Moody’s ups Uruguay growth forecast on US$3bn UPM project

Moody’s has made an upward revision to its GDP growth forecast for Uruguay following the announcement that pulp company UPM will invest over US$3.0bn in the country, whose economy has lost steam in recent years.

The Finnish firm plans to spend US$2.7bn on a new pulp mill and around US$350mn on associated logistics infrastructure. 

The investment announcement comes in an election year and as the country struggles with slowing growth.

“It’s an extremely important investment because what we're seeing in Uruguay is a significant slowdown in economic activity,” Jaime Reusche, a Moody’s VP-senior credit officer, told BNamericas.

“We're seeing how investment rates in the country have actually declined quite substantially. Investment to GDP is bordering 16% from a high of over 22% and we've seen a significant fall in foreign direct investment. I think that this investment really changes things around for economic growth.”

With the investment, Moody’s expects Uruguay’s GDP to expand about 2.7% next year, compared with a previous forecast of around 2.0%.

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The investment will also help reverse a trend of rising unemployment levels in Uruguay and help offset negative fallout from the slowdown in neighbors Argentina and Brazil. The project – due to come online in 2022 – will also make a small contribution to economic growth in the long-term by spurring activity in the services sector and others linked to plant operations, Reusche said.  

UPM, which is poised to start work on the new project, already has the Fray Bentos pulp plant in Uruguay, which cost around US$1.2bn and started operating in 2007. 

UPM's investment will be mainly financed by operating cash flow complemented by “regular group financing activities,” UPM said in a statement. UPM has a 91% stake in the project, with the balance held by a “local long-term partner.”

During a conference call, UPM CFO Tapio Korpeinen, when asked about the financing role of its partner, said: “We have a local partner in Uruguay who has been also with us in the Fray Bentos project from the beginning.

“They hold the 9% and in a sense it's a partnership where they have responsibilities and benefit that mirror ours in that project.”

A UPM spokesperson was not immediately available for comment when contacted by BNamericas.

Economic and fiscal matters – as well as crime and the dominance of the center-left Frente Amplio coalition in government – are key issues this electoral cycle. Voters head to the polls in October. Frente Amplio has held the presidency since 2005. 

Sluggish private investment is a factor behind slowing growth, while the IMF has urged the country to sharpen its focus on reforming its pension system and state-owned enterprises to help control expenses and debt.

Uruguay, with solid public institutions largely respected by its citizens, is one of Latin America's most stable countries. 

In a statement, the office of President Tabaré Vásquez said the latest decision “reinforces Uruguay’s international image regarding its legal security, institutional stability, seriousness, responsibility and reliability to bring in foreign investments.”

Center-right presidential candidate Luis Lacalle Pou of Partido Nacional criticized how negotiations were conducted, but he is in favor of the project. He told Radio Carve that the government should have made fewer concessions and that if he was elected his administration would renegotiate the deal. 

Pictured: UPM executives speak about the pulp mill investment in a press conference in Montevideo. Credit: AFP