SAO PAULO, May 10 (UPI) -- One by one, Latin American economies have picked themselves up from the dirt, checking all vital areas for signs of a fatal wound inflicted by the Argentine crisis.
Most have been able to muster a sigh of relief: Brazil undertook its own painful devaluation and austerity measures in 1999 and appears strong enough to weather the storm. Chile, despite much exposure in its corporate sector, saw the train wreck coming and discounted appropriately. Mexico emerged mostly unscathed, as 85 percent of its trade is with the United States.
But often overlooked is tiny Uruguay and its 3.3 million residents, dwarfed as it is between Brazil, South America's largest country and economy, and Argentina, the continent's second-largest economy.
In Uruguay, the threat of being dragged down by Argentina is still a very real risk, and has been centered mostly within the country's banking system.
Just last week, Moody's Investor Services lowered the country's investment-grade rating -- a huge source of pride, not to mention investor confidence -- to junk status. That downgrade came on the heels of similar measures taken by Standard & Poor's and Fitch Ratings.
"Uruguay is increasingly vulnerable to macroeconomic shocks emanating from Argentina," Moody's said in a report. "Increased foreign currency borrowing has left the government little room to maneuver fiscal and monetary policy."
Uruguay, like most countries in Latin America, relies heavily on an exporting agriculture sector. The country averaged growth of 5 percent between 1996 and 1998, but economic disaster struck when Brazil was plunged into crisis in 1999.
Argentina quickly followed suit, and Uruguay suddenly found that its two big neighbors, who receive about half of its exports, no longer provided a market for its products. Now, Uruguay finds itself in a fourth year of recession with gross domestic product falling 2 percent last year. Economists forecast the same drop in 2002.
The red alert for Uruguay came in December, when Argentina's former President Fernando de la Rua decided to freeze citizens' savings accounts to halt capital flight from banks.
Wealthy Argentines for years have been socking away money in neighboring Uruguay's banks, either out of a lack of confidence in Argentina's system or as a means of skirting taxes. When the banking freeze went into effect, desperate Argentine's turned to their deposits in Uruguay, and in doing so started a run on that country's financial system.
In February, Uruguay's Central Bank was forced to intervene in Banco Galicia Uruguay because of a run on deposits, ordering a 90-day suspension of the bank's operations.
Fiscally, officials in Uruguay took quick action when Argentina devalued its peso in January. To keep its exports cheaper and competitive with its neighbors, Uruguay announced that the trading band of its peso would be doubled to 12 percent, and the currency would be allowed to drop 2.4 percent a month until the end of 2002, as long as it stayed within the trading band.
While making exports more competitive, the weakening of its currency has made Uruguay's mostly dollar-denominated debt a heavier burden, and it now comprises about 60 percent of the GDP.
But the country's decisive moves and stable political scene allowed it to remain in the good graces of international lenders.
In late March, the International Monetary Fund granted Uruguay a standby loan of $743 million. This month, the government announced it would receive $1 billion in aid from the World Bank and the Bank of International Development from now to the end of 2003.
"The Fund welcomes the Uruguayan authorities' energetic response to the challenges affecting the economy by strengthening the macroeconomic framework and pursuing a comprehensive structural reform agenda," IMF Managing Director Horst Kohler said in announcing the March aid package.
Uruguay is undergoing reforms, yet remains arguably the most centralized economy on the continent. The government swears that is changing as quickly as politically feasible, and the IMF appears to buy that, perhaps learning a lesson from Argentina about unsustainable reform that moves too quickly.
Unlike Argentina, which in the early 1990s undertook free-market reforms with, perhaps, misguided gusto, key sectors of Uruguay's economy -- utilities, telecommunications, oil, railroads -- remain under the government's control. Nearly 17 percent of all workers in the country are employed by the state.
Despite these facts, none of which normally lead to pat on the head by the IMF, the country is being offered ample aid to help it avoid falling along with Argentina.
Why is this country and its highly centralized economy receiving aid while Argentina is left out in the cold?
First, Uruguay's officials have a better grip on the management of the country. The government has committed itself and appears fully capable of sharply reducing spending.
Argentina's federal government, on the other hand, has unsuccessfully been trying to rein in the spending of powerful provincial governors. Additionally, Argentina cannot find the political cohesion to pass basic legal reforms that the IMF is demanding, as witnessed Friday in the breakdown of Congressional debate on the killing of a controversial "economic subversion" law.
Second, Uruguay's tax base is more stable than that of Argentina, where tax revenues are plummeting. Indeed, a new tax bill passed recently will increase tax yields by nearly an additional 1 percent of GDP. While taxation is not often smiled upon as a free-market route to recovery, in the case of a country with quickly dwindling coffers, it isn't such a bad idea, the IMF reports.
Third, private banks remain committed to ensuring that the financial system remains liquid and well capitalized. The government is seeking to keep depositors calm and confident in the banking system by strengthening regulations and the reinforcement of the supervisory role of the Superintendency of Banks.
Despite the confidence big lending agencies have in Uruguay, Moody's isn't buying it.
"Broad-based domestic political support for further adjustment cannot be taken for granted in the fourth year of a deepening economic contraction with no clear turning-point in sight," the agency reported.
Uruguay's foreign-currency debt is growing and weak export prospects indicate that debt ratio's are likely to worsen. Moody's highlights the continuing flight of foreign-currency bank deposits and narrowing access to international financial markets, all of which will continue to pressure the currency.
"Since the possibility exists that all these issues might not only remain unresolved, but could worsen somewhat in the next 12 to 18 months, a negative outlook on all these ratings is justified," Moody's concluded.
