This Selected Issues paper examines the drivers and implications of the agricultural land price boom in Uruguay. It finds that almost half of the increase in agricultural land prices between 2000 and 2010 can be explained by commodity price dynamics. At the same time, farmland prices are estimated to have played an important role in the transmission of commodity price shocks to economic activity, accounting for about 30 percent of the effect of commodity price shocks on GDP growth in the region. The paper also examines the performance of Uruguay’s exports and external balances over the past decade.

Abstract

This Selected Issues paper examines the drivers and implications of the agricultural land price boom in Uruguay. It finds that almost half of the increase in agricultural land prices between 2000 and 2010 can be explained by commodity price dynamics. At the same time, farmland prices are estimated to have played an important role in the transmission of commodity price shocks to economic activity, accounting for about 30 percent of the effect of commodity price shocks on GDP growth in the region. The paper also examines the performance of Uruguay’s exports and external balances over the past decade.

Competitiveness Trends in Uruguay1

This Selected Issues Paper examines the performance of Uruguay’s exports and external balances over the past decade, and applies IMF’s standard external sector assessment tools to Uruguay. Our results indicate that export performance has been strong over the last decade, driven by gains in trade competitiveness. That said, the current account deficit has widened in 2012, while remaining more than financed by FDI. Uruguay’s current real effective exchange rate is found to be on the strong side of fundamentals (0–10 percent).

A. Introduction

1. This Selected Issues paper examines the performance of Uruguay’s exports, external balances and relative price movements over the past decade and applies the IMF’s standard external sector assessment tools to Uruguay. Our results indicate that Uruguay has made important strides in export performance, including expanding markets shares, over the past decade driven by ‘trade competitiveness’ gains. The current account deficit (CAD) has remained well contained and more than fully financed by FDI over the past decade, notwithstanding external shocks. At the same time, the real exchange rate has appreciated strongly in recent years. Standard IMF equilibrium real exchange rate valuation models suggest that the Uruguayan peso is slightly stronger than its equilibrium level (0–10 percent).

2. The paper is organized as follows. Section B contains a summary on the evolution of Uruguay’s exports over the past decade using various metrics, including the constant market share measure. An analysis of the current account dynamics is presented in section C. In section D relative price dynamics over the past decade are presented. In section E the IMF’s CGER and EBA methods are used to assess whether the real exchange rate and current account are aligned with fundamentals. The paper concludes in section F.

B. Key Trends in Export Performance in the Last Decade

3. During 2000 to 2012, Uruguayan exports grew robustly, both in value and volume terms. In values, exports grew on average by about 16.8 percent per year during 2005–12, higher than world export growth (9.8 percent) and were within striking range of China’s and India’s export growth (Figure 1). Export growth measured by volume was also robust during the 2005–2012 period (Figure 2).

Figure 1.
Figure 1.

Uruguay: Export Growth (values) 2000-2012

(y-o-y, in percent)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations based on UN Comtrade database.
Figure 2.
Figure 2.

Export Growth (Quantities), 2000-2012

(y-o-y, in percent)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations based on World Economic Outlook.

4. As a result, Uruguay has increased its share of world goods exports to 0.06 percent in 2012 from about 0.036 percent in 2000 (Table 1). However, measured from 2003, Uruguay has doubled its market share of global goods exports. Importantly, during 2000 to 2012 Uruguay increased its global goods market share faster than that of its key regional trading partners—Brazil and Argentina.

Table 1.

Uruguay: Shares of World Exports

(Percent)

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Sources: Fund staff calculations based on Direction of Trade Statistics and UN Comtrade databases.

5. Most of the growth in exports since 2005, at a disaggregated level, occurred in existing markets and products (Table 2). About 55.0 percent of export growth between 2005 and 2012 came from net growth of existing products (intensive margins). On the other hand, product diversification in established markets accounted for 34.8 percent of the growth in exports. Meanwhile, only about 6.9 percent of export growth was explained by the introduction of new products in new markets.

Table 2.

Uruguay: Export Growth Decomposition, 2002-2012

(Contribution to total export growth, in percent)

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Source: Fund staff calculations based on the World Integrated Trade Solution database.

6. World trade growth, market distribution, and commodity composition do not appear to have been key drivers of the change in exports—suggesting that improved pure ‘trade competitiveness gains’ played a key role (Table 3). The constant market share (CMS) approach assumes that the demand for exports in a given market from competing sources is a function of relative prices and therefore assumes that export share remain unchanged over time unless the relative price varies. It decomposes aggregate export growth into growth attributed to general increase in world exports, growth attributed to specializing in specific products, growth attributed to exporting to specific markets (which together represent growth that would result if the country had maintained constant market shares), and a residual representing the gain in export value from increasing market shares.2 Thus, gains in competitiveness reflect an increase in market share by gaining an advantage relative to competitors in world markets. The CMS decomposition of Uruguay’s exports indicates that its exports have increased faster than world exports, and that 63 percent of this gain is related to increased competitiveness.

Table 3.

Uruguay: Constant Market Share Analysis of Export Changes

(in billions of U.S. dollars; unless otherwise indicated)

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Source: Fund staff estimates based on UN Comtrade database.

7. At an aggregate level, Uruguay’s export growth in this decade was accompanied by a slight shift in the composition of exports to primary goods. Figure 3 decomposes total merchandise exports by standard international trade classification (SITC) at three points in time: 2000, 2005, and 2012. The increase in the relative importance of agricultural products (SITC 0, 4, especially beef and rice), and crude materials (SITC 2,3, especially soybeans), coincided with a shift away from manufacturing goods by material (SITC 6), machinery and transport equipment (SITC7) and miscellaneous manufacturing goods (SITC 8). 3 There were also shifts within some SITC groups, including the decline in textile and the rise of wood and paper (Table 4).

Figure 3.
Figure 3.

Uruguay: Sectoral Composition of Exports

(Shares in total exports)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff estimates based on UN Comtrade database.
Table 4.

Uruguay: Key Exports

(In percent of total export, unless otherwise stated)

article image
Source: Fund staff estimates based on Uruguay XXI data.

8. The share of commodities in Uruguay’s exports has increased over time (Figure 4). This result is common with Uruguay’s two important regional trading partners–Brazil and Argentina (based on the Lall (2000) classification scheme). In some of these commodities, however, Uruguay now commands a quality premium, suggesting higher value added. An example is beef exports; quality enhancements have focused on the inputs to the production and logistics in the distribution of beef, such as the introduction of technology to permit traceability of beef exports to production unit. Since 2007, Uruguay’s price premium over the world beef prices has averaged about US$107 per ton of beef (Figure 5).

Figure 4.
Figure 4.

Brazil, Argentina and Uruguay: Export Technological Content, 1990-2012

(in percent of total exports)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations based on data from World Integrated Trade Solution.
Figure 5.
Figure 5.

Uruguay and World Beef Prices

(Index 2000=100)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Sources: Uruguay XXI and World Economic Outlook.

9. At the same time, Uruguay has also diversified, somewhat, its export markets and trading partners. In particular, while Brazil remained the key trading partner during 2000–12, the relative importance of the United States and Argentina has declined, and China, Venezuela, and Russia have become more important destinations for Uruguayan exports (Figures 6 and 7). However, the new markets and trading partners are still small relative to total exports; seven countries still absorbed over half of Uruguay’s exports in 2012.

Figure 6.
Figure 6.

Main Export Destinations, 2000-2012

(In percent of total Uruguayan Exports)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations based on the Direction of Trade Statistics database.
Figure 7.
Figure 7.

Herfindahl Index - Markets

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations based on the World Integrated Trade Solution database.

C. External Sector Dynamics

10. Despite several shocks, the current account deficit during 2004 to 2011 averaged only 1.8 percent of GDP compared with about 2 percent for 1993 to 2001 (Table 5). The non-oil trade balance had an average surplus of about 3.3 percent of GDP during the period, notwithstanding strong FDI financed capital imports. The oil trade deficit, however, averaged about 5.2 percent of GDP, driven by drought episodes as well as higher oil prices. As a result, the overall trade account was in deficit over the decade to the tune of about 2 percent of GDP. The income account deficit averaged about 3.2 percent of GDP, reflecting interest payments on public sector debt and increased dividend payments on growing FDI. Finally, the services and current transfers account had a surplus of about 3 percent of GDP over the entire period.

Table 5.

Uruguay: Current Account Balance

(In percent of GDP, net)

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Source: Fund staff calculations based on Banco Central del Uruguay data.

11. In 2012, the current account deficit widened to 5.4 percent of GDP from about 3 percent in 2011. The drivers of this widening included higher oil imports (40 percent increase in volumes) due to drought conditions and a rise in capital imports boosted by the construction of the Montes del Plata pulp mill (Figure 8). Net service earnings also declined, led by lower net tourism revenues, reflecting lower revenues from Argentine visitors and increased overseas spending by Uruguayans. At the same time, industrial exports weakened in the second half of 2012, reflecting weak demand from Argentina, Brazil, and Europe.

Figure 8.
Figure 8.

Uruguay: Current Account Balance 1/

(In percent of GDP, net)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff estimates based on Banco Central del Uruguay data.1/ Data for 2013 represents the 4-quarter rolling balance through 2013Q2.

12. Since the second quarter of 2013, imports and exports of goods have been normalizing, reducing the current account deficit, albeit, slightly. Oil imports have dropped by about 40 percent in the first 7 months of 2013 compared with the same period in 2012—largely reversing the sharp increase in 2012. Goods exports have been lifted by strong commodity exports—e.g., soybean exports have risen by about 34 percent in the first 8 months of 2013. The net services balance, however, has continued to weaken, mostly owing to still weak tourism revenues and increased spending abroad by Uruguayans, likely to recover only gradually in line with the outlook for demand from Argentina.

13. Over the medium term, the current account deficit is projected to narrow to about 3.5 percent of GDP by 2018 under the baseline scenario. In particular, the oil import bill should decline as the energy mix is diversified to renewable energy and oil prices decrease with new global supply capacity coming on stream. In addition, goods exports are poised to rise (by about 1.5 percent of GDP) and imports will decline from their 2012 levels owing to the completion of the Montes del Plata pulp mill. The net tourism balance is set to recover gradually in line with the outlook for external demand, but downside risks remain.4

14. Since 2004, current account deficits were more than financed by increasing amounts of FDI (Figure 9). During 2005 to 2012, FDI into Uruguay as a share of GDP was second only to Chile in Latin America (Figure 10). Since 2002, FDI has flowed to agriculture, utilities and other services, in contrast to financial, hotel and restaurants, construction and manufacturing sectors as obtained prior to 2002 (see the 2012 Selected Issues Paper FDI in Uruguay: Recent Trends and Developments, IMF Country Report No. 13/109).

Figure 9.
Figure 9.

Uruguay: Foreign Direct Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Sources: BCU and Fund staff calculations.
Figure 10.
Figure 10.

Uruguay: Foreign Direct Investment, 2000-2012

(in percent of GDP)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: World Economic Outlook.

D. Relative Price Dynamics

15. The exchange rate appreciated steadily in real terms over the last decade (Figure 11). During the 2002–03 crisis, the Uruguayan peso depreciated by about 31 percent in real terms (and 109 percent against the U.S. dollar in nominal terms). The Uruguayan peso rose in real terms by about 70 percent from 2003 through end-2011. The appreciation accelerated in 2012, as portfolio capital inflows surged while FDI held steady at a high level. The capital inflows strengthened the Uruguayan peso against the U.S. dollar at a time when Argentina and Brazil depreciated against the U.S. dollar. As a result, the appreciation of the real exchange rate was particularly sharp against the Brazilian real and the Argentine peso (about 26 percent and 19 percent respectively between end-2011 and May 2013). Moreover, even though some of the appreciation of 2012 has been reversed since May 2013, the Uruguayan peso is above its average (Figure 12). This observation on its own may suggest an overvaluation of the Uruguayan peso. However, as we shall discuss below much of the appreciation since 2002 is related to movements in fundamentals.

Figure 11.
Figure 11.

Uruguay: Real Exchange Rates

(Index 2005 = 100)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations.1/ The real exchange rate against Argentina is calculated using the unofficial CPI for Argentina and the average of the unofficial and official exchange rates for the Argentine peso.
Figure 12.
Figure 12.

Real Effective Exchange Rate 1/

(Index 2005=100)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations.1/ Shows 95th and 5th percentile for the period from January 1993 to July 2013. Gray box covers range between 25th and 75th percentile of REER. Dots are latest observation (Jul-13).

16. At the same time, wages have risen faster than export prices (Figure 13). Since 2005 wages have risen by about 12 percent per year, while export prices increased by about 4 percent. In the last two years, wages rose by about 13 percent per year in Uruguay, while export prices increased by about 9 percent per year. This development has contributed to a fall in export sector profitability, especially for the manufacturing sector.

Figure 13.
Figure 13.

Uruguay: Export Price to Wage Rate

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Sources: Haver and Fund staff calculations.

E. Real Exchange Rate Assessment

17. Against this background, we examine the valuation of the Uruguayan peso relative to its equilibrium level. This section uses the IMF’s standard IMF approaches—that is, the CGER methodologies (Lee, et al, 2008) and the EBA (2011) current account approach—for assessing the current account and the real exchange rate. The range of results indicates that the Uruguayan peso is slightly above its equilibrium level, in the range of zero to ten percent (Table 6). The results of each of these approaches are discussed in turn.

Table 6.

Uruguay: Current Account and Exchange Rate Assessments

article image
Source: Fund Staff calculations.1/ The exchange rate gap is derived as the difference between the CAD norm and the CAD forecast divided by the assumed elasticity of the current account with respect to the real exchange rate (-0.640).2/ Positive values indicate that the real exchange rate is stronger than the level implied by the model.3/ Considers the REER as of June 2013.4/ Considers the average REER as of 2013Q2.5/ June 2013.

Macroeconomic Balance Approach

18. The Macroeconomic Balance (MB) Approach suggests that the Uruguayan peso is broadly aligned with its equilibrium level (Table 6). This result is based on the difference between the underlying medium-term CAD forecast (3.4 percent of GDP) and a predicted CAD norm (4 percent of GDP). The underlying CAD is the CAD projected for 2018. The MB current account norm is derived using the coefficients of a model estimated for a large panel of countries, applied to Uruguayan data. The model suggests that from the macroeconomic balance perspective, relative income, the lagged current account, old age dependency are the key factors in Uruguay’s current account norm (Figure 14). The size of the exchange rate gap was derived by dividing the difference between the underlying CAD and the calibrated CAD norm with the assumed elasticity of the CAD to changes in the exchange rate (-0.64).

Figure 14.
Figure 14.

Uruguay: Factor Contribution to CA Norm under CGER-Macroeconomic balance

(In percent)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations.

The External Balance Assessment Approach

19. The External Balance Assessment (EBA) approach suggests that the Uruguayan peso is 3.3 percent above its equilibrium level. The EBA approach, in contrast to the MB Approach, focuses on the current CAD and seeks to strip out the influence of cyclical factors and also to estimate the impact of policy gaps—gaps between desired and actual policies—on the current account. In the EBA method, five policy areas are contemplated: fiscal policy, social protection, capital controls, reserves accumulation, financial and monetary policies.5

20. The CAD norm compatible with fundamentals and desired policies is estimated to be about 2.8 percent of GDP in 2012 (Table 7). This is within the 95 percentile of the current account norms for countries in the EBA sample. The CAD for 2012 of 5.4 percent of GDP corresponds to a cyclically adjusted CAD of 4.9 percent of GDP, implying a total CAD gap of 2.1 percent of GDP (Table 7). Using the assumed elasticity (-0.64) the real exchange rate is found to be about 3.3 percent above its model-predicted value.

Table 7.

Uruguay: EBA Estimate of the Current Account Gap

(In percent of GDP)

article image
Source: Fund staff estimates.

21. The gap of -2.1 percent of GDP between the actual cyclically-adjusted current account and the current account norm can be explained by the policy gaps and the regression residual. The total policy gaps as a whole were positive, 0.6 percent of GDP (Table 8). That is, Uruguay’s policy settings relative to the rest of the world were contributing to a lower deficit—while domestic policies, in particular fiscal policy—were more expansionary than their desired level, the overall policy stance in aggregate was less expansionary than that of the rest of the world, implying a positive contribution from the policy gaps. The regression residual was, however, going in the other direction offsetting the effect of the total policy gap. For Uruguay, the negative regression residual (2.7 percent of GDP) in 2012 likely captures the effect of idiosyncratic factors; above trend oil imports due to the drought and the slump in net tourism revenues, largely owing to low demand from Argentina related to currency restrictions.

Table 8.

Uruguay: EBA Policy Gap Contributions

(In percent of GDP)

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Source: Fund staff estimates based on IMF (2013).

External Sustainability Approach

22. The external sustainability (ES) approach suggests that the real equilibrium exchange rate of the Uruguayan peso is about 3.3 percent above its equilibrium value. The ES approach involves estimating the adjustment in the REER needed to stabilize Uruguay’s NFA to GDP ratio at its 2012 level. The estimation consists of three steps. The first step determines the current account that stabilizes the NFA position at 2012 level:

CAs=gt+πt1+gt+πtbs

Where CAs is the NFA stabilizing current account/GDP; g is real GDP growth rate (3.9 percent in 2018); π is the U.S. GDP inflation rate (2.2 percent in 2018); and bs is the target NFA/GDP (23 percent of GDP). The estimated CAD that stabilizes NFA at 2012 level is 1.3 percent of GDP (Table 9). The second step is to compare this NFA stabilizing current balance (ES norm) with the level of Uruguay’s underlying CAD (UCAD, 3.4 percent of GDP).6

Table 9.

Uruguay: External Stability Approach

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Source: Fund staff calculations.1/ End 2012 NFA/GDP was constructed by adding the CADs to the net foreign assets from Lane and Milessi-Ferretti (2007), External Wealth of Nations, Mark II database - updated to 2010.2/ International Investment Position.
UACDCAselasticity=Exchangeratevaluation

The third step is to assess the exchange rate gap associated with the gap between the underlying current account balance and the NFA stabilizing current account using the assumed elasticity of the current account with respect to the real exchange rate (Table 9).

Reduced-Form Equilibrium Real Exchange Rate Approach

23. The CGER’s reduced form Equilibrium Real Exchange Rate (ERER) Approach suggests that the Uruguayan peso is about 8.8 percent above its equilibrium value. The ERER is estimated based on a large panel of countries (Lee et. al (2008). The estimated coefficients are used to fit an equilibrium real effective exchange rate (REER) path for Uruguay. The equilibrium REER is then compared with the actual REER. The reduced form equilibrium approach suggests that the key factors driving the equilibrium real exchange rate in Uruguay were productivity differentials, government consumption and the terms of trade (Figure 15).

Figure 15.
Figure 15.

Uruguay: Contributions to Real Exchange

(Equilibrium real exchange rate)

Citation: IMF Staff Country Reports 2014, 007; 10.5089/9781484342879.002.A002

Source: Fund staff calculations.

F. Conclusion

24. Uruguay has made important strides in export performance over the past decade. Exports have grown robustly, markets have expanded, quality has improved, and Uruguay is receiving a price premium over world prices for some products such as beef. At the same time, exports have become more concentrated on commodities as Uruguay expanded exports in line with its comparative advantage. In line with this, the strong export performance characterized by increased global market share has been facilitated by pure ‘trade competitiveness’.

25. The real effective exchange rate has appreciated strongly in the past decade. The appreciation since end-2011 has been particularly strong against Uruguay’s key regional trading partners of Brazil and Argentina. At the same time wages have risen faster than export prices in Uruguay, putting strain on the export profitability of enterprises, particularly in the manufacturing sector.

26. The IMF’s standard exchange rate assessment models suggest that the Uruguayan peso is slightly above its equilibrium level. In particular, the equilibrium exchange rate (ERER), external stability (ES) and external balance (EBA) approaches suggest that the Uruguayan peso is on the strong side of fundamentals, by 0–10 percent.

Appendix I. Constant Market Share Analysis

1. Constant market share analysis (CMS) is a method for assessing export competitiveness. This approach was first applied to international trade by Tyszynski (1951). The main elements of the CMS approach can be expressed by equation (A1). The analysis is done on a value basis as quantities are not consistently available.

XiX0=riXi0+i(rir)Xt0+ii(rijri)Xij0+ij(XijiXij0rijXij0)(A.1)

where Xt=ijXijt=iXijt,t=1,0

  • Xijt= the value of Uruguayan export of commodity i to market j at time t,

  • r = the rate of growth of world exports,

  • ri = the rate of growth of world exports of commodity i,

  • rij = the rate of growth of world exports of commodity i in market j.

2. Equation (A.1) shows that the change in Uruguay’s export share can be decomposed into four effects:

• The global market growth effect (first term) gives the part of export growth that is due to the expansion of the overall world trade. This effect shows the potential growth of Uruguayan exports when its share in the world export market is kept constant.

• The commodity composition effect (second term) represents the weighted sum of exports of different commodities. The weights are the deviations of the growth rate of individual commodity exports from the growth rate of the aggregate world exports.

• The market distribution effect (third term) measures the change in exports due to market distribution. This effect would be positive if Uruguay exports had gone to countries where demand growth was faster than the global average.

• The competitiveness effect (fourth term) represents the residual after account has been taken of the other three effects—it is used as a measure of export competitiveness.

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1

Prepared by Garth P. Nicholls, with inputs from Natalia Melgar. The author thanks the seminar participants at the Central Bank of Uruguay for their helpful feedback.

2

See Appendix I for a description of the CMS approach to measuring trade competitiveness.

3

The key commodities beef, rice, soybeans, wheat, milk products, fish, citrus, and malt comprise about 30.6 percent of total export earnings on average during 2000–2012. In 2012, these commodities represented about 48 percent of total goods exported.

4

Once production commences at the Montes del Plata Pulp Mill, export revenues are expected to go up by about US$730 million per year.

5

The EBA method calculates norms for the current account and the real exchange rate. In the case of Uruguay, EBA estimates have been done only for the current account as data deficiencies prevent the application of the real exchange rate method.

6

The underlying CAD is the CAD projected for the medium term (i.e. for 2018, 3.4 percent of GDP).

Uruguay: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.