Uruguay Plans Bond Clearing System to Lure Investment

Uruguay is setting up a local clearinghouse for domestic debt in a bid to lure international investment and cut the nation’s dependence on dollar-denominated bonds, central bank President Mario Bergara said.

The South American country that borders Argentina and Brazil increased its peso-denominated obligations to 35 percent of total debt from zero in 2004, when 100 percent was in U.S. dollars, Bergara said in an interview. The government is seeking to develop the local capital markets as it strives to return to an investment-grade credit rating within two years, he said.

“We are in the process of de-dollarization of our debt,” Bergara said in an interview at Bloomberg’s headquarters in New York yesterday. “The intention is to facilitate operations from international investors to participate in the domestic markets.”

A clearinghouse will be set up at the central bank in early 2011 modeled on Euroclear, Bergara said. It will be backed by the nation’s two stock exchanges, Bolsa de Valores de Montevideo and the Bolsa Electronica de Valores del Uruguay SA, to provide more open pricing and facilitate transactions in the local debt markets, he said.

The government “has to be cautious” in encouraging the development as reducing dependency on dollar obligations too fast could cause “a short-term undesirable misalignment of the exchange rate,” he said.

‘Healthy Process’

“We have to balance a very healthy process of de-dollarization in the long run without misaligning the exchange rate in the short run,” he said. “We don’t have a specific target, but we all agree that dollarization is still high in Uruguay.”

Uruguay has a total $13.9 billion of debt, according to data compiled by Bloomberg.

Investors demand an average 189 basis points, or 1.89 percentage point, in extra yield to hold dollar-denominated Uruguayan bonds rather than U.S. Treasuries compared with 202 for Brazilian debt, according to JPMorgan Chase & Co. indexes.

Brazil is rated investment-grade BBB- at Standard & Poor’s, while Uruguay is rated BB, two levels below, at S&P and Fitch Ratings and Ba3, three levels below, at Moody’s Investors Service, all with positive outlooks.

The three companies assigned investment grade ratings to Uruguay in 1997 before reducing it five years later after Argentina defaulted on $95 billion of debt.

‘Credible Framework’

“The combination of having a credible framework, a good reputation, guarantees and also a decent return is what makes countries like Uruguay fashionable to receive international investors,” said Bergara, 45, who was in New York to meet investors.

The peso is down 6.5 percent against the dollar this year after gaining 25 percent in 2009. It rose 0.2 percent to 20.85 per dollar today. The government’s dollar bond due 2033 fell, pushing up the yield 3 basis points, or 0.03 percentage point, to 5.34 percent.

Uruguay’s $34 billion economy expanded the most since 2008 in the first quarter, led by increases in utilities, transport and manufacturing. Uruguay’s government forecasts economic growth will accelerate to 5.1 percent in 2010 compared with a 2.9 percent increase last year. The expansion will be fueled by growing domestic demand and increased exports of goods including soybeans, it said.

Uruguay is also poised to approve changes in its banking laws to put the country “in the very same line as Chile, for example,” Bergara said.

The Organization for Economic Cooperation and Development included Uruguay on a so-called gray list of countries that “have committed to implement the internationally agreed tax standards, but have not yet substantially implemented” them on Aug. 18.


“Transparency has improved significantly in the last six, seven years in Uruguay,” Bergara said. This process “is not an isolated measure, but part of a broader approach to have the right rules of the game for facilitating and promoting investment in Uruguay,” he said.

Bergara said Uruguay has reduced its reliance on its neighbor since Argentina’s 2001 debt default sparked a banking crisis in his country. Exports to Argentina have fallen to less than 6 percent of total goods exports from about 25 percent, deposits from Argentines in Uruguay have dropped to about 17 percent of total deposits from 40 percent, and loans to Argentine individuals, companies and provinces from Uruguayan banks have dropped to almost zero from 20 percent, he said.

While Uruguay supports the regional trade group known as Mercosur, it’s also trying to diversify its economy more to other parts of the world, Bergara said.

“Our exposure to the regional risk is incomparably lower than 10 years ago,” he said. “We want more Mercosur, but we also want more of the rest of the world.”

(Adds bond prices in 12th paragraph.)
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