Diego Labat, the head of Uruguay’s central bank, is content. The country is spearheading a regional pivot towards interest rate relaxation, the inflation rate is at its lowest point in nearly two decades, and the currency is one of the strongest in the region.
In contrast to Buenos Aires, which is located just across the Rio de La Plata estuary, where inflation hit 124% in August, the highest level since 1991, capital controls are only just preventing a devaluation of the currency, and net reserve levels are negative.
Strong, independent institutions and political stability are aiding Uruguay’s economy to gradually distance itself from its larger neighbor when the two historically rose and fell together. This is also a symptom of a seismic shift over time.
“Uruguay has done its homework,” Labat, 53, said to Reuters in his office near Montevideo’s busy port. He added that the nation had been much more vulnerable to Argentina’s economic shocks just a few decades earlier.
Due to a direct “link” between the two financial systems that have since deteriorated, the small farm-driven economy endured bank closures, significant unemployment, and skyrocketing poverty in 2002 during a terrible financial crisis in Argentina.
When Uruguay had an issue, Argentina did too, according to Labat. Uruguay’s second-largest trading partner at the time was Argentina. It is currently ranked fourth, behind China, Brazil, and the EU.
“Today, a problem that existed in Argentina is no longer a problem here.”
Inflation
The two countries’ divergent fortunes are obvious.
August saw the lowest annual inflation rate for Uruguay since 2005 at 4.1%, which is less than one-third of Argentina’s rate of 12.4% for the entire month of August.
In 2018, Uruguay’s peso was roughly equivalent in value to that of Argentina. Today, that peso is worth nearly ten times as much on paper as it did in reality—the majority of Argentines trade on unofficial markets because formal access to dollars is severely constrained.
Argentina is battling to maintain a $44 billion International Monetary Fund (IMF) program, but estimates place its net central bank reserves in the red, making it more difficult for it to make payments. In the meantime, Uruguay’s has remained constant at about $8 billion.
SETTING A MODEL FOR RATE CUTS
The central bank of Uruguay has been able to reduce interest rates starting in April to 10%, with another decrease likely at its upcoming monetary policy meeting in October thanks to lower inflation and the country’s stable currency.
This should alleviate a slowdown brought on by the drought, which saw activity decline 2.5% in the second quarter compared to the same period last year. Labat anticipates growth in the economy in 2024.
Meanwhile, Argentina’s benchmark interest rate has risen to 118%, impeding growth and credit availability and sending the economy into recession.
Although Labat noted trends, including a decline in the percentage of non-resident bank deposits in Uruguay, many of which were from Argentina, he asserted that a “strong and growing Argentina” was better for Uruguay. Data from the central bank reveal that total non-resident deposits have decreased to 8% from a peak of 41.5% in 2001.
Uruguay is now less vulnerable as a result, despite developing its own institutions and reputation. According to a JPMorgan index, government borrowing costs are declining, with Uruguay overtaking Chile this year as the region’s lowest-risk country.
There is negativity against Latin America, according to Labat. However, Uruguay serves as a model for how improved institutions might alter the economy.
