BBiznews (BN): Thanks to great political, legal, macroeconomic and social stability, Uruguay is one of the fastest growing countries in Latin America and the largest recipient of foreign direct investment (FDI) in relation to the size of its economy over the last decade. How would you describe the current business and investment climate in Uruguay?
Mario Bergara (MB): Uruguay has fairly traditional had institutional strength, but it has been strengthened even more in the last decade. As for political stability, Uruguay is the only full democracy in the whole of Latin America, according to The Economist Intelligence Unit, and the 21st strongest democracy in the world. It is the 6th higest-ranked country in the world for individual liberties and civil rights. The same is true for political stability, where the system of political parties is at the centre of our political system. Uruguay has the oldest institutionalised political party system in the world, in terms of continuity.
It is also the same for social issues, Uruguay is a country that does not have essential conflicts relating to things like ethnicity and religion. It is a country that has an important social stability, with a balance of power between business sectors, trade unions and other entities. We could say it has similarities with Germany in that area. Social stability is achieved through well-being — Uruguay has the best indicators of well-being and equity in all of Latin America, as well as the highest GDP per capita, and the lowest poverty and indigence in the region. This political and social stability is part of the business climate. We also have a tradition of compliance towards our obligations: even in the most critical times, Uruguay never stopped honouring its obligations.
Uruguay is a small country; it is in our interest to integrate ourselves with the world and to offer the world what we can offer. We do not offer scale or low salaries as investor attractiveness. This is not the vocation of Uruguayans. What we have to offer are niches based on quality, on human capital, on natural competitive advantages that we have in the agricultural sector and tourism, for example. But above all, niches based on technology, quality and production.
We are potentially competitive in many areas, which in recent years have received a lot of foreign investment. There has been a very significant increase in investment, both foreign and domestic, especially since 2006. It has been distributed in those sectors in which Uruguay is potentially competitive: agriculture and forestry, industry and services. Services are an important part of Uruguay's exports, with logistics representing a third of our services exports and over a half of the containers passing through Uruguay being in transit. Uruguay exists as a country because it had the most important port in the Southern Cone.
We also have exports of tourism services. Taken individually, tourism is our main export item, representing around 6% of annual GDP. In fact, we are one of the few countries in the world that has more tourists than inhabitants. There has also been a lot of foreign investment here. Our other block of competitive capabilities is based on human capital. There is a lot of service exports based on human capital — called global export services — for example, professional, software and financial services. Our free-zone regime has greatly facilitated this type of service that uses skilled labour. In all these sectors we have very varied and well-distributed foreign investment, from Latin America but also from Europe, Asia and North America.
What does Uruguay offer, besides political, institutional and social stability? Uruguay has credibility and predictability in its policies. We have a reputation and credibility, which is fundamental to us. For example, in the financial sector, we have investor-grade status, in international practices we are implementing the tax transparency standards of the Organisation for Economic Co-operation and Development, we are well-qualified in everything that relates to the mechanisms of preventing money laundering and the financing of terrorism. All these are hallmarks of credibility and in all of these areas Uruguay is very well placed in the international rankings. We have had a predictable, stable economic policy for more than a decade and a half. Even in regional contexts of greater instability, Uruguay has managed to maintain a clear policy orientation with positive results. Reputation also relates to levels of corruption, and Uruguay has very low levels of corruption.
In the more microeconomic arena, which also matters to investors, Uruguay has a clear and transparent investment promotion regime, which started in 2006 with a new regulation. This is what has allowed an important jump in the level of investments in Uruguay since 2006.
BN: This also explains why up to 60% of the profit of foreign companies located in Uruguay is reinvested in the country?
MB: Exactly, both foreign and domestic investments have multiplied. If we take as an example the half-century before 2006, the investment indicators in Uruguay were very poor — we competed for last place in Latin America with Haiti. Today, we have investment levels at 20-24 points of GDP. In investor behaviour, there is a before and after 2006. In terms of foreign investment, Uruguay historically received an average of one point of GDP, annually. Since 2006, we have had four, five, six and even seven points of GDP from foreign investment, distributed in different sectors and from different origins. In addition, since the 1970s, Uruguay treats domestic and foreign investors equally.
Uruguay is, therefore, a very reasonable platform for investment. All international agreements are respected, we have investment protection agreements with countless countries, there has been free capital mobility since the 1970s — we were the first Latin American country that freed capital flows — and we basically operate to the market’s logic. There are levels of stability, clear rules and transparency, which all give guarantees to investment processes.
The financial system works in a very solid, liquid and transparent way, and there are many perspectives of stability. Today, we have an absolutely solid financial system, functioning with great health and prepared to face eventual and unpredictable instability challenges. We do a lot of analysis, both at the macroeconomic level and in the financial system, of risk scenarios — what would happen if catastrophic events occur in the region or world, for example.
There was already a financial explosion in 2008, the European problems that moved to the markets in 2011-12 and now, with all the turbulence in the world, Uruguay has always managed to navigate these turbulences with great calm and serenity. It is because we have built a platform that is based on risk management — on identifying vulnerabilities, reducing them, mitigating them and strengthening shields to deal with them. In this we believe we have been quite successful. We are in a region and surrounded by two countries that are very important to the Uruguayan economy. This is less so than before, as we have diversified our interests in the world by exporting to more than 150 countries and receiving investment from dozens of them as well.
But this does not mean that our region is not important to Uruguay to this day and it is a region that has been going through difficulties over the last five years — without growth, with product drops, without stability in economic policies, with much uncertainty and even with political instability. And yet, in all these years, Uruguay has managed to maintain a very reasonable stability, we continue to grow — in fact, the Uruguayan economy has been growing for 14 years — and the predictions for the coming years is for continued growth, despite being in a region that is not contributing to the growth of the Uruguayan economy.
BN: The Central Bank of Uruguay is acting as a global trailblazer by initiating a pilot programme for issuing digital bills. Please tell us more about this pioneering plan.
MB: We visualise the relevance of technology — we are a country historically open to innovations and a pioneer in many things. We believe it is essential to incorporate the idea that we are in the forefront of a revolutionary change, for example in terms of automation, artificial intelligence, robotisation and digitisation. This is beginning of the interconnection of all productive and social processes. This inevitable change is an important challenge that we face and we must be prepared to take advantage of the opportunities it brings, and mitigate the risks that it also comes along with.
Applied to central bank work, we also have an open vision towards technology. I will give two examples that are in the central functions of a central bank. The first is in the monetary field: cryptocurrencies appeared and it is becoming clear that they will not be operating as currencies, but rather as assets of speculation. But the technology that supports them, block chain, has potential for efficiency in many processes. We are incorporating this into the pilot plan, not to have a cryptocurrency that is validated on the network, but to have notes issued by central banks in digital support.
Just as nowadays you have a paper note in a leather wallet, it will be the same note, with serial number, with the governor’s signature — but digital, in an electronic wallet on your cell phone. Technology allows you to reduce costs of cash management. Cash handling is very expensive: printing notes, moving them, treasuring them, distributing them and security, for example, all this is very expensive. In terms of security, efficiency, transparency and information, digital support seems better.
Ours is a humble pilot plan, but one that is drawing a lot of attention and many are asking for more information about what we are doing. We are testing the technological functioning, which at the moment is going well, but I have no doubt that central banks are on track to have electronic support.
The other technological aspect that interests us at the central bank is the platforms that work in the financial system, the fintech. We are learning what things they do, what things they don´t, how they interact with traditional businesses, how they change business planning and the ways of doing business in general, what risks they generate and, therefore, what attitude the regulating body of a financial system should have with respect to them. To consider all of this we have formed a working group inviting banks, insurance companies, stock exchanges, but also the Chamber of Fintech, the Digital Economy Chamber and the Innovation Agency — bringing together the traditional world with the new to understand each other. We have an open approach, both in the monetary area and in the growing use of technological platforms in the financial system — with our usual objectives: allowing innovation but understanding and mitigating risks.
BN: Germany is Uruguay's largest trading partner in the European Union and fifth biggest globally. On its part, Uruguay has experienced a strong flow of German FDI in the last decade. Both Chancellor Angela Merkel and President Tabaré Vázquez have expressed the excellent relationship between the two countries, but also agree that there is room for it to strengthen. In what areas would you like to see more cooperation?
In the fields of services and technology there is a lot of room for cooperation. Also, in the logistics sector there is much that we can learn from Germany. And of course, there is the opportunity for German investors to enter all those areas that we have been discussing before. For example, in the high-quality foods that we export like meat, there is a lot of technology behind the processes of quality and traceability — Uruguay is the only country in the world that has complete traceability of its entire cattle stock, and Germany is a sophisticated market that values this. And undoubtedly, Germany could cooperate in the educational challenge in Uruguay by incorporating technology. Much progress has been made in Uruguay in infrastructure, but it is true that there is also a growing demand for more infrastructure, as we are decentralising the economy to outside Montevideo, and here again, there is an opportunity for Germany to invest.
