Wedged between Brazil and Argentina—two neighbors with serious economic problems—Uruguay is an attractive foreign direct investment alternative in Latin America.
The nation of Uruguay is working aggressively to boost its allure against a backdrop of regional woes. The urgency increased in July with the release of the 2015 United Nations Economic Survey of Latin America and the Caribbean. With economic activity of the first quarter of 2015 as a baseline, the commission projected a growth rate in the region below last year’s 1.1%. Gross domestic product in South America, however, could contract by 0.4%. Economic problems in Brazil and Argentina, neighbors and partners in Mercosur, the South American trading bloc, highlight the need for Uruguay to get its story out.
In 2014, Uruguay’s GDP grew by 3.5%. That was well above the regional average, although down from the high-water mark of 5.1% reached in 2013, and represented the nation’s second-lowest growth rate since 2004. The UN Commission report forecasts a continued slowdown in 2015 but says Uruguay will still beat the regional average.
Uruguay’s development of renewable energy will soon reach a saturation point, with further demand contingent on increased consumption—which, in turn, is tied to increased GDP. Fluctuating commodity prices inject an element of uncertainty. Protests by European farmers have politicized the funding of the Sheep Technology Centre in Uruguay by the European Union.
Taken together, these factors make growth through FDI more important than ever. Uruguay long ago recognized the importance of FDI and started easing restrictions in the mid-1970s. When the Argentine financial crisis of 2002 spilled into Uruguay, Uruguay refused to default.
“That was an eye-catching scenario where you could differentiate the political attitudes of Argentina and Uruguay,” says Juan Federico Fischer, managing partner at Fischer & Schickendantz in Montevideo. “That coupled with the rising prospect of commodity exports made Uruguay a very attractive place for investors,” he adds.
Its attractions include up to 20 years’ exemption from corporate income tax outside of tax-free zones, according to Fischer, as well as zero tax within the 11 free zones. With a few exceptions like defense and telecommunications, foreign and domestic companies have equal treatment under the law, and foreign companies are free to repatriate capital gains, profits and dividends.
Uruguay is politically stable, and its government is committed to FDI. Its membership in Mercosur and other trade blocs offers a range of export opportunities.
Uruguay continues to compete for FDI with other Latin American countries. It vies with Chile and Panama (logistics projects), with Argentina, Brazil and Paraguay (commodity-related investments), with Brazil (tourism) and with Colombia and Costa Rica (global services).
Current priorities include infrastructure projects like railways and ports; agro-industry; logistics; tourism; and retail.
Exploiting opportunities may mean working with a local partner, says Alvaro Inchauspe, general manager at Uruguay XXI, the Investment and Export Promotion Institute. “Right now, most requests for partners [are in] infrastructure to modernize railways, highways and ports,” he says. Foreign companies usually do seek a local partner, often subsidiaries of groups already active in Uruguay.
VITAL STATISTICS |
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Location: Southern portion of South America |
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Neighbors: Argentina, Brazil |
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Capital city: Montevideo |
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Population: (2014) 3.45 million |
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Official language: Spanish |
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GDP per capita (2014): US $16,811 |
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GDP growth (2014): 3.5% |
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Inflation (2014): 9.65% |
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Currency: Uruguayan peso |
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Investment promotion agency: Uruguay XXI, the Investment and Export Promotion Institute |
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Investment incentives: No corporate tax under specified circumstances, free zones, thematic service zones |
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Ease of Doing Business rank (2014): 82 |
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Corruption Perceptions Index rank: 73 |
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Political risk: Uruguay’s potential role in Colombia peace process with ELN rebels |
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Security risk: Shortage of police patrols in some areas |
PROS |
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Possibility of trade accord between Uruguay, Brazil and the European Union later in 2015 |
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Stable ratings outlook |
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Stepped up efforts to export elsewhere in Latin America, India, the Middle East and Nigeria |
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Favorable debt settlement with Venezuela |
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Public-private partnership project calls for at least one-third private investment |
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Well-capitalized banking sector |
CONS |
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Some economic deceleration expected |
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High crime rate by US standards |
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BP exiting Uruguay |
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Labor trafficking |
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Decline in some areas of tourism |
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High degree of dollarization of deposits |
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Potential for recession spill over from Argentina/Brazil |
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General labor unrest in Montevideo at time of writing |
Sources: BancoColumbia; BBVA Research; Fischer& Schickendantz; Latin American Herald Tribune; MercoPress; Moody’s Investors Service; PanAm Post; Prensa Latina; Reuters; Scotiabank; State Department; Transparency International; World Bank
For more information on Uruguay, check out our Country Economic Reports
