peso

BUENOS AIRES, Jan. 29 (UPI) — Uruguay has raised warning signals in its economic policy after its currency appreciated the most in the world against the dollar this week — a situation the government views as a risk to export competitiveness and the pace of economic growth.

In recent days, the Uruguayan peso strengthened more than comparable currencies and moved to the top of global foreign exchange performance. As a result, the dollar fell 3.1% in the local market, a deeper decline than those recorded in Brazil, Chile or Colombia.

The scenario set off alarms within the economic team. To counter the dollar’s weakness, the Central Bank of Uruguay announced a cut to its benchmark interest rate to 6.5% to discourage financial capital inflows and ease pressure on the local currency.

Along the same lines, the Economy Ministry confirmed forward dollar purchases and coordination with state-owned companies to increase demand for the U.S. currency. Those steps are complemented by measures aimed at reducing domestic costs and supporting economic activity, investment and employment, as concerns begin to mount in the productive sector.

Uruguayan economist Luciano Magnífico, of the Catholic University of Uruguay, said the dollar’s behavior in the country cannot be analyzed in isolation.

“The evolution of the dollar in Uruguay has closely tracked what has happened internationally, and particularly its performance against other regional currencies,” he told UPI.

According to Magnífico, the recent weakness of the U.S. currency largely reflects external factors.

“This weakening was closely linked to economic policies promoted during the first year of the Trump administration, especially on trade. That generated significant volatility in financial variables, and Uruguay was not immune to that dynamic,” he said.

The problem, he said, is that Uruguay’s economy already was expensive in terms of the dollar before this episode.

“According to the main indicators, Uruguay had been carrying an overvaluation for years, and this new drop in the dollar further aggravated that situation,” he said.

That combination hits exporters hardest because they are paid in dollars while many of their costs are in pesos. “When the exchange rate falls, the margin between income and expenses shrinks,” the economist explained. In some cases, that gap can become critical for business continuity.

Gonzalo Oleggini, a Uruguayan foreign trade consultant, focused on companies’ day-to-day operations.

“In Uruguay, as in many countries, foreign trade is conducted in dollars. An exporting industry, such as glass manufacturing, collects in dollars, but pays most of its costs in pesos,” he told UPI.

That mismatch becomes more visible when the dollar loses value.

“A year ago, each dollar brought in 40 pesos. A few days ago, it was 36. That means that for the same sale, a company receives less money to cover virtually the same costs, or even higher ones, because there is inflation and wages are rising,” he said.

Oleggini stressed that the impact is greater in labor-intensive sectors.

“Wages and social contributions weigh heavily in the cost structure. Since Uruguay does not have a highly automated industry, the blow remains strong,” he said.

As a result, much of the productive sector is affected.

“The meatpacking industry, plastics, services, logistics, tourism. The country becomes more expensive in dollar terms, making it harder to sell goods and services abroad,” he said. “Ultimately, the entire export sector, both goods and services, is the most affected.”

The concern is also explained by the weight of foreign trade in the economy.

Uruguay generates about $75 billion a year in economic output, and close to $24 billion of that comes from foreign trade in goods and services.

“It is one of the central pillars of the country’s production,” the consultant said.

One of the sectors generating the strongest concern is agriculture.

“That the dollar keeps falling and has been clearly below 40 pesos for several days is quite frustrating for us,” Rafael Ferber, president of the Rural Association of Uruguay, told local newspaper El Observador.

“We feel that macroeconomic measures continue to be taken in the wrong direction,” he said.

Ferber warned that the combination of factors pushing the exchange rate lower has made the situation “absolutely critical” for producers and exporters.

“Uruguay is basically an exporting country, something that is often poorly measured. It exports close to 70% of what it produces. Therefore, it depends on foreign currency much more than other countries,” he said.

Carmen Porteiro, president of the Uruguayan Exporters Union, said recent government decisions are moving in the right direction, although she noted the sector has been warning since last year about the impact of peso appreciation on competitiveness.

That loss of margins, she said, translates into lower investment, workforce adjustments and, in extreme cases, business closures, with direct effects on employment and future growth.

Oleggini said it is difficult to act against a global trend.

“The ability of a small economy like Uruguay’s to influence this is very limited,” he said.

“You can try to move the exchange rate a few pesos, as happened when it fell from 40 to 36 and then rose to 38, but there are no real chances of a strong peso depreciation, which is what exporters are seeking,” he said.

“From the United States, there is a positive view of a weaker dollar as part of its economic strategy. That makes it very difficult to think of a reversal,” he added.

The main tool applied in Uruguay has been the interest rate cut.

“The idea is to reduce incentives to place money and push those pesos into the market, which could generate a slight depreciation of the exchange rate,” Oleggini said. “It is the strongest tool being used and the one that may have some effect, although always limited.”

The gap with exporters’ demands remains wide.

“Many talk about a dollar at 50 pesos, and today we are at 36 or 38. Even bringing it to 40 would already be a challenge,” he said. “Reaching that level in an economy like Uruguay’s, with a weak dollar globally, is today almost a utopia.”