Uruguay Rejects Volatile Bond Market, Turns to Multilaterals

Uruguay’s relationship with regional development banks is paying off as it borrows $1.4 billion from low-cost credit lines to fund its coronavirus response instead of relying on volatile bond markets as regional peers are doing.

Uruguay was able to tap those pre-approved credit lines quickly and on attractive terms since the loans are tied to the Libor rate, which is close to record lows, Finance Minister Azucena Arbeleche said.

“Uruguay doesn’t have any urgency” to sell bonds on international debt markets, she said in a telephone interview. “The path we have chosen is to trigger these contingent credit lines with multilateral entities.”

Arbeleche didn’t rule out liability management operations or issuing global bonds later in the year.

Debt markets have reopened for emerging market issuers in recent weeks after remaining largely off limits for most of March due to pandemic-related volatility. Paraguay, Peru and Panama have sold $6.5 billion in dollar bonds since late March to fund health care spending and economic stimulus.

Read More:A Bond Market of Haves and Have-Nots for Emerging Nations

The Inter-American Development Bank has already disbursed $800 million, with Uruguay set to receive another $250 million from the bank and $350 million from the development bank CAF in days, she said. The government is also seeking loans from the World Bank and development bank Fonplata as well as negotiating fresh credit lines with the IADB, World Bank and CAF. Arbeleche declined to comment on the sums involved.

End of the Boom

President Luis Lacalle Pou, who started his five-year termMarch 1, is grappling with his country’s biggestdownturn since a regional financial crisis caused the economy to slump in 2002.

After growing just 0.2% last year, the International Monetary Fund now expects Uruguay’s 17-year growth streak to end with gross domestic product shrinking 3% in 2020.

“We are working with a scenario of a drop of around 3%,” Arbeleche said in reference to GDP this year.

The construction of apulp mill by Finland’s UPM Kymmene Corp, which will invest about $1 billion in the project this year alone, and a major railroad line are among the few bright spots in an economy headed for recession.

The government plans to spend $400 million and channel more than $2.6 billion in loans to businesses to mitigate the fallout on society from the pandemic. Restarting the economy hinges on keeping businesses alive and attracting investment through incentives like tax breaks for big-ticket construction projects, Arbeleche said.

“It’s going to be a deep, but transitory shock. We are working for a V-shaped recovery,” she said.

Higher spending and a drop in tax revenue will push the public sector deficit above 5% of gross domestic product this year, she said. Credit rating companies have cited Uruguay’s chronically high deficits as a risk to its investment grade rating.

“Because of the crisis the fiscal improvement planned for 2020 is postponed to 2021,” she said.

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