Q How important to Uruguay are the investments by the Finnish company Metsa-Botnia and the Spanish group Ence in the pulp mills on the River Uruguay?
A The investments are very important. They are the biggest in Uruguay’s history and will have a very positive impact on the economy. In total, we are talking about investments to the tune of $3bn. The Nordic group Stora Enzo has also announced plans to develop a pulp mill in the centre of Uruguay next year but that will be much less controversial than the other two.
Metsa-Botnia and Ence’s pulp mills have attracted controversy because they are on the River Uruguay, which forms a natural border between Uruguay and Argentina. This is the reason the concerns arose in the first place. We understand them and, of course, we are addressing them.
(Note from The Banker: In mid-July, by 14 votes to one, the International Court of Justice at the Hague provisionally ruled against Argentina’s lawsuit that Uruguay was breaking a 1975 treaty between the two countries relating to the River Uruguay, by allowing the pulp mills’ development. Argentina insisted it would continue to pursue its case at the Hague but the Metsa-Botnia mill is more likely to proceed after the ruling. The Spanish company Ence has now put on hold its mill’s development and may even undertake it in a less controversial part of Uruguay.)
Q Is it not going to be very hard to find a solution with Argentina as its position over the pulp mills is diametrically opposed to Uruguay’s? With hindsight, do you think you should have discussed the pulp mills in more detail with Argentina before you granted their approval?
A There will be a shared monitoring and control of the pulp mills by Argentina and Uruguay. I am optimistic that this is the basis to reach an agreement between the two countries. We are certain that we have all the information and have done all the environmental studies that are necessary to develop the mills.
We have supplied the Argentinian government with all the information it needs, mostly during the past year. We had no intention of creating problems with Argentina.
Q Why did Uruguay threaten to leave Mercosur [Southern Common Market]? Have the Argentinians treated Uruguay as if it is a province of Argentina?
A We have not thought of leaving Mercosur. We are thinking of the exact reverse: we want to reinforce it. We want it to overcome the difficulties it has today, so that it functions better. I don’t think Argentina treats Uruguay as if it’s a province, but I do believe there is a problem with [Argentinian and Brazilian dominance] within Mercosur.
It seems to me that, when Brazil and Argentina work together, they can prejudice the interests of the smaller members states, Uruguay and Paraguay. If Argentina and Brazil can overcome this problem and recognise that it leads to an asymmetry within Mercosur, it will be possible to strengthen the bloc.
Q In the past, do you think Uruguay has been too dependent on Argentina and Brazil?
A When Mercosur was set up, some 50% of Uruguay’s exports were with Argentina and Brazil, but since the crises in Brazil and Argentina, the US has emerged as our main trading partner. I think this change has created greater opportunities for Uruguay. However, I believe it’s important that Mercosur is developed so that it is possible for member states to strike bilateral trade accords with other countries.
Q What effect will Venezuela’s entry into Mercosur have on the trading bloc? Will it not complicate your relationship with Mercosur because the president of Venezuela, Hugo Chávez, is anti-US while Uruguay wants to strike a bilateral trade agreement with the US?
A I think Venezuela’s entry into the organisation will help to stop [Argentinian and Brazilian dominance]. Always when a new country enters an organisation, it will lead to a modification of its internal rules. Yes, Hugo Chávez is engaging in a forceful confrontation with the US but the truth is that his country has very big trading volumes with the US.
I have three points. First, I think it’s important to view these matters in terms of the economic fundamentals. Second, it seems to me that Venezuela’s entry into Mercosur should help to expand the level of commerce within the organisation. Third, I think Mercosur must recognise the possibility for its members to undertake bilateral trade agreements with countries outside the bloc, in a way that is compatible with Mercosur membership.
Uruguay has already struck a bilateral trade agreement with Mexico while being a member of the grouping. Uruguay was able to achieve this because the other member states allowed it to do so. I think the same kind of agreements should be allowed with other countries.
Q Is it not better to have Chile’s position and to just be an associate member of Mercosur and to have the freedom to undertake whatever trade deals you like?
A That’s right, but Uruguay was a founding member of the organisation. It seems to me that the best thing to do is to work to ensure that Mercosur membership is more compatible with a country’s insertion into the wider world.
Q How has the Uruguayan economy been performing?
A The economy has been doing very well. It grew by 6.6% last year and at an annualised rate of 7.2% for the first quarter this year. All sectors have been performing well, especially agriculture and manufacturing.
Foreign direct investment in Uruguay doubled to $600m last year against the previous year [excluding the pulp mill investments]. Most of the foreign investment is taking place in agriculture, forestry, services, transport, communications, development of ports and tourism.
Inflation is within the government’s target range of 3.5%-7.5% for this year. It was 4.9% last year. The government’s primary goal is to consolidate growth, thereby reducing unemployment and creating high quality jobs and improving the standard of living for Uruguayans. The current unemployment rate is 12%.
I am convinced that if economic growth continues at its current pace, within the next few months we will see an important drop in unemployment.
Q How has the banking sector been performing?
A This sector has improved markedly. There has been a big recovery in deposits and a strong reduction in the level of bad debts. There has also been a strong recovery in assets. The government is undertaking reforms of the central bank and the country’s main state-owned mortgage lender, Banco Hipotecario.
We want to improve confidence in the banking system. The government wants to define the objectives and responsibilities of the central bank more clearly. The independence of the central bank is guaranteed by the national constitution: we want to spell out the bank’s role better. For example, we are creating within the central bank a more powerful supervisory agency of financial institutions.
However, we are also setting up an agency outside the central bank that will better protect savers; this body will help any banks that fall into difficulties. This institution was not in place during Uruguay’s last banking crisis after Argentina’s economic crisis. The new body will have a deposits fund that will operate in times of crisis.
