Last week, the Uruguayan government officially announced the formation of a US$350mn fund to finance a number of PPP-led infrastructure projects across the country.
The 30-year fund, part of a five-year US$12.5bn infrastructure development project, will draw investment from the four AFAP pension funds and the Banco de Seguros del Estado insurance company.
The Corporacion Andina de Fomento (CAF), the Caracas-based Latin American development bank will also provide 10% of the total amount via the local stock exchange and will administer concessionary or contracting companies with public-private-partnerships (PPPs) for projects in energy, road, education, hospital, ports, and railroad projects.
“There are currently infrastructure projects in the pipeline that have been tendered, including two roads and one railway, and five further road projects are yet to be tendered. There are also numerous education infrastructure projects to be tendered by the end of the year. The plan is to target institutional investors, such as pension funds,” said Gladis Genua, CAF’s representative in Uruguay.
"This is a modern financial instrument that in the Americas, only exists in Colombia and now Uruguay," said Pablo Ferreri, Uruguay’s economy undersecretary, speaking to reporters. "It brings together funding for companies that are participating in PPP investments with those who have the ability to make funds available."
The official stressed that CAF’s participation will improve the efficiency and ‘professionalise’ the structuring of PPP projects.
For years, Uruguay has been one of the strongest and most stable economies in the region, with a flexible exchange rate a natural hedge in terms of trade (the country is a net-exporter). This has enabled the country to weather the commodities price drop relatively unscathed. Nevertheless, the economy has faced pressures.
According to a recent report by Fitch Ratings, government debt is expected remain at around 57% of GDP this year, up from 42% in 2014. This was mainly due to the depreciating peso and weak economic growth, with the EM downturn dragging down wage growth and pushing up unemployment.
In addition, the report noted that fiscal credibility had slipped over the past couple of years, stating that budget targets have regularly been missed and legal limits on increases in net debt have been repeatedly relaxed.
For President Tabare Vazquez, reducing the fiscal deficit, particularly in infrastructure development, has been one of the flagship goals since coming to power in 2015.
There are signs the country is heading in this direction. This year saw the successful implementation of 20% of the first part of the government’s five-year US$12.5bn project.
Some of this success stems from Uruguay’s increased presence on the local and international debt markets. The country issued US$1.75bn in local and foreign currencies this year, including a US$1.147bn tap of existing international sovereign bonds.
Montevideo’s policy to its debts has been more flexible than that of its Latin American peers. While the authorities confirmed plans to issue a further US$2bn-equivalent in local and international bonds next year, some of the proceeds are likely to go towards debt swaps to help diversify the currency portfolio.
In recent years, Uruguay resisted the Latin American trend of issuing euro-denominated Eurobonds, preferring instead to swap existing dollar notes into Euros and other currencies. For example, the country recently swapped a US$500mn loan from the World Bank into yen.
Local currency debt is another option, with the peso appearing to have bottomed out in recent weeks and the current account deficit dropping to 1.4% of GDP in the four quarters through to 2016Q2.
The Uruguayan peso currently stands at 28.3330 to the US dollar according to Bloomberg.
"We see renewed appetite for local currency debt," Herman Kamil, Uruguay’s director of public credit said on the side lines of IMF/World Bank meetings, quoted by Reuters. "We are always looking for ways to increase stable sources of funding in local currency."
An inventive credit strategy will be needed to service the country’s ailing transport infrastructure. Roads, bridges and railways remain in need of renovation, but the recent announcement of a new US$4bn megaproject in the pulp sector will put pressure on the government to source new funds.
The latter project includes a down payment of $1bn to the Finnish paper producer UPM, recruited to help build a second pulp mill in Uruguay.
China, similarly to elsewhere across Latin America, is likely to step in to assist – Vazquez and his Chinese counterpart Xi Jinping met in Beijing last Tuesday, agreeing to establish a strategic partnership which could see the two countries strengthen trade and investment ties.
While Chinese capital would be welcomed by Montevideo, cosying up to China could cause friction with other Mercosur members, who usually insist on discussing any bilateral trade agreements collectively.
Although fixed investments have dropped significantly since 2012, in 2016 such sources of funding have been one of the biggest drivers of growth, expanding by an impressive 16.7% in annual terms.
Despite concerns over fiscal credibility as noted by Fitch, the growth of investment in Uruguay has been driven by a heavy increase in public investments – largely to fund the construction of wind farms.
The government hopes that by drawing funds from local and international markets, it can finance other renewable energy and infrastructure projects via such PPP schemes over the coming years, while continuing with fiscal consolidation.
Genua suggested that if the fund was successfully allocated to the designated projects, CAF would consider further assistance, denominated both in US dollars and in inflation adjusted pesos.
She also added that she does not expect inflation to have any impact, as the payments from the granting authority would capture this effect. Inflation stood at 8.9% in September this year.