EX-99.1 2 ex99-d.htm

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Exhibit 99.D

 

Description of
República Oriental del Uruguay
August 24, 2015

 

D-1
 

 

TABLE OF CONTENTS

 

  PAGE
   
Recent Developments D-3
Introduction D-7
Summary D-8
República Oriental Del Uruguay D-9
The Economy D-14
Gross Domestic Product and Structure of the Economy D-20
Foreign Merchandise Trade D-33
Foreign Trade on Services D-37
Balance of Payments D-39
Monetary Policy and Inflation D-43
The Banking Sector D-48
Securities Markets D-58
Public Sector Finances D-59
Fiscal Policy D-63
Public Sector Debt D-66
Tables and Supplemental Information D-77

 

D-2
 

 

RECENT DEVELOPMENTS

 

The information contained in this section supplements the information about Uruguay corresponding to the headings below that are contained in this Exhibit 99.D to Uruguay’s annual report on Form 18-K, for the fiscal year ended December 31, 2014.

 

Gross Domestic Product and Structure of the Economy

 

The following table sets forth the components of Uruguay’s GDP and their respective growth rates for the periods indicated.

 

Change in Gross Domestic Product by Expenditure
(% change from previous period, except as otherwise indicated, 2005 prices)

 

    January/March
2014/2015(1)(2)
Government consumption     2.1%
Private consumption     3.0  
Gross fixed investment     2.1  
Public sector (% of gross fixed investment)     6.0  
Private sector (% of gross fixed investment)     2.2  
Exports of goods and services     5.0  
Imports of goods and services     0.8  

__________________

(1) Preliminary data.

(2) January 1- March 31, 2015 compared to January 1- March 31, 2014.

Source: Banco Central.

 

Principal Sectors of the Economy

 

The following table sets forth information regarding changes in GDP by expenditure for the periods indicated.

 

Change in Gross Domestic Product by Sector
(% change from previous period, except as otherwise indicated, 2005 prices)

 

   January/March
2014/2015(1)(2)
Primary activities    3.4%
Manufacturing    11.3 
Electricity, gas and water    18.1 
Construction    (2.6)
Commerce, restaurants and hotels    1.2 
Transportation, storage and communications    6.1 
Other services(3) (4) (5)    1.1 
Total GDP    4.0 

__________________

(1) Preliminary data.
(2) January 1-March 31, 2015 compared to January 1-March 31, 2014.

(3) Data includes mining.

(4) Includes public sector services and other services.

(5) Data for the periods January/March 2014/2015 includes real estate, business, financial and insurance services.

Source: Banco Central.

 

Growth in the electricity, gas and water sector (18.1% in the first quarter of 2015 compared to the same period of 2014) was mainly as a result of hydraulic energy generation. Growth in the manufacturing sector (11.3% in the first quarter of 2015 compared to the same period in 2014) was mainly driven by the expansion of the paper pulp sector. The construction sector, on the other hand, contracted by 2.6% in the first quarter of 2015, primarily as a result of a decrease in public and private sector investment, in particular due to the completion of the construction of the “Montes del Plata” paper pulp mill in Colonia.

 

D-3
 

 

Uruguay’s GDP increased by 4% during the first quarter of 2015 compared to the same period in 2014. Growth in the first quarter of 2015 was mainly driven by improved levels of activity in several sectors of the economy, in particular the electricity, gas and water sector and the manufacturing sector.

 

Employment, Labor and Wages

 

Employment

 

Estimates of the National Statistics Institute indicate that the average nationwide unemployment rate stood at 7.4% in May 2015, compared to 6.8% in May 2014, while the average nationwide employment rate decreased to 58.7% in May 2015, compared to 60.5% in May 2014.

 

Wages

 

For the 12-month period ended May 31, 2015, average real wages increased by 2.5% compared to 2.4% for the 12-month period ended May 31, 2014. During this period, public sector real wages increased by 1.1%, while average private sector real wages increased by 3.2%.

 

FOREIGN MERCHANDISE TRADE

 

Merchandise exports for the 12-month period ended May 31, 2015 totaled US$8.9 billion, compared to US$9.3 billion for the same period in 2014. Merchandise imports totaled US$10.7 billion for the 12-month period ended May 31, 2015, compared to US$11.9 billion for the 12-month period ended May 31, 2014.

 

Merchandise trade for the 12-month period ended May 31, 2015 recorded a deficit of US$1.8 billion, compared to a deficit of US$2.6 billion for the 12-month period ended May 31, 2014.

 

BALANCE OF PAYMENTS

 

In the 12-month period ended March 31, 2015, Uruguay’s balance of payments registered a surplus of US$2.3 billion, compared to a surplus of US$3.2 billion for the 12-month period ended March 31, 2014.

 

Current Account

 

Uruguay’s current account for the 12-month period ended March 31, 2015 recorded a deficit of US$2.1 billion, compared to a deficit of US$3.2 billion for the 12-month period ended March 31, 2014.

 

The decrease in the current account deficit was mainly attributable to a decrease in exports, which decreased by US$78 million over the 12-month period ended May 31, 2015, at a pace slower than imports, which decreased by US$1.2 billion during the same period (primarily as a result of the decrease in international oil prices). Also, in the 12-month period ended May 31, 2015, capital outflows on account of interest and dividend payments totaled US$1.9 billion, similar to such payments for the 12-month period ended May 31, 2014.

 

Capital and Financial Account

 

Uruguay’s capital and financial account recorded a surplus of US$5.9 billion for the 12-month period ended May 31, 2015, compared to a US$5.6 billion surplus for the 12-month period ended May 31, 2014.

 

Portfolio investment totaled US$2.5 billion for the 12-month period ended May 31, 2015, compared to US$1.9 billion for the 12-month period ended May 31, 2014. Foreign direct investment decreased to US$2.4 billion for the 12-month period ended May 31, 2015 compared to the US$2.9 billion for the 12-month period ended May 31, 2014. 

 

D-4
 

 

MONETARY POLICY AND INFLATION

 

Monetary Policy

 

During 2015, Banco Central achieved its intermediate monetary policy in the second quarter of 2015. Aggregate M1’ increased 8.5% in the second quarter of 2015 compared to the same period in 2014, within the target range set by Banco Central of 7% - 9% for the second quarter of 2015. In July, Banco Central set the target increase range for the M1’ monetary aggregates for the third quarter of 2015 at 7% - 9%.

 

Inflation

 

The following table shows changes in consumer prices (CPI) and wholesale prices (WPI) for the periods indicated.

 

   Percentage Change from
Previous Year at Period End
   Consumer
Prices
  Wholesale
Prices
For the 12 months ended July 31, 2015    9.0%    7.0%

__________________

Source: National Institute of Statistics.

 

The 12-month rolling consumer price inflation rate reached 9.0% in July 2015. For the 12-month period ended July 31, 2015, wholesale prices showed an increase of 7.0%.

 

Foreign Exchange

 

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
For the 12 months ended July 31, 2015     28.507    23.271    25.174    28.478 
                         

(1) Daily interbank end-of-day bid rates.

Source: Banco Central.

 

FISCAL POLICY

 

The government intends to submit the five-year budget for the period 2015-2019 to Congress by August 31, 2015. In June 2015, the government announced the main guidelines for the new budget, which will take into account macroeconomic developments in the region and be based on the sustainability of public finances, macroeconomic stability, economic growth and the need to advance certain social policies. Subject to congressional debate and approval of the bill to be submitted by government, President Vazquez is expected to sign into law the 2015-2019 budget by December 2015.

 

D-5
 

 

The government’s bill contemplates a reduction of the consolidated public sector deficit from 3.5% of GDP in 2014 to 2.5% of GDP in 2019. The budget also contemplates an increase in the public sector primary balance from (0.6%) of GDP in 2014 to 1.0% of GDP in 2019. The government seeks to earmark increased revenues for expanded infrastructure investments and social expenditures. In addition, in July 2015, President Vázquez, announced an infrastructure plan involving investments of US$12.3 billion over the next five years to sustain long-term growth. The infrastructure plan contemplates that slightly more than one third of the investment will be financed with private sector resources.

 

In anticipation of the submission of the 2015-2019 budget bill to Congress, labor unions expressed opposition to measures likely to reduce real wages and staged a general strike on August 5, 2015, which was honored mainly by government and bank employees.

 

PUBLIC SECTOR DEBT

 

Domestic Debt

 

Since December 31, 2014 and as of June 30, 2015, the central government issued treasury notes denominated in nominal pesos and linked to the CPI for an aggregate principal amount equivalent to US$224 million.

 

In addition, during July 2015, the central government issued and offered bonds denominated in pesos and in pesos linked to UI in the domestic market for an aggregate principal amount equivalent to US$960 million. Investors paid for an aggregate principal amount equivalent to US$955 million of such bonds by tendering short term securities of Banco Central and central government.

 

External Debt

 

The following table sets forth the total public external debt, net of international reserve assets and certain other assets of Banco Central, as of the date indicated.

 

Total Public External Debt, Net of International Reserve Assets
(in millions of US$)

 

   As of March 31,
2015
(1)
Total gross public external debt   US$19,315 
Less external assets:   19,498 
Non-financial public sector(2)    98 
Banco Central    19,400 
Of which:     
Banco Central international reserve assets(3)    18,584 
Other assets    816 
Total public external debt, net of assets   US$(183)

__________________

(1) Preliminary data.

(2) Commencing in 2014, based on information provided by ANCAP, Banco Central has excluded equity interests held by ANCAP in other entities from this item.

(3) Gold valued for each period at London market prices at end of period. 

Source: Banco Central.

 

Total Debt

 

The gross public debt totaled US$34.1 billion as of March 31, 2015, compared to US$33.6 billion as of December 31, 2014.

 

As of March 31, 2015, 46% of the total gross public debt was denominated in foreign currencies and 54% in Uruguayan pesos, compared to 44 % and 56 %, respectively, as of December 31, 2014.

 

D-6
 

 

INTRODUCTION

 

All references in this document to the “government” are to the government of the República Oriental del Uruguay (“Uruguay” or the “Republic”) 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 2005 prices (in accordance with the Integral Revision of the National Accounts published by Banco Central del Uruguay (“Banco Central”) in March 2009) 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 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 latest 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, euros 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 2010, 2011, 2012, 2013, 2014 and 2015 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.

 

Historically, deposits of the non-financial public sector held with Uruguay’s banking system were deducted from Uruguay’s gross public sector debt. According to the methodology adopted by the government in March 2013, deposits of the non-financial public sector held with Uruguay’s banking system are not deducted from Uruguay’s gross public sector debt and are recorded as non-financial public sector assets. Data for previous years has been restated following this methodology.

 

D-7
 

 

SUMMARY

  

   2010(1)  2011(1)  2012(1)  2013(1)  2014(1)
   (in millions of US$, except as otherwise indicated)
THE ECONOMY               
GDP (in millions of US$ at nominal prices)(2)   US$ 40,302   US$47,989   US$51,393   US$57,571   US$57,569 
Real GDP (in thousands of constant 2005 pesos)(2)   Ps. 567,742   Ps.597,050   Ps.616,890   Ps.648,354   Ps.671,036 
% change from prior year    7.8%   5.2%   3.3%   5.1%   3.5%
Consumer price index or CPI (annual rate of change)    9.2%   5.9%   6.9%   8.6%   7.5%
Wholesale price index or WPI (annual rate of change)    6.4%   10.5%   8.4%   11.1%   5.9%
Unemployment rate (annual average)(3)    7.2%   6.3%   6.5%   6.5%   6.6%
Balance of payments(4)                         
Trade balance (merchandise)    (527)   (1,431)   (2,361)   (1,352)   (918)
Current account    (731)   (1,374)   (2,691)   (2,924)   (2,623)
Capital and financial account net    1,057    4,190    6,289    4,606    3,832 
Errors and omissions(5)    (687)   (252)   (308)   1,263    152 
Overall balance of payments excluding impact of gold valuation adjustment    (361)   2,564    3,287    2,945    1,360 
Change in Banco Central international
reserve assets (period end)
   361    (2,564)   (3,287)   (2,945)   (1,360)
Banco Central international reserve assets (period end)(6)    7,656(7)   10,302(8)   13,605(9)   16,290 (10)   17,555(11)
                          
PUBLIC FINANCE                         
Non-Financial Public Sector Revenues    11,732    13,481    14,200    16,948    16,669 
Non-Financial Public Sector Primary Expenditures    11,075    12,648    14,319    16,735    16,869 
Public Sector Primary Balance    756    923    (82)   222    (354)
Public Sector Overall Balance (surplus/(deficit))    (430)   (434)   (1,380)   (1,335)   (1,984)
                          
PUBLIC DEBT                         
Consolidated public sector debt                         
Debt with non-residents(12)    12,822    14,055    16,245    17,558    18,482 
Debt with residents    11,060    12,985    14,893    15,542    15,106 
Total    23,882    27,040    31,138    33,099    33,588 
As a % of GDP    61.5%   57.2%   60.5%   57.5%   58.4%
                          
Consolidated public sector debt service                         
Amortizations    926    1,946    1,896    3,211    2,698 
Interest payments    592    638    573    650    726 
Total    1,519    2,584    2,469    3,861    3,424 
As a % of exports of goods and services    13.1%   20.1%   18.4%   28.3%   25.2%

_________________________

(1)Preliminary data.

(2)Figures are not adjusted by purchasing power.

(3)Unemployment population as percentage of the labor force.

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

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

(6)As presented in this chart, gold reserves have been valued at their corresponding market prices as of December 31, 2010, 2011, 2012, 2013 and 2014.

(7)This amount includes US$1,590 million of reserves and voluntary deposits of the Uruguayan banking system with Banco Central, including US$792 million of Banco de la República and other public sector financial institutions.

(8)This amount includes US$2,350 million of reserves and voluntary deposits of the Uruguayan banking system with Banco Central, including US$1,108 million of Banco de la República and other public sector financial institutions.

(9)This amount includes US$3,969 million of reserves and voluntary deposits of the Uruguayan banking system with Banco Central, including US$1,642 million of Banco de la República and other public sector financial institutions.

(10)This amount includes US$5,299 million of reserves and voluntary deposits of the Uruguayan banking system with Banco Central, including US$2,184 million of Banco de la República and other public sector financial institutions.

(11)This amount includes US$6,768 million of reserves and voluntary deposits of the Uruguayan banking system with Banco Central, including US$ 2,771 million of public sector financial institutions.

(12)Excludes interest on non-resident banking deposits.

 

Source: Banco Central

 

D-8
 

 

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.

 

According to the 2011 national census, Uruguay’s population of approximately 3.3 million is primarily of European origin and has a literacy rate above 98%. Approximately 95% of the population lives in urban areas and about 40% of the population resides in the Montevideo metropolitan area. The population growth rate averaged 0.2% per year for the period from 1985 to 2011, and is the lowest in South America. Uruguay is generally considered a middle-income developing country. The following table sets forth comparative gross national income (“GNI”) figures and selected other comparative statistics as of December 31, 2014, unless otherwise indicated.

 

   Uruguay  Brazil  Chile  Venezuela  Mexico  United
States
Per capita GNI(1)   US$ 16,360   US$ 11,760   US$14,900   US$12,820   US$9,980   US$55,200 
PPP GNI per capita(2)   US$ 20,220   US$ 15,900   US$21,570   US$17,140   US$ 16,710   US$55,860 
Life expectancy at birth(3) (4)    77    74    80    75    77    79 
Adult literacy rate(5)(6)    98.4%   91.3%   98.9%   95.5%   94.2%   n.a 
Infant mortality per 1000 live births(4)    10    12    7    13    13    6 

_______________________

n.a. = not available.

 

(1)World Bank Atlas method.

(2)Current US$, adjusted for purchasing power parity.

(3)In years.

(4)2013 data.

(5)Percentage of people ages 15 and older.

(6)2011 data, except for United States.

 

Source: The World Bank - World Development Indicators database 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 1930s 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.

 

D-9
 

 

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.

 

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. The Partido Independiente is a center-left group which split from the Frente Amplio prior to the 1989 elections. A fifth political party, the Unidad Popular, is a left-wing party formed in 2013 by several smaller left-wing political groups.

 

Presidential elections were held on October 26, 2014. Mr. Tabaré Vázquez Rosas from Frente Amplio (who was president between 2005 and 2010) received 47.81% of the votes cast, Mr. Luis Lacalle Pou from Partido Nacional received 30.88% of the votes cast, and Mr. Pedro Bordaberry from Partido Colorado received 12.89% of the votes cast. Based on these results, Mr. Vázquez Rosas and Mr. Lacalle Pou participated in the runoff election on November 30, 2014, and Mr. Tabaré Vázquez Rosas of the Frente Amplio won the national presidential election with 52.8% of the votes cast. Mr. Vázquez Rosas took office for a second non-consecutive term on March 1, 2015, succeeding Mr. José Alberto Mujica Cordano, who is also a member of Frente Amplio.

 

In the congressional elections also held on October 26, 2014, the Frente Amplio retained a majority of both houses of Congress. The congressional representation of each of the five parties elected for the 2015-2020 term is as follows:

 

   Senate  Chamber of Deputies
   Seats  %  Seats  %
Frente Amplio    15    51.6%   50    50.5%
Partido Nacional    10    32.2    32    32.3 
Partido Colorado    4    12.9    13    13.1 
Partido Independiente    1    3.2    3    3.03 
Unidad Popular            1    1.01 
Total(1)    31    100%   99    100% 

________________________

(1)The Vice President, currently Mr. Raúl Fernando Sendic Rodríguez of the Frente Amplio, occupies the thirty-first seat in the Senate.

 

Although the Frente Amplio retained majorities in both houses of Congress, the ruling party has expressed an intention to seek consensus with the Partido Colorado, the Partido Nacional, the Partido Independiente and Unidad Popular with respect to key areas of government, including macroeconomic and social policies, education and foreign relations.

 

Since 2005, the Frente Amplio maintains the following goals of economic policy:

 

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.

 

D-10
 

 

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 172 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 or the CAF.

 

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, Cuba, Panamá and Nicaragua 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. The common external tariff regime became effective on January 1, 2001. However, it was also agreed that each member country would be entitled to take exceptions to the common external tariff for a transitional period scheduled to end in 2008 for Argentina and Brazil, and in 2010 for Paraguay and Uruguay. These periods have recently been extended, allowing Argentina and Brazil to maintain their list of exceptions until December 31, 2021, Uruguay until December 31, 2022 and Paraguay until December 31, 2023. Accordingly, the full implementation of a customs union has been deferred. See “The Economy—The Mercosur Agreements.”

 

In July 2012, Mercosur members (other than Paraguay) admitted the Republic of Venezuela as a full member of Mercosur. In December 2013, Paraguay acknowledged the admission of Venezuela as a full member of Mercosur. Venezuela is required to adopt the Mercosur common external tariff by 2016. In July 2015, Bolivia signed a Protocol to become a full member of Mercosur. The Protocol provides that Bolivia will gradually adopt the regulations of Mercosur over a period of four (4) years following the entry into force of the Protocol. Within the same period of time, Bolivia is expected to adopt the Mercosur Common Nomenclature (NCM), the Common External Tariff and Mercosur’s Origin Regime.

 

D-11
 

 

Since the establishment of Mercosur, the following trade agreements have become effective for Mercosur members:

 

Year Signed   Year Effective   Country/Economic Region  Description of Agreement
1996   1996   Chile  Free trade zone starting in 2014
1996   1997   Bolivia  Free trade zone starting in 2006
2003   2005   Colombia, Ecuador and Venezuela  Gradual free trade zone for certain goods until 2020
2005   2006   Peru  Gradual free trade zone for certain goods until 2021
2006   2008   Cuba  Tariff elimination for certain goods
2007   2009   Israel  Tariff elimination for certain goods until 2029
2004   2009   India  Tariff reduction for certain goods
              

(1)The Andean Community is a customs union among Bolivia, Colombia, Ecuador and Perú.
(2)Venezuela became a full member of Mercosur in July 2012.

 

In December 1995, Mercosur and the European Union signed a framework agreement for the development of free trade. While the parties have made progress in several areas, Mercosur 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 and negotiations were discontinued in 2004.. Negotiations were re-launched in 2010. Mercosur and the EU have agreed to submit proposals on the open issues by the end of 2015.

 

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.

 

Significant trade imbalances among Mercosur countries developed over time as a result of various factors. These imbalances have prompted discussions and negotiations among the member states that to date have not resulted in the convergence of the national economies, an objective stated on several occasions pursued. Argentina’s crisis in 2001 and its long-lasting effects have 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 triggered the adoption of various safeguard measures and caused indefinite delays in Mercosur’s ability to achieve the macroeconomic coordination and stability sought by its member states. Uruguay continues to support the long-term objectives contemplated in the Mercosur Treaty, while pursuing measures intended to maximize access to export markets by Uruguayan products in the short and medium-term.

 

D-12
 

 

Uruguay has entered into bilateral treaties related to trade and investment, including the following:

 

2004   United Mexican States  Free Trade Agreement
2004   Iran  Bilateral Trade Framework Agreement
2006   United States of America  Bilateral Investment Promotion Treaty
2007   United States of America  Trade and Investment Framework Agreement
2008   United States of America  Cooperation Agreement in Science and Technology
2008   India  Bilateral Investment Treaty
2009   Venezuela  Economic Cooperation Agreement
2010   Chile  Bilateral Investment Treaty
2012   South Korea  Bilateral Investment Treaty
2012   Chile  Public Procurement Agreement
2012   Vietnam  Bilateral Investment Treaty
2013   Armenia  Bilateral Investment Treaty
2015   Japan  Bilateral Investment Treaty
         

In March 2009, Uruguay and Brazil signed an energy cooperation agreement for the development of an electrical transmission line, to facilitate interconnectivity of both countries’ energy networks. The line is expected to become operative by the end of 2015 with a transmission capacity of 500MW. See “Gross Domestic Product and Structure of the Economy—Principal Sectors of the Economy—Electricity, Gas and Water.”

 

D-13
 

 

THE ECONOMY

 

History and Background

 

In the 1980s, Uruguay’s economy was affected by a crisis of its financial system, followed by a severe recession. A deterioration in its external debt to GDP and exports ratios led the Republic to negotiate a rescheduling of its maturing debt obligations within the framework of the Brady Plan in 1991. In the early 1990s, 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 5.0% on average from 1996 to 1998 fueled mainly by increased exports and growth in gross fixed investment, particularly private sector investment, which in turn stimulated private consumption. 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. Argentina and Brazil are currently entitled to 100 exceptions each and Uruguay and Paraguay are currently entitled to 225 and 649 exceptions, respectively. With respect to imports of capital goods, telecommunications and information technology products of non-Mercosur origin, the members of Mercosur agreed that all of them could take exception from the common external tariff, Argentina and Brazil until 2021 and Uruguay and Paraguay until 2022 and 2023, respectively, and Venezuela until 2022. The Mercosur member states 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.

 

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.

 

D-14
 

 

As a result of the impeachment of former President Mr. Lugo in June 2012 and his destitution by the Paraguayan Congress, Paraguay was temporarily suspended as a Mercosur member in July 2012. The suspension of Paraguay was discontinued once the newly-elected Paraguayan president, Horacio Cartes, took office in August 2013. In addition, in July 2012, Mercosur members (other than Paraguay) admitted the Republic of Venezuela as a full member of Mercosur. In December 2013, Paraguay acknowledged the admission of Venezuela as a full member of Mercosur. Venezuela is required to adopt the Mercosur common external tariff by 2016.

 

Certain barriers to the comprehensive regional integration initiated by Mercosur continue to exist. Fitosanitary 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 and cooperation 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. Roads, bridges and railways must also be developed 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, Paraguay 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. See “República Oriental del Uruguay—Foreign Policy and Membership in International and Regional Organizations.”

 

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 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 and increases in international interest rates.

 

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 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. As a result, in 2000 real GDP declined by 1.4% and the consolidated public sector deficit reached 3.8% of GDP, as public sector revenues contracted at a faster pace than public sector primary expenditures.

 

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. As a consequence, real GDP contracted by 3.4% in 2001 driven by a 2.0% decrease in domestic private consumption, a 2.9% decrease in government consumption and a 8.8% decrease in private fixed investment. The consolidated public sector deficit for 2001 reached 3.9% of GDP. Domestic inflation for 2001, as measured by the CPI, stood 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 Argentina 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).

 

D-15
 

 

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 were 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$7.3 billion (of which US$2.4 billion were of non-residents), compared to US$14.2 billion as of December 31, 2001 (of which US$6.6 billion were of non-residents). In the second quarter of 2002, a deposit outflow affected Uruguay’s financial system leading first to the suspension of Banco Galicia de Uruguay, or BGU, and Banco Comercial, Uruguay’s two largest private banks (both affiliated with Argentine banks) and soon thereafter to the closure of Banco Montevideo/La Caja Obrera, Uruguay’s third largest private bank in June 2002. Although the government received approximately US$500.0 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.

 

The Uruguayan authorities sought the financial assistance of the IMF, the World Bank and the IADB to 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 economic 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$6.8 billion 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 2002, the government adopted a series of initiatives intended to reduce the deficit of the public sector. It relied on access to funding by the IMF and other multilateral agencies to shore up Banco Central’s international reserve assets with the expectation that confidence in the banking system would thereby be restored.

 

D-16
 

 

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. The depreciation of the peso resulted in Uruguay’s foreign currency-denominated debt to GDP ratio rising 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 contraction 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 was denominated in foreign currency), practically neutralized the savings achieved by the central government in 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.

 

2003-2014: Recovery and Economic Growth

 

Uruguay’s economy stabilized during the second quarter of 2003 and began to recover, recording an annual real GDP growth of 0.8% and 5.0% in 2003 and 2004, respectively. 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. Between 2005 and 2009 GDP grew at an average rate of 5.5%, and continued to grow at rates of 7.8% in 2010, 5.2% in 2011, 3.3% in 2012, 5.1% in 2013 and 3.5% in 2014.

 

In 2010, domestic private consumption grew by 9.4% compared to 2009 and represented 67% of GDP. In 2011, domestic private consumption grew by 7.2% compared to 2010 and represented 66.8% of GDP. In 2012, domestic private consumption grew by 5.0% compared to 2011 and represented 67.2% of GDP. In 2013, domestic private consumption grew by 5.2% compared to 2012 and represented 66.5% of GDP. In 2014, domestic private consumption grew by 4.2% compared to 2013 and represented 67.1% of GDP.

 

In 2010, gross fixed investment increased by 16% compared to 2009, representing 19.1% of GDP, with private gross fixed investment increasing by 23.2%. In 2011, gross fixed investment increased by 7.0% compared to 2010, representing 19.1% of GDP, with private gross fixed investment increasing by 11.5%. In 2012, gross fixed investment increased by 18.5% compared to 2011, representing 22.2% of GDP, with private gross fixed investment increasing by 22.2%. In 2013, gross fixed investment increased by 4.3.% compared to 2012, representing 21.8% of GDP, with private gross fixed investment increasing by 2.7%. In 2014, gross fixed investment increased by 2.6% compared to 2013, representing 21.4% of GDP, driven by public gross fixed investment since private gross fixed investment decreased by 0.8%. Gross domestic savings represented 17.6% of GDP in 2010, 17.0% of GDP in 2011, 17.4% of GDP in 2012, 16.9% of GDP in 2013 and 17.0% of GDP in 2014.

 

Exports of goods and services grew by 7.2% in 2010, 5.8% in 2011, 3.1% in 2012, 0.2% in 2013 and 1.9% in 2014. Imports of goods and services increased by 13.7% in 2010, 12.5% in 2011, 13.5% in 2012, 3.5% in 2013 and 0.5% in 2014.

 

Deposits held by the non-financial private sector with the banking system (excluding deposits held with off-shore banks and financial houses), stood at US$17.9 billion at December 31, 2010, US$20.6 billion at December 31, 2011, US$23.2 billion at December 31, 2012, US$25.3 billion at December 31, 2013 and US$26.9 billion at December 31, 2014. Approximately 77.7% of those deposits were denominated in foreign currencies (primarily U.S. dollars) as of December 31, 2014. In 2010 and 2011 the annual rate of consumer price inflation was 6.9% and 8.6%, respectively, decreasing to 7.5% in 2012. The annual rate of consumer price inflation reached 8.5% in 2013 and 8.3% in 2014. The rate of inflation for the twelve-month period ended July 31, 2015, was 9.0%, as measured by the consumer price index. For a discussion of Uruguay’s current monetary policy see “Monetary Policy and Inflation—Monetary Policy.”

 

D-17
 

 

The Economic Policies of the Vázquez Administration

 

The Vázquez administration has indicated its intention to continue to prioritize macroeconomic stability and to adjust 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 27, 2010, President Mujica signed into law the five-year budget for the period 2010-2014. The budget reflects the government’s priorities of achieving long-term growth and debt-sustainability balanced with increases in infrastructure and social spending. The budget bill for the period 2015-2019 must be submitted to Congress by August 30, 2015 and, after congressional discussion and approval, is expected to be signed into law by December, 2015. See “Fiscal Policy—Budget.”

 

The Vázquez administration has announced the implementation of a “Sistema Nacional Integrado de Cuidados” (National Care System) to promote and gradually implement public policies addressing the needs of people that are not in a position to fend for themselves, including early childhood through the age of three, disabled people and elders who cannot fend for themselves.

 

Privatizations

 

While privatizations have not been a major focus of Uruguay’s economic policy, the government has divested or privatized certain state-owned enterprises, such as the gas company servicing Montevideo in 1993, and has taken measures to transfer certain activities, such as sewage, garbage collection, maintenance and the administration of certain ports and airports, to the private sector through concessions and other similar arrangements. Legislation has also been enacted enabling 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. Through the Administración Nacional de Telecomunicaciones, or ANTEL, the local telecommunications company, several revenue sharing arrangements with private companies for the installation and operation of certain new telecommunication facilities have been implemented. In February 2001, Congress approved the licensing of cellular phone services and data transmission to private sector providers and opening of 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 foreign telecommunications companies, to provide mobile telephone services. The government has also approved the provision of long distance international telephone services by 17 companies in competition with ANTEL.

 

The government also granted the Corporación Nacional Para el Desarrollo, or 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, or CVU, a special-purpose company responsible for the projects. CVU and private companies have to date signed 50 contracts worth US$109 million for the construction of bridges and highways.

 

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.

 

D-18
 

 

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 retained a 25% stake in the airline. The new company was called Pluna Líneas Aéreas S.A. In 2011, Pluna incurred severe losses, and its liquidity and financial condition deteriorated severely. On June 15, 2012, Leadgate—the controlling shareholder—transferred all of its shares in Pluna to a trust under the surveillance of the Uruguayan government. In July 2012, Pluna suspended all flights and initiated a judicial reorganization procedure. Thereafter, Congress passed Law No. 18,931 to reorganize the operations of the airline, including by disposing Pluna’s assets. In October 2012, through a trust created pursuant to Law No. 18,931, the government conducted an auction for the sale of seven of Pluna’s aircrafts. The auction was initially awarded to Cosmo S.A., a company organized under the laws of Spain, however, the transaction was not completed. In December 2013, the Supreme Court of Uruguay declared several provisions of Law No. 18,931 unconstitutional. As a result, the transfer of the Pluna aircrafts to the trust was reversed and they remained property subject to liquidation by Pluna’s receiver until their sale in 2014 to Strategic Air Finance (SAF) for US$77 million.

 

At this time the government has no plans to privatize any public sector enterprises.

 

In 2015, the government announced a plan to improve the infrastructure of roads and highways. The main goal of this program is to repair and improve 1,300 kilometers of roads, of which 160 kilometers will comprise new roads. The project entails a US$650 million investment over five years, mostly under the public-private partnership regime.

 

For a description of government participation in Uruguayan economy see “Gross Domestic Product and Structure of the Economy—Role of the State in the Economy.”

 

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 by 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 government 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 financing from the IADB for purposes of improving municipal infrastructure services for garbage collection and sewage treatment. The government currently 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 1980s, Uruguay also received a series of loans from the IADB to undertake the cleaning up of 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 failed to honor its obligations under the treaty.

 

On April 20 2010, the ICJ issued its final ruling on this dispute. Although the ICJ ruled that Uruguay breached certain procedural obligations under the Treaty of the Uruguay River, it did not find that any of the environmental damages claimed by Argentina had been proved and did not impose any remedial sanction on Uruguay. Argentine demonstrators dissatisfied with the ICJ ruling repeatedly obstructed traffic across international bridges in protest. In June 2010, the demonstrators agreed to cease the obstruction to facilitate ongoing negotiations seeking to resolve the situation. On August 30, 2010, Uruguay and Argentina signed an agreement providing for the creation of a technical committee within the Administrative Commission of the Uruguay River (“CARP”). This committee was created to monitor the Uruguay river and the industrial and agricultural businesses and cities on both margins of the Uruguay river that discharge effluents into the river.

 

D-19
 

 

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 2005 prices (in accordance with the Integral Revision of the National Accounts published by Banco Central in March 2009) to eliminate distortions introduced by changes in relative prices.

 

GDP and Expenditures
(millions of 2005 pesos, except as otherwise indicated)

 

   2010  2011  2012(1)  2013(1)  2014(1)
GDP   Ps. 567,742   Ps.597,050   Ps.616,890   Ps.648,354   Ps.671,036 
Imports of goods and services   191,449   215,316   244,373   252,836   254,035 
Total supply of goods and services    759,191    812,366    861,263    901,189    925,071 
Exports of goods and services    173,756    183,841    189,541    189,891    193,498 
Total goods and services available for domestic expenditures   Ps.585,435   Ps.628,525   Ps.671,722   Ps.711,299   Ps.731,572 
Allocation of total goods and services:                         
Consumption (public and private)    469,661    501,325    526,863    554,028    576,125 
Gross investment (public and private)    115,774    127,200    144,860    157,271    155,447 
Total domestic expenditures   Ps.585,435   Ps.628,525   Ps.671,722   Ps.711,299   Ps.731,572 
GDP growth (%) (2)    7.8%   5.2%   3.3%   5.1%   3.5%

 ______________________ 

(1)Preliminary data.

(2)% change from previous year, 2005 prices.

 

Source: Banco Central.

 

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

 

   2010  2011  2012(1)  2013(1)  2014(1)
Government consumption    12.6%   12.8%   13.2%   13.6%   13.7%
Private consumption    67.0    66.8    67.2    66.5    67.1 
Gross fixed investment    19.1    19.1    22.2    21.8    21.4 
Public sector (% of gross fixed investment)    4.4    3.6    3,9    4.2    4.6 
Private sector (% of gross fixed investment)    14.6    15.5    18,3    17.6    16.8 
Exports of goods and services    26.3    26.4    25,9    23.5    23.4 
Imports of goods and services    25.3    26,9    29.1    26.2    25.5 
Savings    17.6    17.0    17.4    16.9    17.0 

 ______________________ 

(1)Preliminary data.

 

Source: Banco Central.

 

D-20
 

 

Change in Gross Domestic Product by Expenditure
(% change from previous year except as otherwise indicated, 2005 prices)

 

   2010  2011  2012(1)  2013(1)  2014(1)
Government consumption    3.1%   3.7%   5.9%   5.0%   2.5%
Private consumption    9.4    7.2    5.0    5.2    4.2 
Gross fixed investment    16.0    7.0    18.5    4.3    2.6 
Public sector (% of gross fixed investment)    (4.7)   (9.9)   1.5    13.3    19.9 
Private sector (% of gross fixed investment)    23.2    11.5    22.2    2.7    (0.8)
Exports of goods and services    7.2    5.8    3.1    0.2    1.9 
Imports of goods and services    13.7    12.5    13.5    3.5    0.5 

 ______________________ 

(1)Preliminary data.

 

Source: Banco Central.

 

Principal Sectors of the Economy

 

The Uruguayan economy relies heavily on services, including the commerce, restaurants and hotels sector, which involves a wide range of tourism services, the financial and insurance sector, the real estate and business services sector and the government sector. However, since 2006, high commodity export prices have generally supported the improved performance of the agriculture, livestock and fishing and the manufacturing sectors.

 

In 2014, GDP increased by 3.5% in real terms, after growing by 5.1% in 2013 and 3.3% in 2012, in each case with respect to the prior year. Services accounted for approximately 58.7% of GDP, while the manufacturing and agriculture, livestock and fishing sectors together accounted for 19.9% of GDP in 2014.

 

GDP growth in 2014 was driven mainly by internal demand of products and services. The most significant sectors that contributed to GDP growth were transportation, storage and communications, and manufacturing. The transportation, storage and communications sector grew by 6.6% in real terms with respect to 2013, mainly as a result of the growth in the use of mobile communication and internet services. The manufacturing sector grew by 5.5% in real terms compared to 2013, mainly due to increased production of paper pulp following the start of the Colonia “Montes del Plata” paper pulp mill’s operations in the third quarter of 2014.

 

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 2005 prices to eliminate distortions introduced by changes in relative prices.

 

D-21
 

 

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

 

   2010  2011  2012(1)  2013(1)  2014 (1)
Agriculture, livestock and fishing   US$ 2,903    7.2%  US$4,237    8.8%  US$4,172    8.1%  US$4,561    7.9%  US$4,094    7.1%
Mining    199    0.5    210    0.4    229    0.4    281    0.5    260    0.5 
Manufacturing    5,452    13.5    6,111    12.7    6,297    12.3    6,524    11.3    7,107    12.3 
Electricity, gas and water    1,266    3.1    916    1.9    525    1.0    1,250    2.2    1,346    2.3 
Construction    2,968    7.4    3,659    7.6    4,705    9.2    5,506    9.6    5,357    9.3 
Commerce, restaurants and hotels    5,511    13.7    6,605    13.8    7,191    14.0    7,656    13.3    7,482    13.0 
Transportation, storage and communications    2,850    7.1    3,219    6.7    3,347    6.5    3,550    6.2    3,388    5.9 
Real estate and business services    6,025    15.0    7,238    15.1    8,135    15.8    9,247    16.1    9,330    16.2 
Financial and insurance services    1,734    4.3    2,063    4.3    2,282    4.4    2,523    4.4    2,555    4.4 
Services of the government    3,609    9.0    4,332    9.0    4,701    9.1    5,379    9.3    5,459    9.5 
Other community, social and personal services    3,745    9.3    4,516    9.4    4,847    9.4    5,520    9.6    5,595    9.7 
Net adjustments for payments made by financial institutions and import tariffs    4,040   10.0    4,883    10.2    4,963    9.7    5,574    9.7    5,597    9.7 
GDP (in millions of US$ at nominal prices)(2)   US$40,302    100.0%  US$47,989    100.0%  US$51,393    100.0%  US$57,571    100.0%  US$ 57,569   100.0%
GDP per capita   US$11,865        US$14,062        US$14,999        US$ 16,735        US$16,669     

 ____________________________________________ 

(1)Preliminary data.

(2)Figures are not adjusted by purchasing power.

 

Source: Banco Central.

 

D-22
 

 

Change in Gross Domestic Product by Sector
(% change from previous year, 2005 prices)

 

   2010  2011  2012(1)  2013(1)  2014(1)
Agriculture, livestock and fishing    (1.5)%   13.2%   (0.5)%   4.9%   2.1%
Mining    35.5    (21.1)   (2.3)   19.7    (9.9)
Manufacturing    2.6    2.0    (5.1)   2.1    5.5 
Electricity, gas and water    89.3    (24.2)   (22.7)   56.0    19.4 
Construction    2.4    2.4    15.6    2.0    (1.8)
Commerce, restaurants and hotels    11.6    7.0    6.1    2.6    0.6 
Transportation, storage and communications    15.0    10.7    9.7    9.5    6.6 
Real estate, business, financial and insurance services    4.3    6.5    5.3    4.2    3.6 
Other services(2)    1.4    2.4    1.4    4.3    2.7 
Total GDP    7.8%   5.2%   3.3%   5.1%   3.5%

 ______________________ 

(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 livestock. This sector grew by 13.2% in 2011 compared to 2010, driven by cereal and oil production fueled by high international commodity prices, as well as by milk production. In 2012, the sector contracted by 0.5% mainly due to a decrease in agricultural production as a result of the combined effect of lower prices and lower demand, in particular external demand. This decrease was partially offset by a 3.2% growth in cattle production and a 4.9% growth in milk production. In 2013, the sector grew by 4.9% mainly due to the increase in agricultural production fueled by high international commodity prices and favorable weather conditions, especially for wheat and soybean. In 2014, the sector grew by 2.1%, mainly due to a 6.5% increase in cattle production, which mitigated the adverse impact of a decrease in the production of wheat and soybean.

 

In 2010, cereal and oil production contracted by 2.7% compared to the previous year, mainly as a result of the decrease in wheat production. However, in 2011, cereal and oil production increased by 25.8%, driven by a recovery in wheat production. In 2012, cereal and oil production increased by 0.3%, mainly as a result of an increase in soybean production. In 2013, cereal and oil production increased by 11.6%, mainly as a result of an increase in the production of both wheat and soybean. In 2014, cereal and oil production decreased by 11.8%, mainly as a result of decreased production of wheat and soybean.

 

Milk production grew by 4.8% in 2010, and continued to grow in 2011, 2012 and 2013, increasing by 15.6%, 4.9% and 2.9%, respectively, in each case with respect to the prior year. In 2014, milk production stood at the same level of 2013. During 2010, livestock (except milk) production grew by 1.2%, due to an increase in cattle slaughter. In 2011 and 2012, livestock (except milk) production increased by 7.6% and 3.0%, respectively, in each case compared to the prior year. Although in 2013, livestock (except milk) production decreased by 0.3% compared to 2012, in 2014 it recovered, growing by 4.9% compared to 2013, due to favorable weather conditions through the year that improved grazing conditions.

 

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

 

D-23
 

 

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

 

   2010  2011  2012(1)  2013(1)  2014(1)
Cereals and oil products   US$ 1,932   US$3,106   US$3,218   US$3,534   US$2,633 
 Rice    361    365    376    439    458 
 Wheat    350    780    388    693    354 
 Soybean    735    1,213    1,663    1,631    1,126 
 Pastures    278    373    389    413    406 
Vegetables and fruits    535    594    652    632    584 
Milk    519    754    736    850    854 
Livestock except milk    1,791    2,408    2,447    2,456    2,395 
 Cattle    1,407    1,922    1,951    1,916    1,898 
 Wool    56    79    77    75    68 
Forestry   367   304   264   325   392 
 Total agricultural production   US$5,143   US$7,166   US$7,317   US$7,797   US$ 6,858 
                          
Cattle (in thousands of heads slaughtered)    2,242    2,047    2,116    2,009    2,133 
Milk (in millions of liters)    1,552    1,843    1,936    2,018    2,004 
Wool (in tons)    28,798    30,910    32,402    30,984    29,613 

 ______________________ 

(1) Preliminary data.

 

Source: Banco Central.

 

The following tables set forth percentage changes from prior years for agricultural and livestock production for the periods indicated, based on 2005 prices to eliminate distortions attributable to changes in relative prices.

 

Agricultural and Livestock Production
(% change from previous year, 2005 prices)

 

   2010  2011  2012(1)  2013(1)  2014(1)
Cereals and oil products    1.3%   25.8%   0.3%   11.6%   (11.8)%
 Rice    24.2    0.2    (7.3)   (0.5)   (2.4)
 Wheat    (26.8)   59.5    (49.8)   63.4    (44.4)
 Soybean    36.9    19.1    36.7    6.7    (4.9)
 Pastures    (3.6)   7.9    3.3    7.4    0.0 
Vegetables and fruits    12.3    0.0    8.0    (22.2)   5.0 
Milk    4.8    15.6    4.9    2.9    (0.1)
Livestock except milk    1.2    7.6    3.0    (0.3)   4.9 
 Cattle    2.7    6.6    3.2    (0.2)   6.5 
 Wool    (19.2)   7.2    2.2    (4.4)   (10.2)
Forestry    11.7    (7.9)   (6.6)   14.8    36.8 
 Total agricultural production    3.1%   13.8%   1.8%   4.3%   (1.4)%

 ______________________ 

(1) Preliminary data.

 

Source: Banco Central.

 

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 2010 through 2014 at approximately 0.5%. Uruguay has no known oil or natural gas reserves, although exploratory work has been undertaken in the coastal region. Several projects have been developed in Uruguay over the past years for the mining of nickel, copper and diamonds, without any findings. At present, a project for the mining of iron ore is being developed.

 

D-24
 

 

In October 2012, the government submitted a bill to Congress proposing the enactment of a law regulating large-scale mining projects (Ley de Minería de Gran Porte). In September 2013, Congress passed the law, which sets the conditions under which large mining exploitation concessions will be granted. The law defines large-scale mining projects as those: (i) occupying an area of at least 400 hectares, (ii) involving an investment of at least UI 830 million or (iii) having an annual commercialization value (in exports or sales in the domestic market) in excess of UI 830 million. It also established the Inter-generational Sovereign Investment Fund (Fondo Soberano Intergeneracional de Inversión) to foster the sustainable development of large-scale mining without compromising equal rights of future generations. The Inter-generational Sovereign Investment Fund will receive 70% of total government mining revenues while the remaining 30% will constitute budgetary revenues. The latter will be used to finance infrastructure, housing and social works, productive activities, educational projects and to enhance the technical capabilities of enforcement agencies in charge of monitoring these projects.

 

Manufacturing

 

Manufacturing is an important sector of Uruguay’s economy, accounting for 12.3% of GDP in 2014. In 2010, manufacturing grew by 2.1% in real terms, compared to 2009, mainly due to increased production of pulp, paper and chemicals. In 2011, manufacturing grew in real terms by 2.9% driven by foodstuffs and chemicals production, which increased by 4.3% and 10.7%, respectively. In 2012, manufacturing decreased by 0.3% in real terms compared to 2011, driven mainly by a decrease in wood and textiles production. In 2013, the manufacturing sector grew by 1.3% in real terms compared to 2012, primarily as a result of an increase in wood, pulp, paper and oil and refined products production. In 2014, this sector grew by 3.1% mainly due to increased production of paper pulp following the start of the Colonia “Montes del Plata” paper pulp mill’s operations in the third quarter of 2014.

 

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

 

Selected Manufacturing Goods Production
(in millions of US$)

 

   2010  2011  2012(1)  2013(1)  2014(1)
Foodstuffs:               
Processed meats   US$ 2,555   US$3,138   US$3,169   US$3,126   US$3,430 
Dairy products    1,025    1,398    1,479    1,670    1,759 
Wheat and rice mills    672    797    788    849    865 
Baked goods    829    938    1,026    1,164    1,184 
Other foodstuffs   1,316   1,573   1,589   1,569   1,662 
Total foodstuffs    6,397    7,845    8,050    8,379    8,899 
Beverages    718    870    944    971    887 
Tobacco    132    128    161    150    163 
Textiles    697    784    714    610    514 
Leather goods    275    337    327    353    370 
Wood, pulp and paper   1,584    1,634    1,562    1,683    1,894 
Chemicals    1,867    2,336    2,426    2,484    2,395 
Oil and refined products    1,428    1,553    1,999    2,061    1,866 
Machinery    1,005    1,048    1,090    1,028    1,083 
Other industries   1,675   2,104   2,020   2,236   2,141 
Total   US$15,776   US$18,640   US$19,294   US$19,954   US$20,212 

 ______________________ 

(1) Preliminary data.

 

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

 

D-25
 

 

Manufacturing Production
(% change from previous year, 2005 prices)

 

   2010  2011  2012(1)  2013(1)  2014(1)
Foodstuffs:               
Processed meats    (2.1)%   (2.3)%   6.4%   (0.3)%   6.0%
Dairy products    8.2    20.1    7.5    1.2    3.0 
Wheat and rice mills    (7.6)   12.4    (2.9)   2.0    0.6 
Baked goods    0.4    3.1    1.0    2.6    1.7 
Total foodstuffs    (1.1)   4.3    1.2    (1.2)   4.1 
Beverages    2.5    1.7    4.8    (1.8)   (5.2)
Tobacco    5.7    5.8    (4.6)   (7.7)   8.1 
Textiles    (2.5)   (1.5)   (10.4)   (13.8)   (13.5)
Leather goods    19.7    3.9    (0.4)   0.8    4.1 
Wood, pulp and paper    14.5    (1.9)   (2.4)   7.8    24.0 
Chemicals    6.1    10.7    1.1    2.0    (0.6)
Oil and refined products    (1.5)   (8.5)   10.9    4.3    (4.9)
Machinery    5.2    (5.3)   3.7    (5.2)   4.5 
Total    2.1%   2.9%   0.3%   1.3%   3.1%

 ______________________ 

(1) Preliminary data.

 

Source: Banco Central.

 

Electricity, Gas and Water

 

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 and Uruguay imports electricity from Argentina and Brazil. In March 2009, Uruguay and Brazil agreed to build an electrical transmission line between San Carlos (Uruguay) and Candiota (Brazil), with an intermediate frequency converter in Cerro Largo (Uruguay), with financing provided by the Structural Funds of the Mercosur, the CAF and the National Treasury of Brazil. The Uruguayan government expects this line to become operative by the end of 2015 with a transmission capacity of 500MW. 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. With a view to reducing oil imports, ANCAP invested in biodiesel plants that became operative in 2009. To increase its fuel transportation capacity, ANCAP has also recently invested in vessels. ANCAP also awarded private sector enterprises with hydrocarbon exploration and exploitation contracts in on-shore and off-shore Uruguayan areas. Natural gas can be imported freely, and its distribution and transportation have been opened to private investment. The government is implementing different actions aimed at increasing the supply of liquid natural gas (LNG) in Uruguay to diversify the energy matrix and obtain a stable supply of natural gas. See “—Role of the State in the Economy.”

 

The electricity, gas and water sector’s performance has varied over the past five years, mainly as a result of the electricity sector’s performance, which in turn depends on the type of electricity generated (thermoelectric and/or hydroelectric). In 2010, the electricity, gas and water sector grew by 89.3% in real terms due to an increased use of hydroelectric source of electricity generation. In each of 2011 and 2012, however, droughts affected the Uruguayan basin and the electricity, gas and water sector contracted in real terms by 24.2% and 22.7%, respectively, as electricity generation turned to hydrocarbon based facilities. In 2013, the electricity, gas and water sector grew by 56.0% in real terms, driven primarily by an increase in rainfall, which allowed UTE to increase its supply of hydroelectrically-generated electricity. The generation cost of hydroelectric energy is significantly lower than the one for thermoelectric energy and, as a result, the lower generation cost prompted an improvement in the performance of this sector. In 2014, the electricity, gas and water sector grew by 19.4% mainly due to an increase in the generation and distribution of hydro-electric and eolic energy.

 

Construction

 

The construction sector grew by 2.4% in real terms, in each of 2010 and 2011 fueled by public and private sector investment. In 2012, the construction sector grew by 15.6%, mainly due to investment in the construction of a new paper pulp mill in the city of Colonia del Sacramento. In 2013, the construction sector grew by 2.0% in real terms as compared to 2012. In 2014, the construction sector decreased by 1.8%. The slower growth in 2013 and the decrease in the 2014 rate are mainly attributable to the completion of the construction of the “Montes del Plata” paper pulp mill in Colonia, which became operational in the third quarter of 2014.

 

D-26
 

 

Commerce, Restaurants and Hotels

 

In 2010, the commerce, restaurants and hotels sector grew by 11.6% in real terms, driven primarily by higher sales of motor vehicles and imported goods, and by an increase in the number of tourists and in expenditures by tourists. In 2011, this sector grew by 7.0% in real terms mainly due to the increase in consumption of fuel and imported products and continued growth in tourism activities. In 2012, the sector grew by 6.1% in real terms, driven primarily by an increase in wholesale and retail trade services (mainly involving imported goods). In 2013 and 2014, the sector grew by 2.6% and 0.6% in real terms, respectively, mainly as a result of an increase in wholesale and retail trade services (mainly involving imported goods). The commerce, restaurants and hotels sector accounted for 13% of GDP in 2014.

 

Transportation, Storage and Communications

 

In 2010 and 2011, the transportation, storage and communications sector grew by 15.0% and 10.7% in real terms, respectively, mainly due to an increase in communications (as a consequence of the continued investment in mobile technologies) and transportation activities (primarily supporting and auxiliary transport activities). In 2012, the growth of 9.7% was attributable mainly to the communications segment, reflecting an increase in the use of mobile communication and internet services. This increase was partially offset by a decrease in transportation, mainly as a result of the discontinuation of Pluna’s activities. In 2013 and 2014, the sector grew by 9.5% and 6.6% in real terms, respectively, primarily as a consequence of an increase in telecommunications services.

 

Real Estate, Business, Financial and Insurance Services

 

The real estate and business sector and the financial and insurance services sector grew by 21.1% in the 2010-2014 period. This growth was driven primarily by the financial and insurance services sector and by the business services segment, as a result of a trend in the manufacturing sector to sub-contract administrative, maintenance and cleaning services. Real estate services also grew during this period driven by tourism rentals and purchases.

 

Uruguay established a strong reputation as a regional financial center in the early 1980s, 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.

 

Beginning in 2002, Uruguay’s financial sector was significantly affected by Argentina’s crisis. Large withdrawals of deposits during 2002 significantly exceeded the liquidity of four private banks (including the two largest private banks which were branches of Argentine based banks), which ceased to operate and entered a liquidation stage. 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 the three largest private banks 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.

 

The financial and insurance services sector’s contribution to GDP has grown at a slower pace since 2002 compared to other sectors of the economy. However, since 2008, the financial and insurance services sector’s contribution to GDP has improved.

 

The real estate and business sector accounted for approximately 16.2% of GDP in 2014

 

D-27
 

 

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. In addition, in 2011, the government enacted Law No. 18,786, creating and regulating public-private participation contracts for infrastructure and related services. This law establishes a new type of arrangement designed to allow private investors and the government to invest in different areas of the economy, primarily the energy and infrastructure sectors, requiring significant investments.

 

At present, the government owns:

 

1.the local telecommunications company (ANTEL);

 

2.the electric power utility (UTE);

 

3.the oil refinery company (ANCAP);

 

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.

 

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

 

UTE provides electric power and services to Uruguay. With the exception of Salto Grande, a bi-national 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. To complement traditional energy sources, UTE is implementing actions to develop wind power. These actions include launching bidding processes for the construction, operation and maintenance of wind farms. As of July 31, 2015, UTE had awarded 26 private projects for the development of 1,088 MW of wind power, of which seven are already operative. UTE is also financing with its own resources the development of seven wind farms with an installed generation capacity of 484 MW. The government’s goal is to reach 1,000 MW of wind power generation in the short term, representing approximately 30% of the country’s installed generation capacity. As of 2014, the installed wind power generation capacity was approximately 400 MW. For more information about electricity production in Uruguay see “—Electricity, Gas and Water.”

 

ANCAP is the national oil refinery, responsible for processing the crude oil imported by Uruguay and marketing refined products. Uruguay has no known oil reserves.

 

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In May 2008, the government enacted Decree 239/08 creating the “Uruguay Round 2009” program to be implemented by the national oil refinery ANCAP aimed at awarding private sector enterprises with hydrocarbon exploration and exploitation contracts in off-shore Uruguayan areas, totaling approximately 74,000 square meters. The areas were divided into 11 blocks, each ranging between 4,000 and 8,000 square kilometers in water depths between 50 and 1,450 meters, situated in the Punta del Este basin, the southernmost region of the Pelotas basin and the Oriental del Plata basin. On December 9, 2009, under the “Uruguay Round 2009” program, ANCAP granted hydrocarbon exploration and exploitation contracts to a consortium comprising YPF S.A. (formerly, Repsol YPF) (40%), Petroleo Brasileiro (40%) and Galp Energía (20%) to explore blocks 3 and 4 located in the Punta del Este basin. ANCAP has reserved the right to perform exploratory work in other blocks.

 

In September 2011, the government enacted Decree 259/11 creating the “Uruguay Round II” program to be implemented by ANCAP, aimed at awarding hydrocarbon exploration and exploitation contracts to private sector companies in off-shore areas. In March 2012, ANCAP received 19 offers for off-shore oil exploration and exploitation over eight of the 15 blocks offered. These eight blocks cover more than 50% of the total area offered and were awarded to the British Petroleum and British Gas (UK), Total (France) and the Tullow Oil (Ireland). On October 5, 2012, ANCAP entered into a contract with these companies, committing to invest approximately US$1.6 billion in the aggregate in exploration and development activities without recourse to ANCAP or the government for any risks and costs incurred in connection with activities associated with the project. ANCAP and the government intend to implement a third round of auctions (the “Uruguay Round III”) seeking to award new exploration and exploitation contracts to private companies in other off-shore areas.

 

In October 2009, ANCAP entered into an agreement with the US company Schuepbach Energy and the Argentine company YPF S.A. to begin on-shore exploration for oil and gas in the north and center of the country. In addition, in April 2013, ANCAP authorized three international companies to commence oil and gas on-shore exploration in the north of the country. Total, Geoquim S.A. and Petrina were awarded these exploration and exploitation concessions, involving an aggregate investment of US$4.2 million.

 

In addition, ANCAP, and privately owned companies run the gas transportation and distribution business within a regulatory framework based on the granting of concessions, contracts and decrees by the government. Uruguay imports all the natural gas it consumes.

 

To diversify the energy matrix and obtain a constant supply of natural gas, the government is implementing different actions for the production of LNG in Uruguay. In August 2012, Uruguay launched an international bidding process for the construction and operation of Gas Sayago, a LNG regasification facility in Montevideo with a processing capacity of 10 million cubic meters of gas per day and a storage capacity of 267 million cubic meters. The regasification plant, once operational, will inject natural gas to the local distribution network for homes, industries, transportation and electrical energy generation. In May 2013, the government awarded a 20-year concession to Gas Sayago S.A. (owned by UTE and ANCAP) and Gas Natural Licuado del Sur S.A (“GNLS”), a consortium comprised of GDF Suez S.A. and the Japanese company Marubeni, for the construction and operation of Gas Sayago. The terms of the award require the LNG regasification facility to be operative in 2016.

 

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

 

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

 

In December 2012, the government announced the first project under the public-private participation framework involving the construction, operation and maintenance of a prison with capacity for approximately 2,000 inmates. This project will require an estimated investment of US$82 million. As of July 31, 2015, there were three additional significant infrastructure projects under review involving the maintenance of roads and a railway).

 

Results of Non-Financial State-Owned Enterprises

 

During the past ten years, non-financial state-owned enterprises have in the aggregate recorded operating profits in spite of the slowdowns experienced in the energy sector, affecting mainly ANCAP and UTE, during 2008. In 2008, UTE’s costs of operations were adversely affected by the combination of high oil prices and a severe drought, which heavily affected UTE’s results given the impossibility of fully passing the increased generation costs on to consumers. Record high crude oil prices during 2008 also impacted on ANCAP’s oil refinery costs generating an operating deficit during 2008. This situation was reversed in 2009 and both enterprises recorded a surplus.

 

D-29
 

 

During 2010, the government focused on the long-term management of the results of operations of the state-owned enterprises and established an energy stabilization fund (“Energy Stabilization Fund”) to reduce the impact of droughts and mitigate the need to introduce abrupt rate adjustments affecting consumers. UTE made an initial contribution of US$150.0 million to the fund. In 2010, the current primary result of the state-owned enterprises continued to recover, particularly UTE. Due to favorable weather conditions, UTE was able to meet demand for electricity through hydro-generation, reducing to a minimum the use of its power stations. By maintaining its pricing policy, aligned to the cost structure of generation, UTE was able to restructure its assets and cancel liabilities incurred in 2009.

 

In 2011, ANCAP recorded losses mainly as a consequence of the partial absorption by ANCAP of the increased cost of crude oil imports (the balance being covered by the Energy Stabilization Fund created in 2010). In addition, in a context of high oil prices, ANCAP’s refinery plant was shut down for several weeks to build a desulfuration facility, which in turn required ANCAP to import additional volumes of refined products. In 2011, UTE recorded gains, although significantly lower than in 2010, as a consequence of the increased cost of fuel power generation.

 

In 2012, due to adverse weather conditions UTE was unable to meet demand for electricity through hydro-generation. As a result, UTE relied on fuel power stations, which caused a substantial increase in electricity generation costs, adversely affecting UTE’s results of operations, although the adverse impact was less significant compared to 2011.

 

In 2013 and 2014, normal weather conditions allowed UTE to improve its results of operations through the supply of hydro-generated electricity. This improvement in its results of operations permitted UTE to make additional contributions to the Energy Stabilization Fund. ANCAP, instead, ran a significant deficit in 2014 (US$323 million), primarily as a result of the appreciation of the U.S. dollar considering that ANCAP’s debt is mostly denominated in U.S. dollars. The stabilization of ANCAP’s financial condition and results of operations constitutes a priority for the Vazquez administration.

 

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$)(1) (2)

 

   Total Assets  Total Liabilities  Net Profits  Percentage of
State Ownership
ANCAP     2,606    2,173    (324)   100%
ANP     853    135    44    100%
AFE(3)     204    13    (25)   100%
ANTEL     2,078    229    176    100%
OSE     1,929    438    5    100%
UTE     6,010    1,391    303    100%
                       

(1)Preliminary data.

(2)Data as of and for the year ended December 31, 2014. Converted into U.S. dollars at the rate of Ps. 24.333 per US$1.00, the market rate on December 31, 2014.

(3)Data as of and for the year ended December 31, 2013

 

Source: Financial statements of each public enterprise.

 

Employment, Labor and Wages

 

Employment

 

The employment rate rose from 58.4% in 2010 to 60.4% in 2014. Unemployment declined from 7.2% in 2010 to 6.6% in 2014. The continued growth of the economic activity in Uruguay explains the decrease in the nationwide unemployment rate.

 

D-30
 

 

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

 

Employment and Labor

 (% by population)

 

   As of December 31,
   2010  2011  2012  2013  2014
Nationwide:               
Participation rate(1) (2)     62.9%   64.8%   64.0%   63.6%   64.7%
Employment rate(3)     58.4    60.7    59.9    59.5    60.4 
Unemployment rate(4)     7.2    6.3    6.5    6.5    6.6 
Montevideo:                          
Participation rate(1) (2)     65.1    66.9    66.2    65.1    66.4 
Employment rate(3)     60.4    62.6    61.6    60.9    62.0 
Unemployment rate(4)     7.2    6.4    6.8    6.5    6.7 
                            

(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: Instituto Nacional de Estadística (INE) and Banco Central.

 

The composition of employment by activities in Uruguay generally reflects the composition by activities of the GDP. Unionized labor in Uruguay is concentrated primarily in the public sector and the manufacturing, construction and financial services sectors of the economy.

 

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)

 

   2010  2011  2012  2013  2014
Agriculture, livestock, fishing and mining    11.8%   10.0%   8.8%   9.6%   9.4%
Manufacturing, electricity, gas and water, and construction services    21.2    20.6    21.0    21.3    20.8 
Services    67.0    69.3    70.3    69.1    69.8 
Total    100.0%   100.0%   100.0%   100.0%   100.0%

 ______________________ 

(1)Data refers to total country population.

 

Source: Instituto Nacional de Estadística (INE).

 

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. According to the “Indice de conflictividad laboral” (labor conflict index) published by Universidad Católica del Uruguay, conflicts increased during 2010 as compared to 2009, in anticipation of the negotiations of the collective bargaining agreements that preceded the presidential election. According to the same index, in 2011 and 2012, conflicts decreased with respect to previous years. In 2013, the index increased as a consequence of some general strikes and a rise in sectorial conflicts. In 2014, conflicts decreased compared to 2013, registering a single general strike in 2014 and reaching the lowest level in the last five years.

 

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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)

 

   2010  2011  2012  2013  2014
Average real wages    3.3%   4.0%   4.2%   3.0%   3.4%
Public sector    2.8    2.6    3.4    2.1    2.2 
Private sector    3.6    4.9    4.7    3.5    4.0 

______________________

Source: Instituto Nacional de Estadística (INE).

 

Since 2005, increases in real wages have been discussed within the context of a collective bargaining mechanism involving the principal sectors of the economy, with government participation in the negotiations and frequently providing for backward-indexation of wages. During 2010, the average increase in public sector real wages was 2.8% and 3.6% in private sector real wages. Real wages increased 4.0% on average during 2011 due to an increase of 2.6% in public sector wages and 4.9% in private sector wages. In 2012, real wages increased by 4.2% on average, with an increase in public sector real wages of 3.4% and an increase in private sector real wages of 4.7%. In 2013, real wages increased by 3.0% on average, with an increase in public sector real wages of 2.1% and an increase in private sector real wages of 3.5%. In 2014, real wages increased by 3.4% on average, with an increase in public sector real wages of 2.2% and an increase in private sector real wages of 4.0%. Under the collective bargaining rules, each private sector of the economy negotiates wage increases twice a year while the public sector does it once a year.

 

Poverty and Income Distribution

 

Poverty levels in Uruguay have decreased sharply in recent years due to the economic recovery. According to the most recent estimates of 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 6.4% in 2014, compared to 12.6% in 2010.

 

While Uruguay has disparities in the distribution of wealth and income, which decreased in recent years, such disparities are of a lesser magnitude than those of other Latin American nations such as Brazil, Colombia or Chile. As set forth in the table below, in 2014, 27.2% of the income in urban households in Uruguay was concentrated in the hands of the top 10.0% of the economically active population as compared to 43.8% of the income in urban households for Brazil, 41.4% for Chile and 40.4% for Colombia in 2013, which is the most recent year for which information was available.

 

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

 

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

 

Income Group  2010  2011  2012  2013  2014
Lowest 40%    16.7%   17.4%   18.4%   18.3%   18.5%
Next 30%    24.9    25.8    27.0    26.3    26.3 
Next 20%    27.9    28.0    28.6    28.0    28.0 
Highest 10%    30.4    28.8    26.2    27.4    27.2 
Total    100.0%   100.0%   100.0%   100.0%   100.0%

 _______________________ 

Source: Instituto Nacional de Estadísticas.

 

The government has sought to address problems relating to poverty through health care accessibility and other measures. See “The Economy—The Economic Policies of the Vázquez Administration.” 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.

 

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FOREIGN MERCHANDISE TRADE

 

Uruguay’s exports primarily comprise commodities (farm products and paper pulp).

 

In 2010, merchandise exports increased by 25.4% (measured in U.S. dollars) compared to 2009, as a result of the increase in exports of agricultural products, paper pulp, processed meat and dairy products. In 2011, merchandise exports increased by 15.3% (measured in U.S. dollars) compared to 2010, mainly due to an increase in exports of processed meats, dairy products and chemicals. In 2012, merchandise exports increased by 7.5% (measured in U.S. dollars) compared to 2011, mainly due to an increase in exports of agricultural products and processed meats. In 2013, merchandise exports increased by 4.1% (measured in U.S. dollars) compared to 2012, as a result of an increase in exports of agricultural products, dairy products and paper pulp. In 2014, merchandise exports increased by 1.7% (measured in U.S. dollars) compared to 2013, as a result of an increase in exports of processed meats and paper pulp.

 

In 2010, merchandise imports increased by 24.8% (measured in U.S. dollars) compared to 2009, as a result of a general increase in all imported items, mainly motor vehicles and consumption goods. In 2011, merchandise imports grew by 24.4% (measured in U.S. dollars) compared to 2010, driven by an increase across all imported items, which was particularly strong for intermediate and consumption goods. In 2012, merchandise imports increased by 8.6% (measured in U.S. dollars) compared to 2011, mainly due to an increase in imports of intermediate and consumer goods. In 2013, merchandise imports slightly decreased by 0.1% (measured in U.S. dollars) compared to 2012, as a result of a decrease in imports of intermediate goods. In 2014, merchandise imports decreased by 1.4% (measured in U.S. dollars) compared to 2013, as a result of a decrease in imports of intermediate goods, which more than offset increases in imports of capital goods and, to a lesser extent, consumer goods.

 

A significant portion of Uruguay’s merchandise trade has involved its neighbors and principal trading partners, Argentina and Brazil. With the initial consolidation of the Mercosur in the 1990s, Brazil and Argentina became Uruguay’s principal trading partners. By 1998, those two countries together accounted for more than 50% of Uruguay’s exports. 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 outside Mercosur within the framework of regional as well as bilateral agreements. See “República Oriental del Uruguay—Foreign Policy and Membership in International and Regional Organizations.”

 

Mercosur member states remain the main destination of Uruguay’s exports and source of its imports. Exports to Argentina and Brazil accounted for 25.8% of total exports in 2010, 24.8% in 2011, 22.9% in 2012, 22.1% in 2013 and 20.2% in 2014. Even more significantly, Argentina and Brazil accounted for 35.3% of total imports in 2010, 38.1% in 2011, 32.9% in 2012, 30.0% in 2013 and 29.7% in 2014. In 2012, exports to Brazil included plastics, cereals, milk and dairy products, exports to Argentina were concentrated in motor vehicles and parts, machinery and electrical products, and Venezuela was the destination primarily of milk and dairy products. In 2013, exports to Brazil included plastics, milk and dairy products, cereals and motor vehicles, and exports to Argentina included motor vehicles, machinery, paper, medical equipment and plastics. The primary destination of milk and dairy products continued to be Venezuela, followed by Brazil and Russia. In 2014, exports to Brazil included plastics, motor vehicles, meat, cereals and milk and dairy products, and exports to Argentina included motor vehicles, electrical energy, parts of vehicles and machinery. Venezuela remained the primary destination of milk and dairy products, followed by Brazil, Russia and China.

 

The United States is another of Uruguay’s major trading partners. While Uruguay’s merchandise imports from the United States have fluctuated in recent years (as a percentage of total imports), the United States attracted an increasing percentage of Uruguay’s total merchandise exports after the 2002 crisis reaching a historical record of 21.1% of total exports in 2005. In 2010,the weight of exports to the United States accounted for 2.5% of total exports while imports accounted for 9.9% of total imports. In 2011, the weight of exports to the United States slightly increased to 2.7% of total exports whereas imports from the United States accounted for 10.3% of total imports. In 2012, the weight of exports to the United States increased once more to 3.4% of total exports, while imports from the United States decreased slightly to 8.9% of total imports. In 2013, the weight of exports to the United States increased again to 3.5% of total exports, whereas imports from the United States decreased to 8.7% of total imports. In 2014, the weight of exports to the United States continued to increase reaching 4.1% of total exports, while imports from the United States increased slightly to 9.4% of total imports.

 

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Uruguay has diversified and increased substantially its merchandise exports over time. In 2010, merchandise exports increased by 25.4% compared to 2009, to US$7.7 billion, driven mainly by non-traditional exports. In 2011, merchandise exports totaled US$8.9 billion, representing a 15.3% increase compared to 2010, primarily due to the growth in non-traditional exports. In 2012, merchandise exports amounted to US$9.6 billion, representing a 7.5% increase compared to 2011, driven by a significant increase in non-traditional exports, which more than offset a decrease in traditional exports compared to 2011. In 2013, merchandise exports totaled US$10.0 billion, representing a 4.1% increase compared to 2012, due to an increase in non-traditional exports which, as in 2012, more than offset a decrease in traditional exports. In 2014, merchandise exports totaled US$10.2 billion, representing a 1.7% increase compared to 2013, mainly due to an increase in certain traditional exports (cattle, processed meats and paper pulp).

 

Merchandise exports have historically been concentrated on agriculturally based traditional and manufactured products, such as wool, meat, rice and textiles. 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. Uruguay’s traditional export markets include Brazil, Chile, Israel and the European Union. . Since 2008, paper pulp accounts for a significant portion of Uruguay’s exports, representing 8.0% of total exports in 2011. In 2010, exports of agricultural products, dairy products and processed meat increased by 43.7%, 40.5% and 14.7%, respectively, compared to 2009. Exports of wheat and rice in 2010 decreased by 15.2% compared to 2009. In 2011, exports of processed meat, dairy products and motor vehicles and parts increased by 19.0%, 32.9% and 61.2% respectively, compared to 2010, while exports of paper pulp decreased by 5.3% compared to 2010. In 2012 exports of agricultural products, dairy products and wheat and rice increased by 63.8%, 13.9% and 10.3%, respectively, compared to 2011, however, exports of motor vehicles and parts, paper pulp and textile decreased by 54.7%, 14.4% and 15.1%, respectively, each as compared to 2011. In 2013, exports of motor vehicles and parts, agricultural products and paper pulp increased by 109.2%, 18.3% and 17%, respectively, each as compared to 2012. Exports of oil and refined products, however, decreased 73.5%, compared to 2012. In 2014, exports of oil and refined products, paper pulp and leather goods increased by 153.4%, 23.7% and 17.9%, respectively, compared to 2013. However, exports of agricultural products and dairy products decreased by 11.3%, and 9.1%, respectively, each as compared to 2013.

 

Imports 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 2010, total imports increased by 24.8% compared to 2009, of which 23.5% represented consumer goods, 59.7% intermediate goods and 16.8% capital goods. In 2011, total imports increased by 24.4% compared to 2010, of which 23.4% represented consumer goods, 61.6% intermediate goods and 14.9% capital goods. In 2012, total imports increased by 8.6% compared to 2011, of which 22.8% represented consumer goods, 63.8% intermediate goods and 13.4% capital goods. In 2013, total imports decreased by 0.1% compared to 2012, of which 24.3% represented consumer goods, 59.1% intermediate goods and 16.6% capital goods. In 2014, total imports decreased by 1.4% compared to 2013, of which 25.5% represented consumer goods, 56.1% intermediate goods and 18.4% capital goods.

 

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

 

D-34
 

 

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

 

   2010  2011  2012  2013(1)  2014(1)
EXPORTS (FOB)                              
Agricultural products   US$ 1,188    15.4%  US$1,236    13.9%  US$2,026    21.1%  US$2,395    24.0%  US$2,124    20.9%
Processed meats    1,419    18.3    1,688    18.9    1,821    19.0    1,706    17.1    1,872    18.4 
Dairy products    521    6.7    692    7.8    788    8.2    894    8.9    813    8.0 
Wheat and rice mills    396    5.1    485    5.4    535    5.6    505    5.1    517    5.1 
Other foodstuffs    572    7.4    651    7.3    624    6.5    621    6.2    692    6.8 
Textiles    190    2.5    240    2.7    204    2.1    196    2.0    193    1.9 
Leather goods    198    2.6    228    2.6    244    2.5    267    2.7    315    3.1 
Paper pulp    754    9.7    714    8.0    611    6.4    715    7.2    885    8.7 
Chemicals    414    5.3    512    5.7    558    5.8    549    5.5    531    5.2 
Oil and refined products    127    1.6    56    0.6    89    0.9    24    0.2    60    0.6 
Plastic products    164    2.1    204    2.3    210    2.2    196    2.0    194    1.9 
Motor vehicles and parts    191    2.5    308    3.5    139    1.4    291    2.9    286    2.8 
Other    1,606    20.7    1,911   21.4    1,745    18.2    1,631    16.3    1,679    16.5 
Total exports   US$7,740    100.0%  US$8,925    100.0%  US$9,594    100.0%  US$9,990    100.0%  US$10,161    100.0%
IMPORTS (CIF)                                                  
Consumer goods   US$2,025    23.5%  US$2,514    23.4%  US$2,653    22.8%  US$2,825    24.3%  US$2,929    25.5%
Intermediate goods    5,148    59.7    6,612    61.6    7,438    63.8    6,833    59.1    6,440    56.1 
Capital goods    1,449    16.8    1,600    14.9    1,560    13.4    1,933    16.6    2,115    18.4 
Total imports   US$8,622    100.0%  US$10,726    100.0%  US$11,651    100.0%  US$11,641    100.0%  US$11,484    100.0%
Merchandise trade balance   US$(527)       US$(1,431)       US$ (2,361       US$(1,352       US$(918     

______________________

(1) Preliminary data.
Source: Banco Central.

 

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

 

   2010  2011  2012  2013(1)  2014(1)
EXPORTS (FOB)                              
                               
Americas:                              
Argentina   US$ 575    7.4%   US$588    6.6%   US$504    5.3%  US$493    4.9%   US$440    4.3%
Brazil    1,419    18.3    1,625    18.2    1,688    17.6    1,710    17.1    1,611    15.9 
United States    195    2.5    244    2.7    324    3.4    352    3.5    418    4.1 
Other    930    12.0    1,161    13.0    1,301    13.6    1,205    12.0    1,316    13.0 
Total Americas    3,119    40.3    3,618    40.5    3,817    39.9    3,760    37.6    3,785    37.3 
                                                   
Europe:                                                  
European Union:                                                  
France    31    0.4    41    0.5    33    0.3    33    0.3    38    0.4 
Germany    238    3.1    302    3.4    256    2.7    312    3.1    295    2.9 
Italy    144    1.9    158    1.8    130    1.4    145    1.5    131    1.3 
United Kingdom    109    1.4    122    1.4    118    1.2    86    0.9    87    0.9 
Other EU    471    6.1    560    6.3    396    4.1    461    4.6    424    4.2 
Total EU    992    12.8    1,184    13.3    933    9.7    1,037    10.4    975    9.6 
EFTA(2) and other    616    8.0    711    8.0    686    7.2    506    5.1    471    4.6 
Total Europe    1,608    20.8    1,895    21.2    1,619    16.9    1,543    15.4    1,446    14.2 
                                                   
Africa    216    2.8    288    3.2    334    3.5    290    2.9    218    2.1 
Asia    603    7.8    821    9.2    1,138    11.9    1,584    15.9    1,551    15.3 
Middle East    234    3.0    304    3.4    380    4.0    425    4.3    524    5.2 
Free Trade Zone(3)    1,015    13.1    1,012    11.3    885    9.2    923    9.2    997    9.8 
Other    945    12.2    986    11.0    1,421    14.8    1,464    14.7    1,638    16.1 
Total   US$7,741    100.0%  US$8,924    100.0%  US$9,594    100.0%  US$9,989    100.0%  US$10,159    100.0%
                                                   
IMPORTS (CIF)                                                  
                                                   
Americas:                                                  
Argentina   US$ 1,469    17.0%  US$2,004    18.7%  US$1,741    14.9%  US$1,656    14.2%  US$1,458    12.7%
Brazil    1,578    18.3    2,082    19.4    2,097    18.0    1,836    15.8    1,948    17.0 
United States    855    9.9    1,101    10.3    1,041    8.9    1,010    8.7    1,083    9.4 
Other    1,241    14.4    1,088    10.1    1,523    13.1    1,232    10.6    1,237    10.8 
Total Americas    5,143    59.6    6,275    58.5    6,402    54.9    5,734    49.2    5,726    49.9 
                                                   
Europe:                                                  
European Union:                                                  
France    137    1.6    187    1.7    189    1.6    241    2.1    196    1.7 
Germany    198    2.3    258    2.4    248    2.1    294    2.5    468    4.1 
Italy    161    1.9    148    1.4    153    1.3    193    1.7    181    1.6 
United Kingdom    72    0.8    125    1.2    98    0.8    164    1.4    86    0.7 
Other EU    409    4.7    663    6.2    555    4.8    618    5.3    693    6.0 
Total EU    976    11.3    1,381    12.9    1,242    10.7    1,510    13.0    1,623    14.1 
EFTA(2) and other    352    4.1    228    2.1    895    7.7    314    2.7    233    2.0 
Total Europe    1,328   15.4    1,609   15.0    2,137    18.3    1,824    15.7    1,856    16.2 
Africa    408    4.7    541    5.0    399    3.4    951    8.2    765    6.7 
Asia.    1,652    19.2    2,196    20.5    2,467    21.2    2,853    24.5    2,969    25.9 
Middle East    63    0.7    69    0.6    100    0.9    217    1.9    118    1.0 
Other    28    0.3    37    0.3    147    1.3    65    0.6    50    0.4 
Total   US$ 8,622    100.0%  US$10,727    100.0%  US$11,652    100.0%  US$11,644    100.0%  US$11,484    100.0%

 ______________________ 

(1)Preliminary data.

(2)European Free Trade Association.

(3)Reflects exports from Uruguay to the free trade zones within its territory, for further export, typically as part of a manufactured good comprising inputs produced in third countries, to destinations of which Uruguay does not maintain statistics.

 

Source: Banco Central.

 

D-36
 

 

FOREIGN TRADE ON SERVICES

 

Uruguay’s services trade has traditionally been heavily concentrated on Argentina and Brazil and has been driven principally by tourism, transportation and financial services and, since 2007, transactions made from free economic zones.

 

In 2010 and 2011, gross tourism receipts and the number of tourist arrivals increased by 14.3% and 46.0% and by 14.7% and 23.0%, respectively. In 2012, both gross tourism receipts and the number of tourist arrivals decreased by 5.8% and 3.9%, respectively. In 2013, gross tourism receipts decreased by 7.5% and the number of tourist arrivals decreased by 1.1% compared to 2012, mainly as a result of a 6.5% reduction in tourists arriving from Argentina due to deteriorating economic conditions, limited access to foreign currency in Argentina, as well as higher taxes on the usage of Argentine credit cards outside of Argentina. Uruguayan authorities have implemented measures to support tourism, including VAT refunds on services provided to non-residents paid by credit or debit cards issued abroad.

 

In 2014, gross tourism receipts decreased by 8.4% and the number of tourist arrivals decreased by 0.2%, primarily due to a 10.2% reduction in tourists arriving from Argentina. However, the increase of tourists arriving from Brazil (17.5%) and Europe (8.5%) partially offset the decline in tourism originated in Argentina.

 

Revenues from Tourism

 

   Number of
Tourist Arrivals

(in thousands)
  Gross Tourism
Receipts

(in millions of US$)
 2010    2,408    1,509 
 2011    2,960    2,203 
 2012    2,846    2,076 
 2013    2,815    1,922 
 2014    2,810    1,760 

_________________________

Source: Banco Central.

 

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

 

Tourist Arrivals
(% by country)

 

   2010  2011  2012  2013  2014
Argentina     52.4%   58.2%   62.0%   58.5%   52.7%
Brazil     15.7   14.4   13.9   14.0    16.4 
Other     32.0   27.4   24.1   27.5   30.9 
Total    100.0%  100.0%  100.0%  100.0%  100.0%
                            

 Sources: Banco Central and the Ministry of Tourism.

 

Until the 2002 banking crisis, financial and insurance services, primarily banking and corporate services, contributed to the growth in services exports. 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 BGU, Banco de Crédito, Banco Montevideo and Banco Comercial, all of which had their operations suspended and have since been liquidated or, in the case of BGU, closed. Following the banking crisis in 2002, deposits by non-residents began to recover, reaching US$4.2 billion as of December 31, 2014, representing 15.1% of total foreign currency deposits held by the non-financial private sector with the Uruguayan banking system (excluding deposits held with banks in liquidation).

 

D-37
 

 

In 2012, as part of Uruguay’s efforts to enhance tax transparency, Congress enacted a law to improve access to information regarding share ownership of Uruguayan companies. This law creates a registry to be held with Banco Central where every holder of bearer shares of a Uruguayan company will have to be registered. In addition, in 2012 the tax authorities of Uruguay and Argentina entered into a cooperation agreement to facilitate sharing of tax information. This agreement was ratified by Congress in January 2013. Similar agreements were concluded with Island, Denmark, Norway and Canada (in 2012, 2013 and 2014 respectively).

 

D-38
 

 

BALANCE OF PAYMENTS

 

In 2014, Uruguay’s balance of payments registered a surplus of US$1.4 billion compared to a surplus of US$2.9 billion in 2013, a surplus of US$3.3 billion in 2012, a surplus of US$2.6 billion in 2011, and a deficit of US$360.8 million in 2010. Banco Central’s international reserve assets stood at US$17.5 billion at December 31, 2014, US$16.3 billion at December 31, 2013, US$13.6 billion at December 31, 2012, compared to US$10.3 billion at December 31, 2011 and US$7.7 billion at December 31, 2010.

 

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

 

   2010(2)  2011(2)  2012(2)  2013(2)  2014(2)
                
Current Account               
 Merchandise trade balance   US$ (527.0)  US$(1,430.5)  US$(2,361.3)  US$(1,351.9)  US$(918.1)
 Exports    8,030.7    9,273.7    9,915.8    10,256.4    10,379.5 
 Imports    (8,557.7)   (10,704.3)   (12,277.1)   (11,608.3)   (11,297.6)
 Services, net    1,157.2    1,519.3    1,074.1    (141.4)   1.2 
 Interests and dividends    (1,501.1)   (1,618.3)   (1,519.1)   (1,842.0)   (1,835.9)
 Current transfers(3)    140.0    155.6    115.5    128.5    129.4 
Total current account   US$ (730.8)  US$(1,373.9)  US$(2,690.8)  US$(2,923.9)  US$(2,623.3)
                          
Capital and Financial Account                         
 Capital transfers   US$   US$   US$40.0   US$201.2   US$ 
 Direct Investment    2,348.8    2,510.9    2,539.0    3,026.9    2,741.1 
 Portfolio Investment(4)    (682.6)   1,975.8    1,643.2    2,770.1    1,161.4 
 Other medium and long term capital    (529.6)   (6.4)   52.8    (348.7)   142.2 
 Other short term capital    (79.8)   (290.1)   2,011.2    (1,043.9)   (213.0)
Total capital and financial account, net  US$1,056.8   US$4,190.2   US$6,286.1   US$4,605.6   US$3,831.7 
                          
Errors and Omissions(5)   US$(686.8)  US$(251.9)  US$(308.3)  US$1,263.0   US$151.6 
Total balance of payments   US$(360.8)  US$2,564.4   US$3,287.0   US$2,944.6   US$1,360.0 
                         
Change in Banco Central reserve assets(6)  US$360.8   US$(2,564.4)  US$(3,287.0)  US$(2,944.6)  US$(1,360.0)
                          
 Gold(7)    (0.0)   0.0    (0.4)   (0.0)   (0.0)
 SDRs    (0.1)   0.1    (0.2)   0.1    0.0 
 IMF Position    95.0    50.4    8.9    15.1    4.9 
 Foreign Exchange    (1,370.2)   1,122.5    524.7    191.3    (196.4)
 Other holdings    914.4    1,391.4    2,753.9    2,716.6    1,551.4 
 Total assets   US$(360.8)  US$2,564.4   US$3,287.0   US$2,923.0   US$ 1,360.0 

 _____________________________ 

(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, including gifts.

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

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

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

(7)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, foreign trade on services net, interest and dividend payments, and current transfers.

 

In 2010, the current account recorded a deficit of US$730.8 million. This deficit was attributable to an increase in interest and dividend payments, primarily due to increased remittance of corporate profits to foreign shareholders of direct investments made in prior years.

 

D-39
 

 

In 2011, the current account recorded a deficit of US$1.4 billion. The increase in the current account deficit was mainly attributable to an increase in the merchandise trade deficit while interest and dividend payments and current transfers did not record significant changes. The increased deficit in merchandise trade was partially offset by an increase in the inflows from foreign trade on services, net.

 

In 2012, the current account recorded a deficit of US$2.7 billion. The increase in the deficit compared to the previous year was mainly attributable to an increase in the merchandise trade deficit and a decrease in the surplus in foreign trade on services, net.

 

In 2013, the current account recorded a deficit of US$2.9 billion. The increase in the deficit compared to the previous year was mainly attributable to an increase in interest paid by the public sector on outstanding debt and increased remittance of corporate profits by the private sector. To a lesser extent, a growing imbalance in trade services, particularly in the category of travel and other services, contributed to increase the deficit. In contrast, the merchandise trade balance improved in 2013, decreasing its deficit by US$1.0 billion compared to 2012.

 

In 2014, the current account recorded a deficit of US$2.6 billion. The US$301 million decrease in the current account deficit compared to 2013 was mainly attributable to an improvement in the merchandise trade balance, while investment income and transfers remained stable.

 

Capital and Financial Account

 

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

 

In 2010, Uruguay’s capital and financial account recorded a surplus of US$1.1 billion. mainly resulting from an increase in foreign direct investment, which offset the decrease in portfolio investments and in other medium and long-term capital.

 

In 2011, Uruguay’s capital and financial account recorded a surplus of US$4.2 billion mainly as a result of inflows generated by foreign direct investment, which reached US$2.5 billion and a surge of portfolio investment reflecting improved conditions in the risk perception of Uruguay’s sovereign debt in the international capital markets.

 

Similarly, in 2012, Uruguay’s capital and financial account recorded a surplus of US$6.3 billion mainly as a result of inflows generated by foreign direct investment, which reached US$2.5 billion, and portfolio investment, which reached US$1.6 billion.

 

In 2013, Uruguay’s capital and financial account recorded a surplus of US$4.6 billion mainly as a result of increased foreign direct investment, which reached US$3.0 billion, and an increase in non-resident holdings of local bonds issued by Banco Central and the central government. The increase in foreign direct investment included investments made in connection with the “Montes del Plata” pulp mill construction in Colonia and hydrocarbon exploration activities.

 

In 2014, Uruguay’s capital and financial account recorded a surplus of US$3.8 billion, comprised of US$2.7 billion of foreign direct investment and US$1.2 billion of portfolio investment.

 

In August 2012, Banco Central set forth certain requirements for the purchase by non-residents of Central Bank bonds issued in pesos or UIs. Non-residents, through local financial institutions, must deposit with Banco Central a percentage of the investment made in Banco Central’s debt. This deposit cannot be withdrawn until the security is transferred to a Uruguayan resident or a foreign investor that has previously satisfied the prior-deposit requirements or redeemed by Banco Central. The minimum percentage that investors are required to deposit with one or more local financial institutions was originally set at 40%. In June 2013 this percentage was raised to 50%.

 

In June 2013, Uruguay implemented similar requirements for the purchase by non-residents of local treasury bills and bonds issued in pesos or UIs. The minimum percentage that non-residents must deposit with one or more local financial institutions is 50% of the investment made in these bills and bonds.

 

D-40
 

 

In September 2014, the Macroeconomic Coordination Committee, which is comprised of representatives of the Ministry of Economy and Finance and Banco Central, removed the reserve requirements for non-residents’ holdings of central government local currency-denominated securities and reduced the level of mandatory deposit requirements for investments in Banco Central’s short-term debt from 50% to 30%. As of May 1, 2015, Banco Central removed all remaining reserve requirements on non-residents’ holdings of its securities.

 

International Reserves

 

As of December 31, 2014, the international reserve assets of Banco Central stood at US$17.5 billion, compared to US$16.3 billion at December 31, 2013. The following table shows the composition of the international reserve assets of Banco Central, and the banking system at each of the dates indicated.

 

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

 

   As of December 31,
   2010  2011  2012  2013  2014
                          
Banco Central   US$ 7,656(2)  US$10,302(3)  US$13,604(4)  US$16,290(5)  US$17,555(6)
Of which gold represents    12    12    13    10    10 
Public Banks    2,133    1,491    1,766    1,913    2,196 
Private Banks    5,302    4,126    3,784    3,547    3,599 
International reserve assets   US$15,091   US$15,919   US$19,154   US$21,750   US$23,350 

 ________________________________

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

(2)This amount includes US$1,590 million of reserves and voluntary deposits of the Uruguayan banking system, including US$792 million of Banco de la República and other public sector financial institutions, with Banco Central.

(3)This amount includes US$2,350 million of reserves and voluntary deposits of the Uruguayan banking system, including US$1,108 million of Banco de la República and other public sector financial institutions, with Banco Central.

(4)This amount includes US$3,969 million of reserves and voluntary deposits of the Uruguayan banking system, including US$1,642 million of Banco de la República and other public sector financial institutions, with Banco Central.

(5)This amount includes US$5,299 million of reserves and voluntary deposits of the Uruguayan banking system, including US$2,184 million of public sector financial institutions, with Banco Central.

(6)This amount includes US$6,768 million of reserves and voluntary deposits of the Uruguayan banking system, including US$2,771 million of public sector financial institutions, with Banco Central.

 

Source: Banco Central.

 

As of July 31, 2015, Banco Central’s international reserve assets totaled US$18 billion (of which gold represented US$10 million), including US$6,360 million in reserves and voluntary deposits of the Uruguayan banking system, of which US$2,448 million were claims of Banco de la República and other public sector financial institutions.

 

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.

 

Foreign Investment

 

Uruguay has a legislative framework that provides for the equal treatment of foreign and local investors and access by foreigners 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.

 

D-41
 

 

In each of 2010, 2011, 2012, 2013 and 2014, estimated foreign direct investment accounted for US$2.3 billion, US$2.5 billion, US$2.5 billion, US$3.0 billion and US$2.7 billion, respectively, of Uruguay’s balance of payments.

 

Foreign investment in Uruguay has been traditionally directed towards the industrial, construction and tourism related sectors and land. Since 2004, however, European pulp manufacturers have invested in the pulp industry in Uruguay approximately US$3.1 billion.

 

D-42
 

  

MONETARY POLICY AND INFLATION

 

Banco Central was established in 1967 and is in charge of issuing currency, managing foreign exchange reserves, 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 policy, 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.

 

Banco Central’s charter was most recently amended in 2010. Under the current charter, 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, subject to ratification by the Congress.

 

Banco Central’s charter 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 on public debt. However, Banco Central can serve as a financial agent of the government under article 49 of its charter and has a duty under article 3 to ensure the orderly functioning of the payments system.

 

Law No. 18,401 created the Corporación de Protección al Ahorro Bancario or Corporation for the Protection of Bank Savings as an agency independent of Banco Central, removing Banco Central’s responsibility for the administration of the mandatory deposit insurance program introduced in 2002. Law No. 18,401 placed under a single agency, the Superintendencia de Servicios Financieros, the supervision and regulation of the banking sector, and under the Superintendencia de Seguros, Fondos de Pensión y Mercado de Valores, the regulation of insurance companies, the stock market and pension funds.

 

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. This “crawling peg” system 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 1999 devaluation 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%.

 

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 one year ahead consistent with the inflation objective set for the period. In 2003, the program was designed to generate an inflation rate between 17.0% and 23.0% and the policy was successful in the sense that the target on monetary base was achieved and inflation rate was lower than projected (10.2%). In the first quarter of 2004 a target range for the monetary base was introduced, which implied more flexibility in the intermediate target and more commitment with inflation itself. Since then, the inflation objective was set to a range with floors and ceilings that declined from quarter to quarter, from 9.0-14.0% in the third quarter of 2004 to 4.5-6.5% by the end of 2006.

 

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In September 2007, Banco Central began defining monetary policy by reference to short term interest rates as the new intermediate target. As a consequence, Banco Central introduced a short-term interest rate that was initially set at 5.0% and established the average money market rate as the instrument to monitor its new inflation target. The interest rate band was set at 4.0-6.0%.

 

In January 2008, the monetary policy rate was kept constant at 7.25%, but the tolerance of the inflation target range was changed to 3.0-7.0% in recognition of the difficulties to keep a close track of this target in a context of high volatility in commodity and asset prices. On October 3, 2008, Banco Central raised the monetary policy rate to 7.75%, taking into account the strong domestic demand compared to aggregate supply in a context of international uncertainty.

 

In light of the deepening international financial markets crisis, Banco Central decided, in the last quarter of 2008, to allow a broader fluctuation of the average money market rate. It also established a program to repurchase Peso-denominated Monetary Regulation Bills, giving holders the option to elect the currency of redemption, to reduce volatility in the foreign exchange market. As financial markets recovered stability, Banco Central once again focused on the monetary policy rate as an operational target and raised the rate to 10.0% in January 2009, given the persistent inflationary pressures. In March 2009, the global economic recession scenario, along with the decrease of inflationary expectations in the middle term, contributed to the decision to lower the monetary policy rate to 9.0%. In June 2009, the authorities decided to lower the monetary policy rate further to 8.0% considering inflation performance and as aggregate demand pressures diminished. Although inflationary pressures emerged in the second half of 2009, the monetary policy rate remained unchanged until December 2009. At that time, Banco Central decided to lower the rate to 6.25%, taking into account the decrease of uncertainty in the international context and a favorable assessment of domestic risks. Additionally, in December 2009, it narrowed the inflation target range from 3.0-7.0% to 4.0-6.0%. In September 2010, Banco Central raised the monetary policy rate to 6.50% to mitigate increasing inflationary pressures. In March 2011, Banco Central once again increased the monetary policy rate to 7.50% in response to prevailing inflation expectations for the subsequent 18 months, attributed primarily to inflationary pressures generated by the international markets and a growing domestic demand. In June 2011, Banco Central increased the monetary policy rate from 7.5% to 8.0% in response to prevailing inflation expectations. In December 2011, Banco Central again increased the monetary policy rate to 8.75%. In March 2012, Banco Central decided to maintain the monetary policy rate at 8.75%. In October and December 2012, Banco Central increased the monetary policy rate to 9.0% and 9.25%, respectively, responding to increasing inflation expectations. On June 28, 2013, Banco Central discontinued the use of a monetary policy rate determined by reference to a short term interest rate as its principal monetary policy tool and reverted to using the monetary base by managing monetary aggregates, focusing on variables such as the amount of money in circulation and bank deposits levels to define monetary levels. Banco Central’s use of short term interest rates as its main monetary policy tool in an international environment characterized by depressed interest rates was considered ineffective to control inflation. Capital inflows resulted in an appreciation of the Uruguayan peso. Banco Central currently manages monetary aggregates (MI) to control inflation. Banco Central also broadened the inflation target range from 4.0-6.0% to 3.0-7.0% starting in July 2014, and announced that it expects to maintain this range for 24 months.

 

To regulate liquidity in the market, Banco Central conducts periodic auctions of Banco Central notes denominated 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. While during the past nine years (with the exception of 2008), foreign currency deposits held with the banking system as a percentage of total deposits declined, as of December 31, 2014, 77% of all deposits held with the banking system continued to be 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.

 

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

 

   As of December 31,  As of April 30,
   2010  2011  2012  2013  2014  2015
Currency, including cash in vaults at banks   US$ 1,899   US$2,271   US$2,726   US$2,783   US$2,594   US$2,169 
Other    613    705    995    1,179    937    758 
Monetary base   US$2,512   US$2,976   US$3,721   US$3,962   US$3,531   US$2,927 

_______________________

(1) Exchange rate at the end of the period.

 

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)

 

   2010  2011  2012  2013  2014  For the twelve months ended April 30, 2015(1)
M1 (% change)(2)    30.0%   20.8%   11.2%   15.0%   3.7 %  6.3%
M2 (% change)(3)    30.4    22.1    10.5    13.9    6.7    6.9 
Credit from the financial system (% change)    22.5    14.2    18.3    19.8    14.7    13.9 
Average annual peso deposit rate (period end)    4.8    5.5    5.2    5.1    8.5    5.2 
                               
Monetary policy rate (TPM)(4)    6.50    8.75    9.00             
Average money market rate (TMM) (period end)(4)    6.50    8.75    9.00             

 __________________________ 

(1)  Preliminary data.

(2)  Currency in circulation plus peso-denominated demand deposits.

(3)  M1 plus peso-denominated savings deposits.

(4)  On June 28, 2013, Banco Central discontinued the use of a monetary policy rate (TPM) and discontinued the publication of the money market rate (TMM).

 

Source: Banco Central.

 

Liquidity and Credit Aggregates
(in millions of US$(1))

 

   2010  2011  2012  2013(2)  2014(2)
Liquidity aggregates (at period end):               
Currency, excluding cash in vaults at banks   US$ 1,469   US$1,761   US$2,035   US$2,107    US$1,975  
M1(3)    5,174    6,310    7,197    7,504    6,841 
M2(4)    6,340    7,820    8,866    9,160    8,591 
M3(5)    16,992    20,252    22,700    24,737    25,905 
Credit aggregates (at period end):                         
Private sector credit    8,781    10,574    12,459    14,103    14,658 
Public sector credit    624    1,332    1,204    1,021    1,383 
Total domestic credit   US$9,405   US$11,906   US$13,663   US$15,124   US$16,041 
Deposits:                         
Uruguayan Peso deposits   US$4,871   US$6,059   US$6,830   US$7,053    US$6,616 
Foreign currency deposits    14,582    15,718    17,576    19,568    21,571 
Total deposits   US$19,453   US$21,777   US$24,406   US$26,621   US$28,187 
                          
Deposits of non-residents   US$3,930   US$3,286   US$3,742   US$3,992    US$4,257  

 ______________________ 

(1)Exchange rate at the end of the period.

(2)Preliminary data.

(3)Currency in circulation plus peso-denominated demand deposits.

(4)M1 plus peso-denominated savings deposits.

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

 

Source: Banco Central.

 

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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
       
 2010    6.9    8.4 
 2011    8.6    11.1 
 2012    7.5    5.9 
 2013    8.5    6.3 
 2014    8.3    10.6 
 For the 12 months ended July 31, 2015     9.0    7.0 

_______________________

Source: National Institute of Statistics.

 

In 2009, inflation (as measured by consumer prices) declined compared to the previous year, mainly influenced by lower government regulated prices. These fiscal measures assisted in keeping inflation in line with the expectations that supported the monetary policy measures adopted by Banco Central in January 2009. The global economic downturn in 2009 further contributed to reducing inflationary pressure. The inflation rate for 2009 ended at 5.9%. In 2010, the inflation rate increased to 6.9%, reflecting the inflationary effects of the recovery in prices of oil and agricultural products. This situation was offset in part by the appreciation of the peso against the U.S. dollar. In 2011, the inflation rate exceeded the target range and reached 8.6%, prompting Banco Central to increase the monetary policy rate to 8.75%. In 2012, the inflation rate exceeded the target range set by Banco Central and reached 7.5%. Banco Central increased the monetary policy rate to 9.25% in December 2012. The inflation rate in 2013 reached 8.5%, and the monetary policy rate remained at 9.25% until Banco Central discontinued its use on June 28, 2013 as a means of controlling inflationary pressures (see “Monetary Policy and Inflation—Monetary Policy.”). The inflation rate reached 8.3% in 2014 and 9.0% for the twelve-month period ending July 2015. Banco Central monitors developments in monetary demand with a view to avoiding further increases in inflation rates and medium term expectations. In March 2014, the government sought to prevent further price increases on basic goods and reached an agreement with supermarkets and main stores to maintain prices for a basket of basic products at January 2014 levels until June 2014. A similar agreement has been entered into in August 2015 for a 60-day period. In addition, the government decided to exempt from VAT fruit and vegetable sales (which were the most volatile goods during the last, exceptionally rainy, summer) as well as fixed-charge public utility services such as electricity, water and communications. The government continuously monitors the impact on inflation of fiscal policy measures and developments in the labor market with a view to reducing inflation inertia.

 

The weighted average annual interest rate for 91 to 180 day term deposits in U.S. dollars in the banking system was 0.6%, 0.5% and 0.4% in December 2009, December 2010 and December 2011, respectively. This rate was 0.4% in December 2012, 0.3% in December 2013, 0.3% in December 2014 and remained at 0.3% in June 2015. The weighted average annual interest rate for 91 to 180 day term deposits in pesos in the banking system was 5.2% in December 2009. This rate stood at 5.2% in December 2010, 4.7% in December 2011, 4.8% in December 2012, 5.2% in December 2013, 8.5% in December 2014 and declined to 5.2% in April 2015.

 

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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. At December 31, 2009, the ratio of non-performing loans (“NPLs”) to total loans was 1.2%, while the provision for NPLs ratio (provision for NPLs in relation to total gross loans) stood at 6.4%. As of December 31, 2010, the ratio of NPLs to total loans decreased to 1.0% while the provision for NPLs ratio decreased to 6.2%. As of December 31, 2011 the ratio of NPLs to total loans was 1.3% excluding Banco Hipotecario and 2.7% including Banco Hipotecario. As of December 31, 2011 the provision for NPLs ratio stood at 6.0% excluding Banco Hipotecario and 7.2% (including Banco Hipotecario). As of December 31, 2012, the ratio of NPLs to total loans was 2.3% while the provision for NPLs ratio stood at 6.2% (both including Banco Hipotecario). As of December 31, 2013, the ratio of NPLs to total loans was 1.8% while the provision for NPLs ratio stood at 4.7% (both including Banco Hipotecario). As of December 31, 2014, the ratio of NPLs to total loans was 1.7% while the provision for NPLs ratio stood at 5.1% (both including Banco Hipotecario).

 

For a discussion of Uruguay’s current monetary policy, see “—Monetary Policy.”

 

Foreign Exchange

 

Between 1990 and June 2002, the Uruguayan peso gradually lost value relative to other currencies. Banco Central allowed the peso/U.S. dollar exchange rate to fluctuate within a band of its value (initially set at 3.0% and increased to 6.0% in June 2001) and the bounds of the band were adjusted upward by 0.6% (1.2% after June 2001) 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 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%, responding to Argentina’s economic crisis and its impact on the region as a whole. 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. Starting in 2003, the peso strengthened versus the U.S. dollar. In 2008, the appreciation of the peso was interrupted by the financial crisis, but once the uncertainty decreased, the peso began to appreciate versus the U.S. dollar. This trend continued until the third quarter of 2011. Thereafter, the peso depreciated against the U.S. dollar in line with the fluctuation recorded in other Latin American currencies. Throughout 2012 and until May 31, 2013, the peso appreciated against the U.S. dollar. However, beginning in June, 2013 the peso has depreciated against the U.S. dollar. As of December 31, 2014, the exchange rate stood at Ps. 24.333 per US$1.00, compared to Ps. 20.268 per U.S. dollar on June 1, 2013. Between January 1, 2015 and July 31, the peso continued to depreciate against the U.S. dollar by 17%. As of July 31 2015, the exchange rate stood at Ps.28.478 per US$1.00.

 

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
 2010    21.329    19.042    20.072    20.094 
 2011    20.426    18.300    19.300    19.898 
 2012    22.099    19.111    20.321    19.399 
 2013    22.646    18.858    20.496    21.389 
 2014    24.742    21.268    23.225    24.333 
 For the 12 months ended July 31, 2015     28.507    23.271    25.174    28.478 

____________________

(1) Daily interbank end-of-day bid rates.

 

Source: Banco Central.

 

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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 most recently amended, Banco Central exercises its supervision and inspection powers over public and private financial institutions through the Superintendencia de Servicios Financieros or Financial Services Superintendency. Although the Superintendency has technical and operational autonomy, Banco Central retains certain powers in relation to receivership of impaired institutions and revocation of banking licenses. 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 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 Financial Services 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 1.5% 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 3.0% 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 17.0% 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.

 

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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 Basel 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 8.0% in the case of banks, financial cooperatives, financial houses and off-shore banks, and 12.0% in case of financial cooperatives holding a limited license. Minimum capital requirements must cover credit, market and operational risk requirements under Basel II recommendations. In addition, Banco Central requires banks to maintain minimum capital requirement for systemic risk of up to 2% of the bank’s risk-weighted assets. Banco Central has maintained a maximum leverage ratio of 25 times capital and has defined a roadmap for the implementation of Basel III, which is currently scheduled to be fully implemented by 2018.

 

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 must be taken into consideration by the banks in assessing the borrowers’ ability to repay their obligations (and classifying 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 UIs, of UIs.130 million. The minimum capital required for financial houses and cooperatives with limited licenses is UIs 65 million, and for off-shore banks is US$4.5 million. At December 31, 2014, one UI was equal to Ps. 2.9632.

 

As of December 31, 2014, financial institutions had on average a total capital to risk-weighted assets ratio above the ratio required by Banco Central.

 

In early 2003, the government began the restructuring of Banco Hipotecario’s operations and modification of its sources of funding. Banco Hipotecario ceased 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. In addition, Banco Hipotecario’s lending capacity was suspended by Banco Central while the restructuring process was underway and has recently been reestablished with respect to loans denominated in local currency only. The restructuring of Banco Hipotecario’s operations entailed a significant reduction of its payroll and branches throughout the country. To improve its capital structure, the government acquired from Banco Hipotecario several portfolios of non-performing and low quality loans and, in consideration of such assets, assumed certain liabilities incurred by Banco Hipotecario with Banco de la República in connection with the transfer of U.S. dollar-denominated deposits in 2003. Additional transfers of assets to the government and further assumption of Banco Hipotecario liabilities by the government were completed in 2010. As of December 31, 2014, Banco Hipotecario had US$1.7 billion of assets and US$745 million of capital. As of December 31, 2014, Banco Hipotecario remained in full compliance with current minimum capital adequacy ratios requirements.

 

The Uruguayan Banking System

 

Commercial banks in Uruguay typically provide full-service banking. Of the ten private banks operating in Uruguay as of December 31, 2014, eight were Uruguayan corporations majority owned by foreign banks and two were 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 limited to taking local currency denominated deposits and making local currency denominated mortgage loans.

 

D-49
 

 

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 60.0% of Nuevo Banco Comercial’s equity) were acquired by a group of international investors led by Advent, an investment fund manager. In June 2011, Scotiabank Group, a Canadian company, acquired Advent’s participation in Nuevo Banco Comercial. In December 2012, Scotiabank Group acquired the remaining state-owned shares of Nuevo Banco Comercial, increasing its ownership interest to 100.0%.

 

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. As of July 31, 2015, there were no savings associations 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, 2014, Banco de la República held approximately 42.3% 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 non-residents 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 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 those two institutions.

 

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

 

D-50
 

 

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$2.2 billion. 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$1.4 billion 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.

 

During the 2002 crisis, with the exception of the country’s two largest banks, foreign-owned banks in Uruguay funded deposit outflows from their own resources.

 

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The share of NPLs on total loans issued to the non-financial sector increased during the 2002 crisis. For all active private institutions excluding off-shore 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 NPLs 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.

 

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 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 1.3% in December 2009. The guarantee was never called upon and it was released in December 2006 as Banco de la República 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.

 

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 increased from about 1.3% in 2005 to 2.5% in 2007, decreasing to 1% in 2008 and to 0.5% in 2009. Sight deposits, which accounted on average for 79% of total deposits, paid minimal interest in case of current accounts denominated in pesos 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.

 

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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$20,000 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$20 million loan plus an additional credit line of US$40 million which are expected to be replaced over time by insurance premiums 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 non-financial private sector’s deposits with the banking system and solvency ratios improved 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$9.4 billion 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 first 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 in January 2006. 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 Superintendencia de Protección del Ahorro Bancario (“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.

 

In 2008, the Uruguayan financial system suffered some of the impacts of the global financial crisis, mainly affecting bank earnings. Deposits of the non-financial sector with the financial system (excluding the central government and social security agencies) increased in 2008 by 19.0% or US$2.1 billion up to US$13.3 billion and grew again in 2009 by 19.0%, or US$2.6 billion, totaling US$15.9 billion as of December 31, 2009. Credit extended to the domestic private sector by the banking system also increased from US$6.9 billion in 2008 to US$7.2 billion in 2009. The share of NPLs to total loans (based on payment delinquencies) stood at 1.7% as of December 31, 2009.

 

Regulatory capital as of December 31, 2009 increased with respect to 2008, representing 16.7% of risk-weighted assets (excluding Banco Hipotecario). During 2009, bank credit to enterprises and individuals represented approximately 25% of Uruguay’s GDP.

 

In 2010, deposits of the non-financial private sector with the banking system increased by 17.0% or US$2.6 billion to US$17.9 billion (74.2% denominated in U.S. dollars) as of December 31, 2010. Credit extended to the domestic private sector by the banking system also increased from US$7.2 billion in 2009 to US$8.6 billion in 2010. The share of NPLs to total loans (based on payment delinquencies) stood at 1.1% (excluding Banco Hipotecario) as of December 31, 2010.

 

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Regulatory capital as of December 31, 2010 increased with respect to 2009, representing 16.8% of risk-weighted assets (excluding Banco Hipotecario). During 2010, bank credit to enterprises and individuals represented approximately 22% of Uruguay’s GDP.

 

In 2011, deposits of the non-financial private sector with the banking system increased by 15.0%, from US$17.9 billion in 2010 to US$20.6 billion (73.6% denominated in U.S. dollars) as of December 31, 2011. Credit extended to the domestic private sector by the banking system also increased from US$8.6 billion in 2010 to US$ 10.4 billion in 2011. The share of NPLs to total loans (based on payment delinquencies) stood at 2.7% as of December 31, 2011 (1.3% excluding Banco Hipotecario).

 

Regulatory capital as of December 31, 2011 represented 15.6% of risk-weighted assets (including Banco Hipotecario). During 2011, bank credit to the non-financial sector represented approximately 24% of Uruguay’s GDP.

 

In 2012, deposits of the non-financial private sector with the banking system increased by 12.4%, from US$20.6 billion in 2011 to US$23.2 billion (73.9% denominated in U.S. dollars) as of December 31, 2012. Credit extended to the domestic private sector by the banking system also increased from US$10.4 billion in 2011 to US$ 12.2 billion in 2012. The share of NPLs to total loans (based on payment delinquencies) stood at 2.3% as of December 31, 2012 (1.5% excluding Banco Hipotecario).

 

Regulatory capital as of December 31, 2012 represented 15.7% of risk-weighted assets (including Banco Hipotecario). During 2012, bank credit to the non-financial sector represented approximately 24% of Uruguay’s GDP.

 

In 2013, deposits of the non-financial private sector with the banking system increased by 8.9%, from US$23.2 billion in 2012, to US$25.3 billion (75.3 % primarily denominated in U.S. dollars) as of December 31, 2013. Credit extended to the domestic private sector by the banking system also increased from US$12.2 billion in 2012 to US$13.8 billion in 2013. The share of NPLs to total loans (based on payment delinquencies) stood at 1.8% as of December 31, 2013 (1.3% excluding Banco Hipotecario).

 

Regulatory capital as of December 31, 2013 represented 15.4% of risk weighted assets (including Banco Hipotecario). During 2013, bank credit to the non-financial sector represented approximately 25% of Uruguay’s GDP.

 

In 2014, deposits of the non-financial private sector with the banking system increased by 6.3%, from US$25.3 billion in 2013, to US$26.9 billion (77.7 % primarily denominated in U.S. dollars) as of December 31, 2014. Credit extended to the domestic private sector by the banking system also increased from US$13.8 billion in 2013 to US$14.4 billion in 2014. The share of NPLs to total loans (based on payment delinquencies) stood at 1.7% as of December 31, 2014 (1.5% excluding Banco Hipotecario).

 

Regulatory capital as of November 30, 2014 represented 13.7% of risk weighted assets (including Banco Hipotecario). During 2014, bank credit to the non-financial sector represented 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 November 30, 2014:

 

Classification of Aggregate Assets of the Uruguayan Banking System(1)
(as of November 30, 2014 in millions of Uruguayan pesos)

 

   1A  1B  1C  2A  2B  3  4  5  Total
Banco de la República    70,210    1,155    67,345    17,725    20,679    15,873    4,626    3,982    201,595 
Privately owned banks    89,659    8,995    153,922    40,266    31,686    7,358    4,719    3,300    339,905 
Financial houses    2,560    78    1,513    261    282    141    138    174    5,147 
Off-shore banks    3,632    500    3,144    2,467    411    4,059    573    0    14,786 
Cooperatives    76    0    319    3    26    64    5    39    532 
Total    166,137    10,728    226,243    60,722    53,084    27,495    10,061    7,495    561,965 
Percentage    29.6%   1.9%   40.3%   10.8%   9.4%   4.9%   1.8%   1.3%   100.0%

 ______________________ 

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

  

Source: Banco Central.

 

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Credit Classification of the Banking System(1)
(Based on payment behavior of clients)
(as of December 31, 2014)

 

Institution Type  Performing
Loans
  NPLs
Banco de la República    99.5%   0.5%
Banco Hipotecario del Uruguay    97.7%   2.3%
Private banks    99.8%   0.2%
Cooperatives    99.1%   0.9%
Financial houses    96.0%   4.0%
Off-shore banks    98.5%   1.5%
Total    99.5%   0.5%

 _________________________ 

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

 

Source: Banco Central.

 

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Total Provisions of the Banking System for
Gross NPLs(1)
(as of December 31, 2014)

 

Institution Type  Provisions
Banco de la República    324.8%
Banco Hipotecario del Uruguay    246.4%
Private banks    344.2%
Cooperatives    180.0%
Financial houses    79.9%
Total    311.0%

 _________________________

(1)Total provisions as a percentage of gross NPLs loans to financial and non-financial sector.

 

Source: Banco Central.

 

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,
   2010  2011  2012  2013  2014
   (Number)  (Number)  (Number)  (Number)  (Number)  (Loans)(2)  (Deposits)(3)
Financial Institutions:                     
State-owned    2    2    2    2    2    40.9%   43.9%
Privately-owned(1)    21    20    20    18    18    59.0%   56.1%
Cooperatives    1    1    1    1    1    0.1%   0.0%
Total    24    23    23    21    21    100.0%   100.0%

 _________________________ 

(1)At December 31, 2013, includes ten banks, five financial houses and three off-shore agencies (IFEs).

(2)Loans to non-financial sector, net of provisions.

(3)Non-financial private sector deposits.

 

Source: Banco Central.

 

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

 

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

 

   As of December 31,
   Banco Central  Private
Commercial Banks(1)
  Banco de la
República
   Pesos  Foreign
Currency
  Pesos  Foreign
Currency
  Pesos  Foreign
Currency
 2010    0.8%   0.1%   16.3%   44.4%   21.6%   16.8%
 2011    0.6%   0.3%   16.2%   43.1%   24.1%   15.8%
 2012    0.5%   0.3%   18.9%   44.4%   20.5%   15.4%
 2013    0.5%   0.3%   18.5%   45.3%   19.4%   16.9%
 2014    0.0%   0.0%   18.3%   46.2%   18.4%   17.1%

 _________________________