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AmericasOctober 5 2008

Uruguay makes its mark overseas

Long dependent on exports and its larger neighbours, Uruguay is using tax breaks, duty-free zones and investor-friendly legislation to make itself an attractive prospect for foreign money. By John Rumsey.
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Uruguay has long been an economy that is open to the world, as befits a smaller nation that has traditionally relied on exports. The country is now working to position itself as a pivotal part of trade organisation Mercosul and a gateway to the region for foreign investors.

Uruguay is pursuing these aims through investor-friendly legislation, a more favourable tax regime, and the expansion of duty-free zones that act as poles to stimulate local industry.

Not surprisingly, Uruguay’s fate has always depended to a large degree on that of its two giant neighbours, Argentina and Brazil. Indeed, since the financial crisis of 2002 there has been increasing interest from Argentines in investing in livestock farming, while Brazilian investors have been helping develop technology sectors of the economy.

But Uruguay is also seeking to exploit this strategic location as well as a relatively low taxation regime, a solid reputation for probity and a light hand in bureaucracy, the latter a particular advantage when compared with its neighbours.

“The country will face both ways. It will continue to deepen its partnerships within Mercosul and be open to inflows from abroad,” says Banco República president Fernando Calloia.

Stability and economic growth are clearly prerequisites for attracting foreign interest, and the economic crisis of 2002-03 acted as a significant deterrent for foreign investment in subsequent years. But Uruguay now has five years of solid GDP growth under its belt. That means the most important pillar for attracting foreign investment is firmly in place.

Favourable climate

Uruguay also has a transparent government with one of the lowest corruption levels in Latin America. According to Transparency International’s much-heeded corruption perceptions index, Uruguay ranks 25th, behind only Chile at 22nd in Latin America and firmly ahead of Brazil (72) and Argentina (105).

Uruguay has not rested on its laurels but has been working to create a more investor-friendly legislative environment. The government does not place restrictions on investment and subsequent repatriation of profits, and has adopted flexible, easy-to-understand and stable policies on investment.

This positive environment for foreign investment has been enhanced recently by tax changes. Implemented on July 1, 2007, tax law 18.083 eliminated the tax on corporate credit of 2% and lowered corporate rates from 30% to 25%, provided profits are re-invested.

Tax breaks

In addition to the more attractive tax regime, Uruguay offers significant tax breaks for key investments and has proven smart in using free trade zones to lure high-quality investors, including one in the capital, Montevideo.

When the government granted a free trade zone permit for a large-scale pulp mill project to be built by Finland’s Botnia, it secured the largest private investment in the country’s history at $1.2bn.

The eucalyptus mill, in Fray Bentos, has not been without controversy. Indeed, relations with Argentina, long the key investor in the country, were hurt by the Finnish investment, with Buenos Aires accusing Uruguay of environmental destruction of a shared river. That led to blockades of key bridges between the two countries by the Argentines last year. However, most foreign investors did not share the Argentine view and, if anything, have been encouraged to invest by the transparency shown by Uruguay and the high environmental standards imposed by the Finnish company.

Inflow deals

The upshot of all this attention has been a welcome surge in large-scale foreign investment in Uruguay, with investments including that of Spanish energy firm ENCE and paper manufacturer Portucel pledging more than $1bn in investments each. That has seen Uruguay’s dependence on Argentina diminish, bolstering economic autonomy and diversification.

There have been other benefits from having foreign entrants, particularly a substantial upgrade to the country’s technological base. In the case of Botnia, the firm trained Uruguayan technicians in Finland for the construction of the plant, leaving a legacy of knowledge that will prove key in developing the paper and pulp sector. As Mr Calloia points out, this technological upgrade is vital for a country that has long depended on its larger neighbours to supply it with technical support.

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Read more about:  Americas , Uruguay