An object lesson in South America:
As a small, open economy dependent on banking, beach tourism and beef exports, Uruguay ought to be more exposed to the world recession than Argentina, with its large domestic market. Both economies have slowed sharply after years of rapid growth. But Uruguay looks set to fare much less badly than Argentina. . .
That is because the growth in Argentina owed much to expansionary fiscal and monetary polices which caused the economy to overheat. Over the past year prices for its farm exports have fallen, bringing down tax revenues. To keep public spending going, President Cristina Fernández de Kirchner nationalised the private pension system in October, destroying what little confidence investors had in her government. Argentines, long inured to such behaviour, responded as they always do, by taking their money out. Capital outflows reached 7% of GDP in 2008.
Much of that money went across the river. Deposits in Uruguay’s banks by non-residents rose by 41% in the 12 months to December. These pesos follow others: during the presidency of Néstor Kirchner, Ms Fernández’s husband and predecessor, some Argentine beef farmers sold their herds rather than submit to export bans and price controls, and ploughed the money into Uruguayan ranches. . .
Uruguay is better placed to mitigate recession than its neighbour. Argentina may struggle to roll over the $23 billion in debt maturing this year and next because of investors’ distrust: its bonds yield 15 percentage points more than American Treasury bonds. Uruguay is charged a premium of only five percentage points, and can thus more easily afford a fiscal stimulus.
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