CENTRAL BANK PRESIDENT LAYS OUT GOU'S ECONOMIC POLICY

UNCLAS MONTEVIDEO 000105

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN UY
SUBJECT: CENTRAL BANK PRESIDENT LAYS OUT GOU'S ECONOMIC POLICY
CONSIDERATIONS

Ref A: 08 Montevideo 583
Ref B: 08 Montevideo 627
Ref C: 08 Montevideo 697
Ref D: Montevideo 74

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SUMMARY
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1. (SBU) SUMMARY: Central Bank President Mario Bergara told the
Charge d'Affaires that Uruguay remains relatively well-positioned to
confront the worldwide economic slowdown -- its banking sector
remains healthy, consumer spending is solid, and its fiscal house is
in order. While some in the business community have pleaded for
greater government intervention, along the lines of stimulus
packages seen in many other countries, the GOU sees this as a bad
remedy for Uruguay and prefers to keep its economic policy arrows in
the quiver for now. During the week of February 16, the GOU did
access a USD 200 million loan from the Andean Development
Corporation and arranged a USD 400 million line of credit with the
World Bank. END SUMMARY.

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BERGARA ASSESSES IMPACT ON THE ECONOMY
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2. (SBU) In a meeting with the Charge on February 12, Central Bank
President Mario Bergara discussed recent GOU economic policy
decisions made in light of the global crisis and showed he was well
aware of, and comfortable responding to, public debate over the
GOU's strategy. Begara noted that GDP growth projections for 2009
remain positive, but the dramatic drop from approximately 10 percent
growth in 2008 to expected 1-3 percent growth in 2009 is
reverberating throughout the economy and hitting some specific
sectors hard. Commodity prices had fallen, but remain at
historically high levels similar to a year ago. Bergara noted that
the total value of exports (of which commodities or commodity-based
industrialized goods represent over 70 percent of total merchandise
exports) remained constant; Uruguay is actually exporting a higher
volume of goods at a lower price and to more diverse markets than in
the past. He predicted that some affected sectors, such as leather
upholstery for European-made luxury cars, would remain at the mercy
of European and U.S. markets recovering in the future. However, the
economy is general was relatively well-positioned to weather the
global downturn.

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NO STIMULUS PACKAGE FOR URUGUAY
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3. (SBU) Bergara discussed comments made recently by some in the
business community who have called for a stimulus package to help
business and for the monetary policy to focus on competitiveness.
The Central Bank recently raised its benchmark interest rate (from
7.75 percent to 10 percent) in order to fight inflation, while
others in the region were lowering theirs. Bergara explained that,
since the Uruguayan economy is highly dollarized, the
peso-denominated interest rate is not a key variable locally as in
Brazil, where most debt is denominated in reales. Uruguay has a
higher percentage of dollar-denominated debt and a more open
economy, he added. He also pointed out that domestic consumption
remains solid and that many Uruguayan consumers have recently begun
buying more after four years of strong growth, a trend noted in
holiday sales figures, new car sales and private investments. As
the economy began to recover from the 2002 economic crisis,
consumers initially paid down debts, were cautious with spending and
saved more. As a final point, Bergara explained that an injection
of liquidity, while a common prescription elsewhere, would be a bad
plan for Uruguay. Such a measure would increase inflationary
pressures, while noting that Uruguay has largely dodged the
financial crisis due to its underdeveloped capital markets, so there
has been no resulting loss of capital.

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INFLATION VS. THE EXCHANGE RATE
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4. (SBU) Bergara acknowledged that the inflation rate in recent
months has been too close to the GOU's self-imposed 10 percent limit
to give the GOU room to maneuver. If year-over-year inflation rises
above 10 percent, it would trigger biannual salary and pension
adjustments, costs which comprise a large portion of Uruguay's
public expenditures. These adjustments would put additional upward
pressure on the inflation rate. Bergara described the ten percent
ceiling as a psychological barrier as well, stating that the
government had to set an upward limit at some point and that
Uruguayans had quickly become accustomed to single-digit inflation
rates, compared to the often soaring inflation figures of the past.


5. (SBU) Some business leaders have criticized the government for
focusing too much on fighting inflation at the expense of
competitiveness through a weaker peso, a perspective Bergara
described as myopic. Instead, he argued that that price stability
is essential to achieve competitiveness and that exchange rate
fluctuations provide only an ephemeral advantage. Brazil, however,
can afford to depreciate and has the luxury that much of its
consumer price index (CPI) basket of goods is domestically
manufactured and priced in reales. Nearly half of the items in
Uruguay's CPI are tied to the U.S. dollar, making changes in the
exchange rate a big problem - if the dollar goes up 10 percent, the
CPI would automatically increase about 5 percent.

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UPCOMING INTENATIONAL MEETINGS
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6. (SBU) Bergara will attend the Inter-American Development Bank
meeting in Medellin, together with Minister of Economy Alvaro
Garcia, and looks forward to meeting USG officials in attendance.
He said Garcia also plans to attend the World Bank and IMF meetings
this spring. Bergara also encouraged the new Treasury Secretary to
continue meeting with "like-minded" Latin American ministers,
meetings he said would provide opportunities for valuable
exchange. Peru, Colombia, Chile and even Mexico (despite having
very different economic circumstances) were important partners,
along with the international banks, for Uruguay to discuss economic
policy.

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URUGAUY TAPS INTO CREDIT LINES
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7. (SBU) On February 16, Uruguay applied for a USD 200 million loan
from the Andean Development Corporation (CAF in Spanish). Central
Bank contacts told Emboff the money would be used for debt
management. Uruguay pays an average of 9 percent interest on its
foreign debt; the CAF loan is substantially lower at LIBOR minus
points (currently about 1.2 percent). At the same time, the GOU
announced it has secured access to a USD 400 million line of credit
with the World Bank.

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COMMENT
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8. (SBU) COMMENT: In November 2008, Bergara returned to the
Central Bank from his previous role as Vice Minister of Economy, and
has been intimately involved in GOU economic and fiscal policy. He
was comfortable addressing points of difference with the business
community. While he has no doubt that Uruguay will be further
impacted by the global economic downturn, Uruguay's economic
policies appear targeted to Uruguay's specific exposures. Post
believes high-level bilateral meetings with the Uruguayan economic
team in Medellin and during the World Bank/IMF meetings in
Washington will send a strong message to reinforce Uruguay's
pragmatic policies. End Comment.

MATTHEWMAN