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Uruguay: Investment, Growth, and Development

August 10, 2007

For the second year in a row, the Americas Society and Council of the Americas, in conjunction with the Chamber of Commerce Uruguay-USA, convened over 150 senior-level private sector representatives, government officials, and members of the press for a conference analyzing Uruguay’s investment opportunities as well as the Southern Cone’s energy sector.

 
  • H.E. Danilo Astori, Minister of Economy and Finance
  •  Other featured speakers and panelists included:
    • Guillermo Brooks, Regional Executive GE Energy, General Electric Energy
    • David Lovegrove, Director, Private Sector Development, International Development Ireland
    • Eduardo Mangarelli, Country Manager, Microsoft
    • Alfonso Marques, Director, Drever y Lavista
    • Susan Segal, President and CEO, Americas Society and Council of the Americas
    • Horacio Vilaró, President, Chamber of Commerce Uruguay – USA
     
     
     
    Background
     
    On January 25, 2007, the United States and Uruguay signed the Trade and Investment Framework Agreement (TIFA). With the aim of expanding opportunities for investment for both countries, the agreement provides an agenda to encourage bilateral trade and investment, loosen technical barriers to trade, and set guidelines for intellectual property rights and other regulatory issues.
     
    President George W. Bush’s trip to Montevideo in March 2007 further boosted the U.S.-Uruguay relationship. In his opening remarks, Horacio Vilaró of the Chamber of Commerce said that the Uruguayan business community hopes the TIFA agreement serves as the first step towards a free trade pact with the United States.
     
    Summary
     
    The Montevideo conference focused on a variety of issues, including Uruguay’s economy, investment prospects, and its business sector, as well as the Southern Cone’s energy sector. The forum brought together members of the private and public sector for first-hand analysis of the economy’s investment climate, energy sector, and opportunities for innovation.
     
    Economy and Investment Climate
     
    Uruguay has demonstrated sustained economic growth and financial stability over the past several years. According to Fitch Ratings’ Lorna Martin, Uruguay’s economic growth remains sustainable because of the country’s ability to attract diverse investment. Danilo Astori, the finance minister, said maintaining economic growth at an average of 5.6 percent since 2004 serves as the most immediate challenge, but can be accomplished through measures such asimproving the conditions for competitiveness,stimulating innovation, and encouraging productivity growth.
     
    Astori noted that the recently created Private Sector Support Unit at the Ministry of Economy has received projections of approximately $650 million of investment in sectors such as tourism, real estate, and agriculture over the next few years. The minister also highlighted a new tax law that provides incentives for private investment by lowering the income tax from 30 percent to 25 percent, offering tax breaks in initiatives related research and development, and allowing deductions on loans from national and international organizations. It also establishes tax deductibility for certain types of financial transactions.
     
    For Martin, the Uruguayan economy’s weak points include the high proportion of debt as a percentage of GDP as well as the large portion of total debt—about 81 percent— denominated in dollars and therefore subject to foreign exchange fluctuations and external shocks. Despite these weaknesses, Martin maintains that growth prospects are favorable. Uruguay will benefit from increased consumption, high levels of diversified investment, and less dependency on Mercosur.
     
    An important source of software, investing in education is crucial to continuing the growth of Uruguay’s technology sector. Eduardo Mangarelli of Microsoft spoke about the importance of innovation as well as research and development in the technology sector.
     
    The Challenges of the Energy Sector in the Americas
     
    Though Uruguay has exhibited sound financial stability and economic growth, energy security remains a critical issue for generating investment and maintaining its economic performance. By 2030, the demand for electrical energy will double, according to Guillermo Brooks. Hydroelectric sources will fulfill roughly 50 percent of this demand. However, the remainder will have to be met from sources such as natural gas or other fuels. Analysts agreed that it is unlikely the price of oil will decrease in the short term. Biofuels and regasification plants will be the best ways to meet regional energy needs.
     
    According to Minister Jorge Lepra, Uruguay has the potential to become a major exporter of biofuels. The government offers incentives for biofuel development. Looking specifically at ethanol, efforts to produce it from sweet sorghum not only helps to satisfy energy demands (through resource diversification) but also results in less environmental damage than the use of fossil fuels. Furthermore, unlike ethanol from corn or sugarcane, sorghum does not affect human consumption, according to Alfonso Marques.
     
    Speakers concluded that it is important to create the institutional conditions favorable for overcoming barriers to energy investment and to forge agreements that will guarantee long-term energy security. Ernesto Gutierrez of Private Sector of the Americas emphasized the importance of partnerships between the private and public sectors to facilitate the flow of investment in infrastructure for generating and transporting resources. Alejandro Bulgheroni of Pan American Energy said his company hopes to increase its presence in the Uruguayan energy sector by participating in the construction of a regasification plant built in cooperation with the government. Pan American Energy is also considering investing in aeolic energy (wind power) production.
     
     
    The Irish Case: A model for Innovation
    David Lovegrove showcased the Irish model of development—a model that turned Ireland into one of the most open and globalized economies in the world. Success there resulted from a combination of factors, such as industrial policy and incentives, sound macroeconomic management, and social partnership agreements. However, Lovegrove highlighted two key areas for fostering development: the ability to innovate in strategies and public policies while supporting the domestic sector, and the willingness of the public and the private sectors to work together to facilitate business. Lovegrove argues that the Irish model is a strategy that can work for other countries, irrespective of time and place.
    Conclusion
    Uruguay saw a GDP growth rate of 7 percent on 2006, which is above the regional average for the fourth consecutive year. As in the rest of Latin America, Uruguay is boosting its economy by taking advantage of increased liquidity in global markets as well as high commodity prices. In general, most of the region has been experiencing positive economic growth. However, according to the Financial Times’ Richard Lapper, Latin America’s growth is expected to average around 4 percent to 5 percent in 2007, which is lower than that of India, China, and Russia.
    The greatest challenge for Latin America is achieving social equality along with growth. As AS/COA’s Susan Segal argued, one of the best ways to attract investment and growth is through entrepreneurship. She argued that, alongside large corporations, it is the small businesses and entrepreneurs that help a country grow.