Uruguay floats the peso

Uruguay battles to survive its neighbour's crisis

Uruguay has allowed its national currency, the peso, to float freely in an effort to make its exports more competitive.

We think this is a welcome and bold policy

IMF deputy managing director Eduardo Aninat

The Uruguayan economy ministry said on Thursday that it had abandoned exchange rate controls which kept the peso's fluctuations against the dollar within a 12% band.

The currency fell 11.9% to 19.5 pesos per dollar shortly after the controls were scrapped.

The tiny south American republic has been hit hard by the devaluation of the Argentine peso earlier this year, which has made competing Argentine exports cheaper for international buyers.

The country's close economic ties with crisis-torn Argentina have put the wider Uruguayan economy under severe pressure.

Uruguayan consumer spending has nosedived, and its banks have been hit by a run on deposits.

Currency squeeze

Currency weakness in Brazil, Uruguay's other major neighbour, have added to the country's economic woes.

"Fundamentally, they could not sustain an exchange rate policy like theirs when the big economies that influence their own are devaluing," said Maria Paz Ferreres, an economist at the Orlando Ferreres consultancy in Buenos Aires.

Analysts said the devaluation of the Uruguayan peso means that the country's central bank will not be forced to spend its international reserves propping up the ailing currency.

But there are concerns that the cost of servicing the country's foreign debts could spiral out of control if the peso collapses against the dollar.

Debt crunch?

"If the exchange rate were to depreciate substantively, Uruguay's debt burden would become more difficult to manage in peso terms," said Marco Santamaria, a sovereign strategist at Lehman Brothers bank in New York.

International credit rating agencies have lowered the country's debt ratings - their assessment of Uruguay's ability to repay its debts.

The one bright spot is that the International Monetary Fund is standing firm behind Uruguay.

IMF deputy managing director Eduardo Aninat welcomed the devaluation of the peso, calling it a "welcome and bold" move.

He added that he was confident the IMF would approve an additional $1.5bn loan next week.

The international lending institution signalled that it was willing to lend more money to Uruguay last month after the government pushed through tax increases aimed at shoring up its finances.

Uruguay, with a population barely one tenth the size of Argentina's at 3.3 million, is heavily dependent on tourism and agriculture.