3.0%) and the bounds of the band were adjusted upward by 0.6% each month. Interest rates for deposits in foreign currencies generally tracked movements in international interest rates. Interest rates for deposits in pesos, however, fell during the first months of 2000. In June 2001, Argentina adopted measures relating to its foreign exchange regime designed to increase the competitiveness of Argentine industries by subsidizing exports with reimbursements and taxing imports. Following the adoption of those measures, Banco Central adjusted the rate of devaluation of the Uruguayan peso relative to the U.S. dollar from 0.6% to 1.2% per month through December 31, 2001 and the band of fluctuation for the peso to U.S. dollar exchange rate from 3.0% to 6.0%.

          In response to the new economic environment in the region, in January 2002 Banco Central adjusted the monthly rate of devaluation of the Uruguayan peso from 1.2% to 2.4% and the width of the band of fluctuation for the peso to U.S. dollar exchange rate from 6.0% to 12.0%. The continued devaluation of the Argentine peso, and increasing uncertainties as to the future of the Brazilian economy increased the risk of a speculative run on the peso. On June 19, 2002, Banco Central allowed the peso to float. A steep devaluation of the peso followed, reaching its lowest point on September 10, 2002, when the exchange rate reached Ps.32.325 per US$1.00. Since then, the peso has strengthened versus the U.S. dollar. As of December 31, 2007, the peso traded at Ps.21.50 per US$1.00 and as of April 30, 2008, the peso traded at Ps.19.95 per US$1.00. See “The Economy—2003-2007: Recovery and Economic Growth” and “Monetary Policy and Inflation—Monetary Policy.”

          Since the mid-1970’s, Uruguay has not imposed foreign exchange convertibility or remittance controls. Uruguayan residents are permitted to buy or sell foreign exchange without restriction, and there are no restrictions on the repatriation in foreign currency of capital or dividends by foreign investors.

          The following table shows the high, low, average and period-end peso/U.S. dollar exchange rates for the dates and periods indicated.

Exchange Rates(1)
(pesos per US$)

 

 

 

 

 

 

 

 

 

High

 

Low

 

Average

 

Period-End

 


 


 


 


2003

29.540

 

26.150

 

28.160

 

29.290

2004

29.810

 

26.010

 

28.645

 

26.380

2005

26.250

 

23.150

 

24.406

 

24.100

2006

24.400

 

23.700

 

24.010

 

24.400

2007

24.450

 

21.500

 

23.414

 

21.500

For the 12 months ended April 30, 2008

24.050

 

19.590

 

22.239

 

19.949


 

 


(1)

Daily interbank end-of-day bid rates.

Source: Banco Central.

D-45


THE BANKING SECTOR

          Prudential regulation, supervision and financial system

          Banco Central supervises the banking system and requires regular monthly filings of balance sheets, income statements and statements of stockholders’ equity, as well as daily reports on foreign exchange exposure and other information from the banks in the Uruguayan financial system. According to Banco Central’s charter as enacted in 1995, Banco Central exercises its supervision and inspection powers over public and private financial institutions through the Superintendencia de Instituciones de Intermediación Financiera, Superintendency of Financial Institutions or Bank Superintendency. Following international best practices, supervision of financial institutions by Banco Central is based both on the level of risk that each bank adopts and the management of those risks evidenced by each institution. To improve the supervision of local financial institutions that are affiliated with Spanish financial groups, the Bank Superintendency entered into a Memorandum of Understanding with the supervisory authorities of Spain, Banco de España, that allows both agencies to share relevant information.

          The Bank Superintendency imposes lending limits and cash and liquidity reserve requirements, among other requirements. Financial institutions are required to classify loans made to non-financial borrowers in accordance with the following criteria that, in addition to the performance of payment obligations, factor in the borrower’s projected ability to remain current:

 

 

 

 

Category 1A:

Loans secured with liquid collateral. This category includes loans secured by highly liquid collateral which banks can have access to through the exercise of set-off rights. No provisions are required for this category.

 

 

 

 

Category 1B:

Financial sector borrowers including non-resident banks and other financial institutions, whose payments are not past due and have an international credit score rated between BBB- and BBB.

 

 

 

 

Category 1C:

Borrowers with strong ability to repay their obligations. Payment obligations may not be past due by more than 10 days. In addition, based on the bank’s assessment, the borrower should be expected to remain current on its payment obligations even under extremely adverse scenarios. Provisions of 0.5% are required for this category.

 

 

 

 

Category 2A:

Borrowers with adequate ability to repay their obligations. Payment obligations may not be past due by more than 30 days. In addition, based on the bank’s assessment, the borrower should be expected to remain current on its payment obligations under adverse circumstances. Provisions of 3.0% are required for this category.

 

 

 

 

Category 2B:

Borrowers with potential financial difficulties. Payment obligations may not be past due by more than 60 days. In addition, based on the bank’s assessment, the borrower should be expected to remain current on its payment obligations under somewhat adverse circumstances. Provisions of 7.0% are required for this category.

 

 

 

 

Category 3:

Borrowers with an impaired ability to repay their obligations. Payment obligations may not be past due by more than 120 days. In addition, based on the bank’s assessment, the borrower would have difficulty in repaying its obligations on the original terms under moderately adverse circumstances. Provisions of 20.0% are required for this category.

 

 

 

 

Category 4:

Borrowers with a substantially impaired ability to repay their obligations. Payment obligations may not be past due by more than 180 days. In addition, based on the bank’s assessment, the borrower would have a high probability of defaulting on its future obligations. Provisions of 50.0% are required for this category.

  Category 5: Irrecoverable: Borrowers included in this category have payment obligations past due by more than 180 days and based on the bank’s assessment are unable to repay the loan. Provisions of 100.0% are required.

 

 

 

 

D-46


          Home loans and consumer loans must also be classified and reserved in accordance with the prior classification taking their specific characteristics into consideration.

          Banco Central substantially adheres to the requirements of the Basle Committee on Capital Adequacy of the Bank of International Settlement and, as a general rule, since September 1998 has required ratios of total capital to risk-weighted assets equivalent to 8% in the case of banks, financial cooperatives, financial houses and off-shore banks, and 12% in case of financial cooperatives holding a limited license. Minimum capital requirements must cover credit risk requirements and market risk requirements under the Basle I Capital Amendment.

          In order to mitigate the exposure of Uruguayan banks to the foreign exchange risk created by the denomination of a significant portion of their loan portfolio in U.S. dollars, – impact on the creditworthiness of borrowers that could arise from volatility in foreign exchange rates – loans denominated in foreign currency are given a weight of 125% instead of the normal 100% applied to loans denominated in pesos and significant shifts in the dollar/peso exchange rate should be taken into consideration by the banks in assessing the borrowers’ ability to repay their obligations (and in order to classify the foreign currency-denominated loans in accordance with the categories described above).

          Banco Central requires banks and cooperatives that apply for licenses to have a minimum capital (“responsabilidad patrimonial básica”) in Indexed Units, or UIs, of UIs.130 million. The minimum capital required for financial houses, cooperatives with limited licenses and offshore banks is UIs.91 million, UIs.19.5 million and US$4.5 million respectively. At December 31, 2007, one UI was equal to Ps.1.7338.

          As of December 31, 2007, financial institutions had on average a total capital to risk-weighted assets ratio above the 8% required by Banco Central. Private banks and cooperatives averaged a total capital to risk-weighted assets ratio of approximately 14%, while Banco de la República had a ratio of almost 27%. All financial institutions met their capital to risk-weighted asset ratios throughout 2006, except for Banco Hipotecario.

          Since early 2003, Banco Hipotecario has undergone a process intended to restructure its operations and redefine its sources of funding. Banco Hipotecario will refrain from taking deposits other than pre-saving deposits denominated in local currency with respect to amounts intended to be applied together with the proceeds of a mortgage loan to purchase or build a property. Until the restructuring process is completed, Banco Hipotecario can neither extend new loans, nor take deposits from the general public.

          Due to difficulties in achieving a capital to risk-weighted asset ratio in compliance with the capital adequacy regulations, and as a consequence of a significant run by depositors in January 2006, Banco Central suspended the activities of Uruguay’s largest credit cooperative, focused on retail banking and small businesses, or COFAC, as of February 1, 2006. Depositors were given access to the deposit insurance scheme administered by the Superintendency for the Protection of Bank Savings (SPAB) in March 2006. Banco Bandes Uruguay S.A. a subsidiary of Venezuela’s development bank incorporated as a bank in Uruguay, acquired the assets and remaining deposits of COFAC after its business plan and operations were approved by the Superintendency of Financial Institutions. The plan contemplated a possible need for further capitalization of the new institution, which occurred in January 2007, after the capital adequacy ratio fell below 8.0% in December 2006. As of December 2007, Banco Bandes Uruguay S.A. shows a capital to risk weighted assets ratio of approximately 14%.

          The Uruguayan Banking System

          Commercial banks in Uruguay typically provide full-service banking. Of the 14 private banks operating in Uruguay as of December 31, 2007, nine are Uruguayan corporations (eight of them owned by foreign banks) and five are branches of foreign banks. In accordance with current legislation, the Republic guarantees the deposits of Banco de la República, Banco Hipotecario and of Banco Central, and the performance and payment obligations of Banco de Seguros del Estado. The operations of Banco Hipotecario are being restructured and consequently the services the bank is authorized to provide in respect of extending credit and taking deposits have been limited.

D-47


 

          Nuevo Banco Comercial, which was created by the government with the purpose of acquiring the recoverable assets of three banks that were liquidated in December 2002, is subject to the laws and regulations applicable to private financial institutions, and its deposits are not guaranteed by the Republic. In June 2006, 100% of its common shares (representing 60% of Nuevo Banco Comercial’s equity) were acquired by a group of international investors led by Advent, an investment fund manager.

          Under Uruguayan banking legislation, banks organized in Uruguay are considered national banks even if their capital is held by a foreign bank. Foreign banks may set up branches in Uruguay that enjoy the same operating privileges as banks incorporated in Uruguay. Financial houses, the majority of which are owned by foreign banks, may conduct any type of financial operations except those reserved exclusively to banks, such as accepting demand deposits both from Uruguayan residents and from nonresidents and time deposits from Uruguayan residents. Financial cooperatives are financial institutions organized as cooperatives, which can only provide banking services to their members. There are two kind of licenses granted to financial cooperatives – the first limiting its financial operations to operating predominantly in pesos and imposing a fixed ceiling on the amount of individual loans, and the second having a broader scope and allowing cooperatives to perform the same operations as banks, and as a result of that making them subject to the same regulatory requirements. Following the suspension of COFAC’s operations, there are no cooperatives holding broad banking licenses in Uruguay.

          Banco de la República serves as the government’s commercial bank and also operates as a commercial and development bank for industrial and farming activities. As of December 31, 2007, Banco de la República held approximately 45% of deposits of the private non-financial sector with the financial system (excluding off-shore banks and financial houses). Following the financial crisis of the early 1980s, Banco de la República enhanced its position as the predominant provider of long-term financing and of promotional medium-term loans for industrial and farming activities, as many private banks geared their business toward short-term loans. Certain private banks have extended medium-term loans to corporations and individuals, primarily to purchase goods, and long-term mortgage loans in connection with the purchase of real estate.

          The 2002 Banking Crisis

          Volatility in Argentina at the end of 2001 initially caused an increase in deposits by nonresidents with the Uruguayan banking system. As of December 31, 2001, U.S. dollar deposits in the financial system totaled US$14.2 billion compared to US$12.4 billion as of December 31, 2000. However, Uruguay’s two largest private banks, Banco Comercial and BGU, were affiliated with Argentine banks and experienced an increase in deposit withdrawals in December 2001 and January 2002. Between December 2001 and January 2002, depositors withdrew a total of US$564 million from BGU and Banco Comercial.

          As of December 31, 2001, BGU was the second largest private bank in Uruguay, with assets of approximately US$1.7 billion and deposits of approximately US$1.3 billion. BGU is a subsidiary of Banco de Galicia y Buenos Aires S.A. Its core business consisted of taking deposits from, and making loans to, Argentine persons and companies. The adoption of foreign exchange controls by the Argentine authorities in December 2001 severely limited BGU’s access to liquidity. BGU depleted its liquid assets in January 2002 and did not qualify to receive liquidity assistance from Banco Central. Banco Central took control of BGU on February 13, 2002 and instituted a suspension of its operations. In May 2004, Banco Central revoked BGU’s banking license.

          Banco Comercial was the largest private bank in Uruguay with US$2.0 billion in assets and US$1.3 billion in deposits as of December 31, 2001. Banco Comercial was the Uruguayan private bank with the largest branch network in the country. It provided payment services to numerous Uruguayan entities. Out of total deposits held with Banco Comercial as of December 31, 2001, approximately 25.0% were placed by non-residents. Banco Comercial was also affected by the Argentine crisis and, to an even greater extent, by the implication of a former board member and shareholder in alleged fraudulent activities involving the bank and its Argentine affiliate, Banco General de Negocios, as well as Compañía General de Negocios, a Uruguayan affiliate. On February 28, 2002, Uruguay and Banco Comercial’s three other shareholders (JP Morgan Chase, Credit Suisse First Boston and Dresdner Bank) each contributed US$33 million to the bank in exchange for 25.0% of the bank’s equity and replaced management. Banco Comercial also received US$10 million (net of repayments) in emergency liquidity lines from Banco Central and direct financial support from the Uruguayan government for an additional US$277 million. The capital contributions, together with the financial assistance, allowed Banco Comercial to continue operating during the first seven months of 2002. Banco Comercial lost approximately US$787 million (56.0% of its total deposits held for the non-financial sector) in U.S. dollar-denominated deposits between January 1, 2002 and July 30, 2002, when Banco Central declared a bank holiday and instituted a suspension of Banco Comercial’s operations. See The Banking Sector—Banco Comercial Shareholder Dispute.”

D-48


          The deposit outflow spread through the rest of the financial system in the second quarter of 2002 as the contagion effects of Argentina became clearer. On June 21, 2002, Banco Central took control of Banco Montevideo/La Caja Obrera, Uruguay’s third largest private bank, and removed its management.

          Although the government received approximately US$500 million from the IMF on June 29, 2002, and provided liquidity assistance to the local banks, confidence in the Uruguayan financial system continued to erode. Between June 1 and July 30, 2002, total deposits in the financial system decreased by US$2,206 million. On July 30, 2002, after a sharp decrease in Banco Central’s international reserve assets to approximately US$650 million, the government declared a bank holiday (which ultimately continued for four business days).

          The Uruguayan authorities sought the financial assistance of the IMF, the World Bank and the IADB for a program that would safeguard Uruguay’s payment and financial system without unnecessarily channeling additional resources to support financial institutions that had become insolvent. The cornerstone of Uruguay’s program consisted of providing the liquidity needed by the two state-owned banks (Banco de la República and Banco Hipotecario) and the three banks under the control of Banco Central at the time (Banco Comercial, Banco Montevideo/La Caja Obrera and Banco de Crédito) to honor sight deposits existing as of July 30, 2002. The IMF program also contemplated a mandatory rescheduling of U.S. dollar-denominated time deposits held with Banco de la República and Banco Hipotecario and the suspension of the activities of Banco Comercial, Banco Montevideo/La Caja Obrera and Banco de Crédito.

          On August 4, 2002, Congress passed Law 17,523, known as the Law for the Strengthening of the Financial System. The law (i) provided for the establishment of a fund for the stability of the Uruguayan banking system, the FESB, (ii) extended the maturities of all U.S. dollar-denominated time deposits held with Banco de la República and Banco Hipotecario to three years, (iii) transferred foreign currency-denominated liabilities of Banco Hipotecario to Banco de la República, and (iv) facilitated the liquidation of insolvent banks.

          On August 4, 2002, Uruguay gained access to US$1,372 million of additional assistance from the IMF, the World Bank and the IADB. The proceeds of this financing were contributed by the government to the FESB, thereby providing the liquidity needed by Banco de la República, Banco Hipotecario, Banco Comercial, Banco Montevideo/La Caja Obrera and Banco de Crédito to honor sight deposits existing as of July 30, 2002 and thereby prevent a meltdown of Uruguay’s payment system.

          On December 27, 2002, Congress enacted an amendment to the banking law (Law 17,613) aimed at strengthening the banking system. The law imposed reporting obligations on bank employees that acquire knowledge of irregularities, authorized the Superintendency of Financial Institutions to impose fines on the state-owned banks, and created a public register for bank shareholders. The law also provided the basis for the liquidation of the four private banks whose operations were discontinued in connection with the bank holiday declared on July 30, 2002 and the creation of a new financial institution with the portfolio of recoverable assets previously owned by the liquidated banks, expanded the powers of Banco Central in connection with the liquidation of financial institutions and the application of prudential regulations to state-owned banks, and mandated a deposit insurance program (which was implemented in March 2005). Following the adoption of the law, the government completed the reorganization of the discontinued banks into a new commercial bank, Nuevo Banco Comercial. Nuevo Banco Comercial, which was set up as a private bank, although its capital was initially owned by the government, acquired the recoverable assets of three of the liquidated banks (Banco Comercial, Banco Montevideo and La Caja Obrera), assumed certain deposits and commenced its operations in March 2003. The non-recoverable assets of the three liquidated banks are held by liquidation funds, which were initially managed by Banco Central and were subsequently transferred to a private asset management company following a public bidding process. Deposits of the liquidated banks that were not assumed by Nuevo Banco Comercial entitle depositors to a pro rata share of the assets held by the corresponding liquidation fund.

D-49


          During the 2002 crisis, with the exception of BGU and Banco Comercial, foreign-owned banks in Uruguay funded deposit outflows from their own resources.

          The share of non-performing loans (NPLs) on total loans issued to the non-financial sector increased during the 2002 crisis. For all active private institutions excluding offshore banks, NPLs increased from 5.0% to 16.0% on a net basis (from 10.0% to 25.0% on a gross basis) from December 2001 to December 2002. The deterioration of the loan portfolio can be attributed to the deepening of the recession and the devaluation of the peso. Devaluation affected the ability of local borrowers that did not have access to foreign exchange revenues to pay back their debts, which were mostly denominated in dollars. The increase of non-performing loans also, however, reflected the effect of the dramatic reduction of the stock of credit, from US$3.2 billion in December 2001 to US$2.0 billion in December 2002. In order to fund the deposit outflow, most banks ceased extending loans, thereby contributing to the increase in the share of NPLs.

          Banco Central took measures to improve the soundness of the banking system, raising the minimum capital required to hold a license to operate as a financial intermediary institution (“responsabilidad patrimonial básica”) and also issuing instructions to banks requiring that the value of any collateral be reappraised after July 30, 2002 so as to factor into such valuation the impact of the devaluation of the peso.

          Uruguay’s Banking System Following the 2002 Crisis

          During 2003 Uruguay’s banking system gradually recovered stability. While a gradual recovery of deposits by the banking system noted during the last quarter of 2002 was suddenly reversed with the withdrawal of approximately US$353 million of deposits between January 30 and February 7, 2003, beginning in March 2003, the level of deposits by the non-financial private sector started to increase. By December 2003 such deposits had reached US$7.6 billion (excluding deposits held with off-shore banks and financial houses). The successful reprofiling of the government’s foreign currency-denominated debt in June 2003 assisted in reducing the uncertainties and volatility that had affected Uruguay’s banking system since the end of 2001.

          On February 28, 2003, Banco Central decided to liquidate Banco de Crédito, whose operations were suspended in August 2002. The decision was adopted after attempts to reach an agreement to transfer control to the minority shareholder failed. Banco Central had conditioned the transfer of control on a significant capital contribution and a strict business plan.

          The government also implemented certain structural reforms affecting state-owned banks. Following the transfer of all deposits to Banco de la República during the last quarter of 2002, the government streamlined the operations of Banco Hipotecario and limited its license to receive deposits. In December 2003, Banco de la República transferred a portion of its loan portfolio, comprised mainly of past due loans, to a financial trust. A special vehicle was established to administer the transferred loans under the terms of the arrangements setting up the financial trust, Banco de la República was entitled to receive proceeds arising from recoveries under the transferred the loans in accordance with a pre-set cash flow schedule. The government guaranteed the recovery rate contemplated in the trust agreement and agreed to cover any deficit if the recovery rate were not realized. This transfer improved Banco de la República’s percentage of NPLs to 0.7% in December 2007. The guarantee was never executed and it was released in December 2006 as the bank achieved better than expected cash flows from the recoveries.

          At December 31, 2004, the non-financial private sector’s deposits held with the banking system (excluding deposits held with off shore banks and financial houses), of which 89.5% were denominated in foreign currencies, stood at US$8.2 billion. Approximately 54.3% of those deposits were held with Banco de la República, Banco Hipotecario and Nuevo Banco Comercial. The improved liquidity of the financial institutions also extended to Banco de la República, which was able to commence the repayment of the deposits whose maturity had been extended in August 2002 on an accelerated basis.

D-50


          As inflation rates dropped and the peso appreciated, interest rates declined, but this did not result in an immediate expansion of bank credit. See “Monetary Policy and Inflation.”

          The weighted average interest rate for term deposits denominated in U.S. dollars has increased in the last two years from about 1.3% in 2005 to 2.5% in 2007. Sight deposits, which accounted on average for 70% of total deposits, paid minimal interest in case of current accounts denominated in U.S. dollars and rates below 0.5% for savings accounts denominated in U.S. dollars. During the same period, real interest rates for deposits denominated in pesos (nominal rate minus inflation) remained negative.

          Deposits during 2005 were largely denominated in foreign currencies, primarily U.S. dollars. In March 2005, the government established a deposit insurance regime to protect holders of U.S. dollar-denominated deposits of up to US$5,000 and peso-denominated deposits of up to the current equivalent of US$15,000 coverage in the event of a liquidation of the bank where such deposits are held. The government provided initial support for this regime through a US$60 million loan, which is expected to be replaced over time by insurance premiums required to be paid by the financial institutions on account of deposits taken.

          In the first quarter of 2005 Banco de la República completed the repayment of time deposits whose maturity was extended in August 2002 as part of the solution of the banking crisis. Since 2004, when Banco de la República commenced the repayment of these deposits, amounts exceeding 90.0% of the deposits repaid have been voluntarily deposited with Banco de la República. During 2005, the financial trust created in 2003 to manage the majority of past due loans of the bank has honored the pre-set payments and the government guarantee did not need to be called upon.

          During 2005, the non-financial private sector’s deposits with the banking system and solvency ratios increased and the share of NPLs on total loans, decreased. Deposits (including deposits in off-shore banks) increased by US$222 million in 2005, to a total of US$9,377 million as of December 31, 2005. Despite the increase in deposits, credit extended to the non-financial sector remained relatively stable during 2005. Solvency ratios of the banking system on average remained above the 10.0% total capital to risk-weighted asset ratio required by Banco Central and 6.4% above the level at December 31, 2004. At December 31, 2005, the regulatory capital of private banks (including Nuevo Banco Comercial) was 2.2 times above the minimum regulatory requirement, while capital of the Banco de la República was at 2.1 times the minimum requirement. Finally, the share of NPLs on total loans (based on payment delinquencies) of private banks (including Nuevo Banco Comercial) decreased from 7.6% in December 2004 to 3.6% in December 2005, while it remained within a range of 7.0% and 8.0% in 2005 for Banco de la República.

          In March 2005, the operations of COFAC were suspended by Banco Central when it became apparent that its capitalization was insufficient to support its continued operations. After a US$39 million increase in COFAC’s equity (resulting primarily from the capitalization of certain creditors’ deposits), the rescheduling of a portion of the time deposits held at COFAC, the amendment of their corporate governance rules and the approval of a plan to reduce costs by 30%, the Uruguayan bank supervisory authority allowed COFAC to resume its operations. On February 1, 2006, Banco Central suspended COFAC’S activities for a second time following a run on its deposits that resulted from a loss of confidence of its clients. COFAC also failed to meet the conditions imposed by Uruguayan bank regulators in March 2005, which included maintaining its net worth over the minimum capital requirements established by prudential regulation and reducing its operational deficit when COFAC confronted a liquidity crisis. On March 9, 2006, for the first time since it was established in 2005, the SPAB began honoring insurance claims for deposits made with COFAC covering substantially all eligible deposits within a period of two months for an amount totaling nearly US$50 million. After the analysis of a business plan submitted by the Venezuelan government-owned development bank – BANDES – in connection with an application made for a license to operate as a bank in Uruguay, the authorized new institution, Bandes Uruguay S.A., purchased most of COFAC’s assets and remaining deposits. Bandes Venezuela discharged all amounts COFAC owed the SPAB.

          During 2006, the non-financial private sector deposits with the banking system increased, solvency ratios increased and the share NPLs on total loans, decreased. Deposits (including deposits in off-shore banks) increased by US$845 million to a total of US$10,222 million as of December 31, 2006. Credit extended to the non-financial sector recovered substantially in 2006, increasing by US$545 million to a total of US$4,606 million. Solvency ratios of the banking system on average remained over the 8% total capital to risk weighted assets ratio and at a level similar to that of December 2005. At December 31, 2006, the regulatory capital of the banking system (excluding Banco Hipotecario) was 2.1 times above the minimum regulatory requirement. Finally, the share of NPLs on total loans (based on payment delinquencies) of private banks fluctuated between 3.6% and 4.3% in 2006 and decreased from 8.0% in 2005 to 2.9% in 2006 for Banco de la República.

D-51


          In 2007, deposits of the non-financial sector in the financial system grew by US$1,290 million, representing a nearly 13% increase over the previous year, up to US$11,510 million (approximately 79% denominated in U.S. dollars). Regulatory capital as of December 31, 2007, represented 18% of risk-weighted assets (excluding Banco Hipotecario del Uruguay). The share of NPLs on total loans (based on payment delinquencies) of private banks declined from 3.6% as of December 31, 2006, to 1.1%. During 2007, bank credit to enterprises and individuals increased to approximately 26% of Uruguay’s GDP.

          The authorities continue to monitor the overall condition of the banking sector closely with a view to taking early action on a case-by-case basis and correcting any trend that could adversely affect the banking system as a whole.

          The following tables set forth classifications of loan assets of the Uruguayan banking system as of December 31, 2007.

Classification of Aggregate Assets of the Uruguayan Banking System(1)
(as of November 30, 2007 in millions of Uruguayan pesos)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1A

 

1B

 

1C

 

2A

 

2B

 

3

 

4

 

5

 

Total

 

 

 


 


 


 


 


 


 


 


 


 

Banco de la República

 

 

56,300

 

 

9

 

 

21,580

 

 

3,558

 

 

3,172

 

 

3,888

 

 

1,615

 

 

1,299

 

 

91,421

 

Privately owned banks

 

 

53,896

 

 

176

 

 

50,390

 

 

9,192

 

 

9,403

 

 

4,246

 

 

4,131

 

 

1,445

 

 

132,879

 

Financial houses

 

 

1,480

 

 

28

 

 

1,010

 

 

131

 

 

293

 

 

121

 

 

93

 

 

6

 

 

3,163

 

Off-shore banks

 

 

3,536

 

 

399

 

 

924

 

 

766

 

 

0

 

 

0

 

 

0

 

 

1

 

 

5,626

 

Cooperatives

 

 

121

 

 

0

 

 

338

 

 

44

 

 

48

 

 

62

 

 

16

 

 

56

 

 

684

 

 

 



 



 



 



 



 



 



 



 



 

Total

 

 

115,333

 

 

611

 

 

74,243

 

 

13,691

 

 

12,916

 

 

8,317

 

 

5,855

 

 

2,806

 

 

233,772

 

 

 



 



 



 



 



 



 



 



 



 

Percentage

 

 

49.3

 

 

0.3

 

 

31.8

 

 

5.9

 

 

5.5

 

 

3.6

 

 

2.5

 

 

1.2

 

 

100.0

 

 

 



 



 



 



 



 



 



 



 



 


 

 


(1)

Classification based on credit risk analysis. Gross credit and contingent risks to the financial and non-financial sector.

 

 

Source: Banco Central.

Credit Classification of the Banking System(1)
(Based on payment behavior of clients)
(as of December 31, 2006)

 

 

 

 

 

 

 

 

Institution Type

 

Performing
Loans

 

Non Performing
Loans

 


 


 


 

Banco de la República

 

 

 

99.3

%

 

 

 

0.7

%

 

Banco Hipotecario del Uruguay

 

 

 

36.9

%

 

 

 

63.1

%

 

Private banks

 

 

 

99.6

%

 

 

 

0.4

%

 

Cooperatives

 

 

 

95.8

%

 

 

 

4.2

%

 

Financial houses

 

 

 

100.0

%

 

 

 

0.0

%

 

Off-shore banks

 

 

 

100.0

%

 

 

 

0.0

%

 

Total

 

 

 

90.9

%

 

 

 

9.1

%

 


 

 


(1)

Loans to both financial and non-financial sector, net of provisions.

 

 

Source: Banco Central.

D-52


Total Provisions of the Banking System For
Gross Non-Performing Loans(1)
(as of December 31, 2007)

 

 

 

 

 

Institution Type

 

Provisions

 


 


 

Banco de la República

 

1,094

%

 

Banco Hipotecario del Uruguay

 

49

%

 

Private banks

 

350

%

 

Cooperatives

 

141

%

 

Financial Houses

 

1,678

%

 

Total

 

103

%

 


 

 


(1)

Total provisions as a percentage of gross non-performing loans to financial and non-financial sector.

Source: Banco Central.

          In 2003, the authorities introduced special liquid asset requirements with respect to deposits by non-residents to mitigate risks that could arise if runs on such deposits comparable to those observed during the 2002 crisis recurred.

          The following table shows the number of financial institutions and percentage of loans and deposits corresponding to each category.

The Uruguayan Financial System
(as of December 31)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

 

 


 


 


 


 


 


 

 

 

(Number)

 

(Number)

 

(Number)

 

(Number)

 

(Number)

 

(Number)

 

(Loans)(3)

 

(Deposits)(4)

 

Financial Institutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State-owned(1)

 

 

2

 

 

3

 

 

3

 

 

3

 

 

2

 

 

2

 

 

43.6

%

 

42.4

%

Privately-owned(2)

 

 

31

 

 

26

 

 

24

 

 

24

 

 

25

 

 

25

 

 

56.1

%

 

57.5

%

Cooperatives(5)

 

 

5

 

 

4

 

 

4

 

 

3

 

 

2

 

 

2

 

 

0.3

%

 

0.1

%

 

 



 



 



 



 



 



 



 



 

Total

 

 

38

 

 

33

 

 

31

 

 

30

 

 

29

 

 

29

 

 

100.0

%

 

100.0

%

 

 



 



 



 



 



 



 



 



 


 

 


Data as of December 31, unless otherwise indicated.

 

(1)

Banco de la República, Banco Hipotecario and Nuevo Banco Comercial until 2005.

(2)

At December 31, 2007, includes 14 banks, 6 financial houses and 5 offshore agencies (IFEs).

(3)

Loans to non-financial sector, net of provisions.

(4)

Non-financial private sector deposits.

(5)

COFAC represented more than 90% of credits and deposits of this category.

Source: Banco Central.

          The following table shows the bank credit provided to the private sector by Uruguay’s financial system for the periods shown.

D-53


Bank Credit to the Private Sector
(% of total credit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco Central

 

Private
Commercial Banks(1)

 

Banco de la
República

 

 

 


 


 


 

 

 

Pesos

 

Foreign
Currency

 

Pesos

 

Foreign
Currency

 

Pesos

 

Foreign
Currency

 

 

 


 


 


 


 


 


 

2003

 

1.2

 

0.3

 

  4.2

 

51.7

 

  4.1

 

38.6

 

2004

 

1.3

 

0.3

 

  6.0

 

44.8

 

  7.2

 

40.4

 

2005

 

1.4

 

0.3

 

  7.0

 

44.5

 

  9.0

 

36.4

 

2006

 

1.4

 

0.2

 

10.2

 

54.0

 

13.9

 

20.3

 

2007

 

1.3

 

1.1

 

12.3

 

54.5

 

14.7

 

16.1

 


 

 


Data as of December 31, 2007 unless otherwise indicated.

 

(1)

Includes private banks, financial houses and cooperatives of financial intermediation.

Source: Banco Central.

          Since the early 1980’s, the majority of bank credit provided in Uruguay has been denominated in foreign currency, principally in U.S. dollars. At December 31, 2007, the amount of credit denominated in foreign currencies represented 72% of total credit to the non-financial private sector.

          The Uruguayan financial sector also includes five domestic and 11 foreign insurance companies (including the state-owned insurance company). Insurance companies are regulated on a variety of matters by Law 16,426, dated October 14, 1993, Decree 354/94, dated August 17, 1994, and several circulars issued by the Superintendencia de Seguros y Reaseguros of the Banco Central.

          Banco Comercial Shareholder Dispute

          JP Morgan Chase (through a subsidiary), Credit Suisse First Boston and Dresdner Bank (through a subsidiary), the three former shareholders of Banco Comercial, brought a suit before an arbitration panel alleging that Uruguay failed to comply with certain obligations assumed by the Republic in connection with the February 2002 agreement relating to the capitalization of Banco Comercial and claimed US$100 million plus certain ancillary expenses. In December 2004, the arbitration panel ruled in favor of the former shareholders and, in January 2005, the former shareholders petitioned the United States Court for the Southern District of New York to confirm the arbitration award. On March 25, 2005, the District Court confirmed the arbitral award as well as interest and litigation expenses. Uruguay’s subsequent request to stay the court’s decision was denied. In April 2005, Uruguay filed an appeal with the United States Court of Appeals for the Second Circuit seeking reversal of the judgment confirming the arbitration award. The Court of Appeals rejected Uruguay’s appeal. It noted, however, that since the judgment issued by the District Court did not direct present payment, the conflict claimed by Uruguay with an attachment order issued against the former shareholders by an Uruguayan court did not exist at that time. Concurrently, litigation is pending in a Uruguayan court against the recipients of the arbitral award and, in connection with that action, the proceeds of any payment by Uruguay of the arbitral award have been attached by the parties bringing that Uruguayan legal action.

          In addition, in 2005, Uruguay filed a summons with notice in the United States against the three former shareholders and three former directors of Banco Comercial alleging intentional misconduct in the administration of Banco Comercial. In response, the defendants initiated arbitration before the ICC, based on the terms of a February 2002 agreement and asserting that Uruguay had violated the terms of such agreement in several respects. In addition, the banks and former directors successfully moved to have the proceeding in the United States stayed in favor of resolving all claims in arbitration. As a result, Uruguay’s claim for intentional misconduct was introduced as a counter claim in the arbitration in 2006. On May 7, 2008, the arbitral tribunal issued its award rejecting the claims of both parties practically in all respects, and considering that the Republic’s defense and counterclaim were not frivolous and that there were reasonable grounds to have introduced the counterclaim, only imposing on Uruguay the obligation to pay two-thirds of the expenses incurred by the banks and former directors.

D-54


SECURITIES MARKETS

          Until 1994, the Montevideo Stock Exchange was the only stock exchange in Uruguay. The share of total trading volume in the Montevideo Stock Exchange represented by non-governmental securities has been stable during the last few years.

          In September 1994, an Electronic Stock Exchange was established for use exclusively by banks and other financial institutions. Foreign exchange transactions and certificates of deposit account for substantially all of the total amount traded in the Electronic Stock Exchange. The aggregate securities trading volume on both exchanges reached US$2,537 million in 1998, representing approximately 12.0% of GDP. The aggregate securities trading volume on both exchanges decreased from US$2,771 million as of December 31, 2002 to US$1,348 million as of December 31, 2003. In 2004 and 2005, this trend was reversed and, as of December 31, 2004 and 2005, the aggregate securities trading volume on both exchanges increased to US$2,106 million and US$2,481 million, respectively. In 2006 and 2007, the volume of securities traded continued to rise, reaching US$7,597 million and US$9,979 million, respectively, but continues to be largely concentrated in debt securities, especially certificates of deposit.

Consolidated Montevideo Stock Exchange &
Electronic Stock Exchange Securities Trading Volume

(in millions of US$)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007(1)

 

 

 


 


 


 


 


 


 

Private sector securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

US$

0

 

US$

1

 

US$

1

 

US$

1

 

US$

2

 

US$

2

 

Bonds

 

 

71

 

 

11

 

 

23

 

 

17

 

 

23

 

 

143

 

Certificates of deposit and other

 

 

1,640

 

 

414

 

 

792

 

 

1,150

 

 

6,555

 

 

8,693

 

 

 



 



 



 



 



 



 

Total private sector securities(1)

 

 

1,711

 

 

426

 

 

816

 

 

1,168

 

 

6,580

 

 

8,837

 

 

 



 



 



 



 



 



 

Public sector securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Central Government

 

 

1,052

 

 

911

 

 

1,254

 

 

1,303

 

 

1,014

 

 

1,138

 

Public enterprises

 

 

7

 

 

11

 

 

36

 

 

10

 

 

4

 

 

4

 

 

 



 



 



 



 



 



 

Total public sector securities(2)

 

 

1,059

 

 

922

 

 

1,290

 

 

1,313

 

 

1,018

 

 

1,142

 

 

 



 



 



 



 



 



 

Total

 

US$

2,771

 

US$

1,348

 

US$

2,106

 

US$

2,481

 

US$

7,597

 

US$ 

9,979