Uruguay’s bigger-than-expected interest rate increase last week was meant as a “strong signal” that the government will do whatever it takes to control inflation, the central bank president and economy minister said.
Bank President Mario Bergara led policy makers on March 23 to boost the benchmark rate by one percentage point, to 7.5 percent, double the increase estimated by any of the four economists surveyed by Bloomberg. Uruguay’s $40 billion economy expanded 8.5 percent last year as surging demand for agricultural exports, rising consumer spending and a jump in oil and food prices pushed inflation to its fastest pace in two years.
“The first strong signal we decided to give was in the area of monetary policy,” said Bergara, 45, in his first media interview since the policy meeting. “This decision was a sign that the entire economic team, not just the central bank but also the Economy Ministry, is focused on inflation.”
Uruguay joins other emerging-market countries, including Brazil and Chile, in raising rates this month to prevent economies from overheating. Inflation in the South American nation that borders Argentina and Brazil quickened to 7.67 percent in February from 7.27 percent the previous month, above the upper limit of the central bank’s 2011 target range of 4 percent to 6 percent.
After a bigger rate increase than economists expected, “the market has to interpret that the authorities are ready to take the necessary measures to contract a little, cool down the economy a bit,” Bergara said in the interview at the Inter- American Development Bank annual meeting in Calgary.
Bergara raised borrowing costs even as unemployment rose to 6.1 percent in January from a record low 5.4 percent in December, according to the national statistics institute.
He said policy makers were concerned that private consumption accelerated faster than economic growth last year. That development, combined with external pressures such as oil and food price rises, the Mideast crisis and the Japan earthquake made inflation the “main risk for Uruguay’s economy,” he said.
The government is also committed to controlling spending growth in order to keep demand from overheating, said Economy Minister Fernando Lorenzo, 51, who will host the IDB summit next year in Montevideo, the nation´s capital. Government spending last year trailed economic growth, rising 3 percent, he said.
The central bank move aimed “to reaffirm what has been a fundamental anchor of the Uruguayan macroeconomic program, which is a commitment to prudence and fiscal safety,” said Lorenzo.
Uruguay, a nation of 3.6 million, is rated Ba1, one level below investment grade, with a stable outlook at Moody’s Investors Service; BB+, one level below, with a stable outlook at Standard & Poor’s; and BB, two levels below investment grade, with a positive outlook by Fitch Ratings. The three companies assigned investment-grade ratings to Uruguay in 1997 before reducing them five years later after Argentina defaulted on $95 billion of debt.
Policy makers will focus on operations such as debt swaps and repayments as it works to change its debt profile and reduce the country’s vulnerability, Bergara said.
In 2005, Uruguay’s gross debt was equivalent to 100 percent of gross domestic product. It was entirely denominated in dollars, had an average expiration of two to three years and was expensive, as it consisted mostly of emergency loans from multilateral agencies such as the World Bank and the IMF, Bergara said. Now debt amounts to less than 60 percent of GDP. It’s 40 percent denominated in local currency, the average expiration is above 12 years and it is much cheaper, as it comes mostly from investors, he said.
While he’s not planning to issue bonds, since the country’s financing needs are “very low,” Bergara sees appetite from investors, especially for fixed-rate instruments denominated in the peso.
Despite the country’s lack of an investment-grade rating, “it is reasonable to say that we will certainly be one of the next ones to get it,” Bergara said. “The market places us on the same level as investment-grade countries, especially in Latin America.”
Investors yesterday demanded an average 177 basis points in extra yield to hold dollar-denominated Uruguayan bonds rather than U.S. Treasuries, compared with 156 basis points for Colombian debt and 173 basis points on Brazilian dollar bonds, according to JPMorgan Chase & Co. indexes.
The yield on Uruguay’s dollar bond due 2036 has declined 27 basis points to 6.09 percent from this year’s high of 6.36 percent on Feb. 15. The bond rose 0.15 cent to 119.54 cents on the dollar as of 9:22 a.m. New York time, according to data compiled by Bloomberg.
As part of the measures needed to prevent the economy from overheating, the ministry will postpone to 2012 tax cuts proposed in President Jose Mujica’s Frente Amplio party government plan, Lorenzo said. The government pledged to cut the rate of value-added tax to 20 percent from 22 percent.
“We were supposed to introduce a group of measures that involved tax adjustments, and we now consider it adequate to implement them in 2012,” Lorenzo said. “By then we believe the economy will be back on a path compatible with its long-term growth.”