Political risk

Uruguay's small economy leaves it extremely vulnerable to economic shocks and disruptions in either of its larger neighbours – Argentina and Brazil. The Uruguayan economy badly needs to develop new sources of growth to offset the effects of an ageing population and constraints to capital accumulation.

International issues

A short section of boundary with Argentina is in dispute. The same applies to two short sections of the boundary with Brazil – the Arroyo de la Invernada (Arroio Invernada) area of the Rio Cuareim (Rio Quarai) and the islands at the confluence of the Rio Cuareim (Rio Quarai) and the Uruguay River.

Uruguay is a full member of the Mercosur common market with Brazil, Argentina and Paraguay (Chile and Bolivia are associate members). Support for Mercosur dwindled sharply in 2005 and 2006. Many Uruguayans advocate withdrawal in favour of a series of bilateral trade agreements with the US, China and other larger economies.

In 2007, the government signed an agreement for trade and investment with the US. The agreement could be a precursor for a full-fledged free-trade deal. Such an agreement is opposed by Mercosur, which requires members to negotiate these deals collectively.

Main industries

Agriculture's share in GDP amounts to just 8% and has been falling in recent years. Farms, however, are very productive. The sector's main products include wheat, rice, corn, sorghum and livestock. Cattle herding is the main farming activity and the biggest single source of foreign exchange. Large foreign investments in the forestry industry during 2006 and 2007 are expected to provide a tangible boost to economic growth.

Manufacturing, which accounts for almost one-fifth of GDP, includes various agro-processing industries such as meat processing, wool and hides, sugar, textiles, wine, footwear and leather apparel. Other industries manufacture industrial components and industrial intermediates, such as vehicle tyres, cement, plywood and petroleum products, as well as a range of more sophisticated consumer goods. In 2006, the country began construction of two large paper mills at a cost of US$1.7 billion, the largest private investment planned in Uruguay.

A free trade agreement with Mexico has been implemented and further trade reform measures are under negotiation, including reductions in tariffs on capital goods for equipment and telecommunications, information technology and agricultural inputs from 6-9% to 2% – effective through 2011. At the same time, the authorities will continue to phase out a number of specific import duties on textiles, foodstuffs and chemical products.

The government is promoting Uruguay's transformation into a regional distribution and logistics hub. Concessions have been awarded to the private sector to operate two ports, while two new private ports are already being developed.

Economy

Between 1999 and 2003, GDP declined by 16%. An estimated 120,000 people (most of them young) left the country during 1995-2004 and about 30% of Uruguayans were living in poverty. Since then, the economy has been recovering at an impressive rate. Poverty has begun to decline again but is still above the pre-crisis level. The government has followed a broad policy known as “neo-liberalism”. This approach was distinguished by modest efforts to privatise state-owned enterprises and the pursuit of free trade with the US.

The strategy is strongly opposed by a majority of voters who favoured stronger support for Mercosur and higher spending on social issues. Export growth remains strong, and while a sharp recovery in imports contributed to an increase in the current account deficit, capital inflows have helped raise international reserves. The country’s foreign debt has declined by US$1.3 billion since 2002. However, it is still about US$2 billion larger than in 2001.

Energy

Uruguay has no known oil resources and must import the 35,000 barrels per day it consumes. A recent drought has left Uruguay’s hydropower plants operating well below capacity, forcing the government to resort to running more expensive oil-fired power plants.

Natural gas is likely to play a growing role in the future. The government wants this energy source to make up 30% of total usage. Economic weaknesses in recent years are hindering this goal, however, because public spending has had to be cut. Despite such setbacks, projects already completed are having a major impact. The most recent development was the successful opening of the first phase of the Southern Cross pipeline that cost between US$160 million and US$170 million. The pipeline will eventually be capable of carrying up to five million cubic meters per day.

Imports and Exports

External Links

Uruguay CIA Report

CENTRAL BANK OF URUGUAY

EL OBSERVADOR One of the main newspapers of the country

TOURISM IN URUGUAY Yahoo! Travel

PUNTA DEL ESTE Beach resort in South America

Doing business in Uruguay PRICEWATERHOUSE