by Jason Mitchell
Portucel, the giant Portuguese pulp producer, announced in September that it had signed a memorandum of understanding with the Uruguayan government to invest $3 billion in a pulp mill, a paper factory, a deep water port and an electricity generation plant in the east of the country. The deal, understood to be the biggest foreign direct investment in Uruguay’s history, is one of many hitting the minor South American nation.


The exact location has not yet been announced, as developers do not want to attract environmental protestors, but the country is fast-becoming Latin America’s pulp factory: Botnia, the Finnish group, has already invested $1.1 billion in a controversial pulp mill at Fray Bentos, and Spanish paper producer ENCE will plough $1.25 billion into a pulp mill at Punta Pereira. 

Stora Enso, the Swedish-Finnish pulp producer, is also developing a $1 billion pulp mill on the River Negro. In March, Uruguay’s economy ministry confirmed that Nippon Paper, a Japanese pulp producer, had also acquired land in the country and had started to forest, with a view to installing a new mill.

Uruguay has also seized the opportunity to become an agricultural powerhouse, especially while the farming industry of its bigger neighbor, Argentina, was paralyzed by a farmers’ dispute with the government for more than three months this year.

Uruguay’s government has announced huge investments in new ports, highways and railways to ensure that soya and beef – in particular – are able to reach overseas markets smoothly. During the first six months of 2008, Uruguay exported 212,000 metric tones of beef, 21% more than Argentina.

“Public and private investment is booming in the country,” says Daniel Varese, president of Citi in Uruguay and vice-president of the US-Uruguayan Chamber of Commerce. “In per capita terms, Uruguay is on course to become one of the most prosperous countries in Latin America, approaching Chile, the region’s leader on a per capita basis.”

Adding to the bullish scenario, in June, Uruguay’s state energy company Ancap said it had discovered a large natural gas field – potentially some 85 billion cubic meters – off its Atlantic coast, which could transform the country from an importer to an exporter of the fuel. Repsol-YPF, Total, Eni and BP have expressed interest in helping develop the field.

Stable Expansion
According to the UN, total FDI in Uruguay amounted to $880 million last year and $1.4 billion in 2006. At the start of the decade, the country was only drawing around $200 million a year.

According to the IMF, the country of 3.3 million people will have a nominal GDP of $26.6 billion this year, against $23.0 billion in 2007. Income is $8,300 per head, against $8,500 in Brazil, $8,914 in Mexico, and $10,125 in Chile.

Official data show that in the first quarter GDP expanded by 2.4% on a seasonally-adjusted, quarter-on-quarter basis, well ahead of market expectations. This increase represents 10.9% growth on a year-on-year basis and a 60% rise from the 2002 trough, according to Deloitte, which predicts expansion of 7.5% this year, easing to 4.4% in 2009.

According to Uruguayan statistics agency INE, retail inflation is running at 7.26% on an annualized basis, much lower than Argentina, which private economists estimate to be at around 25%. Average inflation in South America is around 7.4%, according to the IMF.

“Uruguay has been modifying the way it conducts monetary policy, moving gradually from an exchange rate anchor toward an inflation-targeting regime in which the central bank’s goal is to keep overall price increases within a target range,” Marco Pinon, an economist at the IMF, says.

Besides improved macro fundamentals, Uruguay has also reduced its need for external funding. It has narrowed the fiscal deficit and made significant improvement to the profile of the public debt, says Alfonso Lema, managing director of Deloitte in Uruguay.

The Stability Factor
This backdrop has helped lure blue chip investors. In August, Anglo-Australian mining giant Rio Tinto announced a $300 million development of the port at La Agraciada on the River Uruguay, which will enable it to ship iron ore from the Carumbá mine in Brazil. Rio says it could have located its transshipment port for the mine in Argentina but opted for Uruguay instead.


“We carried out an extensive site survey in both countries,” says Bart Wiersum, project manager for port and river logistics at Rio Tinto. “There is a pool of factors that we must consider: land availability, land costs, transshipment costs, and so on. We also assessed the rule of law and political and economic stability – Uruguay is better than Argentina from that perspective.”

Rio Tinto’s $2.15 billion Carumbá investment is a good example of how South American countries can cooperate to magnetize hefty foreign investment. According to the company, the development will involve the longest logistics chain of any mine in the world.

This incorporates a 30 kilometer conveyor belt from the project on the Brazilian-Bolivian border to the barge port of Albuquerque on the River Paraguay in Brazil. It continues with barge transfer for 2,500 kilometers downstream along the River Paraguay through Paraguay and along the River Paraná through Argentina, to the La Agraciada port in Uruguay.

At La Agraciada, iron ore will be transferred to ocean going vessels, up to 60% of their capacity. The ships will then sail to a special transfer zone off the coast of Montevideo, where they will be topped up to 100%. Rio declines to discuss financing for the mine.

Getting Wired Up
The list of new infrastructure investments in Uruguay is impressive. Ancel, the cellphone arm of Antel, the state-owned Uruguayan telecoms company, is spending $81 million on a new network for cell phones in the country between this year and next year, according to KPMG. Claro, the cellphone company owned by América Móvil, and Telefónica are each committed to investing $70 million in new cellphone infrastructure, so that full 3G capabilities are available in Uruguay.


Antel is increasing annual capex to $140 million next year, a 16% jump from $120 million this year. It will construct a new submarine fiber-optic cable between Uruguay and Argentina, giving the country direct access to the main international internet network for South America for the first time.

Elsewhere, the main international airport at Carrasco will see a new $134 million terminal open at the end of the year, developed by its Argentine owner, Aeropuertos Argentina 2000.

As well as constructing a new 45,000 square meter terminal at Carrasco, Aeropuertos Argentina 2000 has upgraded the airport at Punta del Este. The government has also announced plans to modernize airports at Salto and Durazno.

The government also wants to enter into public-private partnerships to upgrade the road network, in particular the corridor between Rio Blanco and Colonia on highways one, eight and 11. Total investment for this upgrade will be $176 million, initially financed by the government. It will grant concessions to private operators, which will finance the road’s upkeep by levying tolls.

The government is also considering building a ring-road around Montevideo for the first time, so that heavy trucks do not have to enter the city center, and is expected to give shortly the green light to a new $1.2 billion port at La Paloma, in eastern Uruguay. This is a controversial move, as the area is a tourism destination, but it is essential for the Portucel pulp mill to go ahead and for agribusiness in this region to be fully developed. 

And the fashionable tourism destination, Punta del Este, is also experiencing a wave of new investments in hotels, resorts, and towers – since 2001, more than $1 billion has been invested in new projects, according to KPMG.

A big proportion of this investment has come from European property developers, especially Spanish, which want to diversify beyond the depressed European real estate market.

Carrasco airport was financed through corporate bonds issued via ABN AMRO in the local capital markets in April 2007, according to KPMG. “This case is exceptional; most capital raising takes place in the form of loans granted by banks within the countries in which the companies are headquartered,” says Rodrigo Ribeiro, a partner at KPMG in Uruguay. “The Uruguayan government finances its investments with debt from multilaterals,” he adds.

Local Limits
Citi’s Varese says it is difficult for private companies to raise funds for infrastructure within Uruguay, because of limited capital markets. “The size of some of the projects is just too big for the domestic financial system,” he says.

Typically, projects fund from a variety of sources, including multilaterals, syndicated loans and the domestic bond market. “New infrastructure projects create an opportunity for the development of the local capital markets,” says Varese. “The banks can offer loans but often in the case of these mega-deals, it’s better if the companies seek longer-term financing.”

Varese adds that local pension funds – with the equivalent of $4 billion under management – are eager for new kinds of investment. Regulators allow up to one quarter of assets to be invested in the private sector, but only $120 million has been committed so far, leaving plenty of scope for more.

Uruguay has come a long way since 2001, when it almost suffered a similar economic meltdown to Argentina, because of over-dependence on its bigger neighbor and contagion. It is attempting to decouple itself from Argentina and Brazil, which it feels have not treated it fairly as a Mercosur member.

A section of the left-wing government of Tabaré Vázquez would like to see the country play a smaller role within Mercosur and follow the Chilean model of forging bilateral trade agreements with the US, Europe and Asia. However, it seems more likely that Uruguay will remain a member of Mercosur while also pursuing trade deals with other countries.

Uruguay heads to the polls for presidential elections in October 2009, and Vázquez will not be standing. José Mujica, a populist left-wing national senator and leader of Espacio 609 is favored to win. It is not clear if he would follow Vázquez’s relatively orthodox economic policy.

Some Uruguayan commentators are concerned that the economy may be showing the first signs of overheating, as inflation has been moving northwards. Others are worried that the small economy will not be able to absorb so much investment. However, most people embrace the mega-investments, believing they pave the way for a wealthier society.

As long as commodity prices remain high and planned infrastructure projects come nto being, Uruguay looks set to attract ever-greater FDI flows and become a much more prosperous country. LF

Open All Hours in Montevideo
Tata Consultancy Services Iberoamerica – the IT unit of Indian conglomerate Tata –opted for Uruguay as its start-up location of Latin America. Mario Tucci, vice-president, attributes this to a well-educated local workforce and easy access to the government.

The firm arrived in LatAm six years ago as part of a program to diversify into other markets and to have offices in time zones closer to its main clients in the US and Europe. Today, it employs 5,700 people throughout LatAm, 750 based at Montevideo head office. It has invested more than $30 million in Uruguay.

“It was our first attempt to enter Latin America and we wanted to set up in a country where we would have a big impact,” says Tucci, country head of Tata for Uruguay and Argentina. “Uruguay embraced Tata, and there was a wide availability of good people.” Tata has some 40 projects being managed from Uruguay, and Tucci lauds the locals’ command of English, the universal language of the IT industry.

In LatAm, Tata provides IT solutions, business process outsourcing, and IT helpdesk services for clients globally, including many multinationals. Its regional workforce includes 1,700 people in Brazil, 1,200 in Ecuador and 1,400 in Chile. In India, Tata is a leading auto maker, famous for developing the low-cost Nano car.

“The office in Uruguay provides outsourcing services to global clients based anywhere in the world, while offices in the countries tend to provide solutions to only domestic clients,” Tucci adds. “It’s a 24-hour operation in Uruguay.”

He says that since Tata entered the country, it has pushed Antel, the state-owned telecoms operator, to build a new internet cable to Argentina. This would directly connect to the Unisur Cable, the main internet mesh for South America. Antel plans to make the link within the next couple of years.

“It is critical for our success that Uruguay has excellent communications, including telecoms and air travel,” says Tucci. “A country must be committed to the world. Tata needs to be able to transfer large amounts of data easily.”

He adds that the government must also focus on boosting direct flights to Carrasco International Airport in Montevideo. The seasonal and limited American Airlines service to Miami is not enough, says Tucci.

However, Tucci praises Pluna, the national carrier, for developing direct routes from Montevideo to cities in Brazil, such as Curitiba. But he is concerned by recent news that the airline has stopped its direct flights to Madrid because of high oil prices. Local press in September suggested that the flagship airline may have to declare bankruptcy.

Nonetheless, the Indian firm is upbeat on the Southern Cone nation. “Overall, Tata is pleased with the performance of its office in Uruguay,” he says. “It has had a very good track record.” – Jason Mitchell