Thu, Dec 27, 2001 page19

• Uruguayans worry neighbor's devaluation will hit home

  If Argentina allows the peso to fall, Uruguay will follow suit and that will increase the burden for those repaying dollar-denominated debts

  • BLOOMBERG
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  Argentina's default on US$132 billion of debt and the anticipated devaluation of the peso is being felt in neighboring Uruguay, where the economy is expected to suffer as a result.

  "What's going on in Argentina could damage our quality of life," said Geza Kercmar, 42, a Slovenian-born painter and decorator from Montevideo.

  Sympathetic fall

  Uruguay's peso fell 10 percent against the dollar already this year after the central bank in June increased to 15.4 percent from 7.4 percent the maximum devaluation it will allow in a year.

  With about 90 percent of Uruguayan bank deposits and 80 percent of loans denominated in US dollars, Uruguayan businesses and individuals face higher repayments on loans as their peso loses value along with the Argentine currency.

  If, as some predict, Argentina's peso loses 40 percent of its value in an eventual devaluation, Uruguay would have to allow its currency to slide another 10 percent a year to compensate, said Marcela Bension, an economist at ABN Amro Bank in Montevideo and daughter of Alberto Bension, Uruguay's economics minister.

  The Argentine peso has already been devalued by 50 percent by Montevideo exchange houses.

  Argentina's interim president, Adolfo Rodriguez Saa, has announced plans to create a new currency to pay salaries for state workers and other bills, in addition to the planned default on debt, which analysts said is likely to fuel inflation and may prolong a recession.

  Gales Casa Cambiara in Montevideo pays only seven Uruguayan pesos for an Argentine peso that in theory still is worth the same as the US dollar. Yet Gales pays 13.85 Uruguayan pesos for a dollar.

  Uruguay's US$2.7 billion in foreign reserves, equivalent to up to five times the amount of money in circulation, means the central bank can probably manage further slippage in its peso, ABN Amro's Bension said.

  Uruguay's US$18.5 billion economy relies on its neighbor to buy exports of automobiles and wood pulp. The country's 3.3 million people have shared the burden of Argentina's three-year contraction, which helped bring down president Fernando de la Rua.

  The government expects the Uruguayan economy, which shrank 2.8 percent in 1999 and 1.3 percent in 2000, to shrink at least 1 percent in 2001.

  The flood of Argentine cash into Montevideo banks in the months leading up to de la Rua's resignation won't help Uruguay's economy, said Eduardo Fernandez-Arias, an Uruguayan who is head research economist at the Inter-American Development Bank.

  Flood of cash

  New deposits from non-residents reached US$1.1 billion in the 12 months to August, bringing the total to US$5.2 billion, according to Uruguay's central bank.

  "The abrupt increase in Argentine-sourced deposits in the local banking system is recycled to the exterior by the banks," Fernandez-Arias said.

  Fabian Rozenblum, director of Motociclo SA, a bicycle maker in Montevideo, said devaluation in Argentina would cause the country's recession to deepen, accelerating a decline in sales.

  Last year, Motociclo shipped 70 percent of its output to Argentina, generating revenue of US$18 million.

  Argentina is Uruguay's second-biggest trading partner after Brazil, buying 16 percent of its exports in the first nine months of the year.

  "We also would lose some of our competitiveness in prices," Rozenblum said.

  Argentina's crisis is also being felt in the Uruguay's tourism industry, which derives 80 percent of its business from Argentines. Tourism's US$700 million in revenue is equivalent to 30 percent of Uruguay's exports.

  Since November, bookings for hotels in Punta del Este, an Atlantic coast resort 160km from Montevideo, have been "very few," said Mario Amestoy, president of the Uruguayan Tourist Chamber and owner of the Arapey Thermal Oasis, a hot springs resort in northwest Uruguay.

  Graciela Fernandez Meijide, a former deputy cabinet chief in de la Rua's government, spent last week in Punta del Este but said events back home made it impossible to enjoy her vacation.

  "We spent most of the time watching what was happening on television," said Fernandez Meijide, who was waiting for the next ferry to cross the River Plate, which separates the two countries, and return home Argentina. "It was horrible to see."
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