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Can the recession in Argentina affect Uruguay?

Can the recession in Argentina affect Uruguay?

Argentina will go through a strong recession this year, with a 3.3% drop in its GDP, according to the forecast of the Organization for Economic Cooperation and Development (OECD), so it is worth asking if this scenario will affect the economy of Uruguay.

Although the balance of trade with the neighboring country decreased considerably in recent decades, it is common for Argentine economic circumstances to cause different impacts on Uruguayan soil, just as happened with the price gap, which has been reducing.

The senior consultant of Exante, Alejandro Vallcorba, He specified that the lower commercialization of goods between both countries “occurred, to a large extent, because in the last 10 years Argentina experienced a series of ‘mini’ recessions that determined that it did not accumulate growth in the last decade.”

“This determined that the Argentine demand lost weight. So while the current economic recession may have a significant impact on some sectors that have a relatively high level of dependence on the trade with Argentina, at a macroeconomic level we estimate that the effect is small,” Vallcorba highlighted, minimizing a severe impact due to the situation on the other side of the pond.

For his part, the president and founder of Center for Development Studies (CED), Hernán Bonilla, stated that the fall predicted by the OECD “It is within what was planned based on the very complex situation that the current government of Argentina”.

He too Professor of Economy and Uruguayan Society at the ORT University agreed that “the drop figure is not so relevant to the extent that the commercial relationship with Argentina represents a smaller percentage of the Uruguayan exports, although relevant for a set of industries.”

Bonilla even predicted that “to the extent that some import restrictions, “It can compensate for the drop in product and can even improve trade flows to the extent that there are fewer restrictions.”

The rise in prices in Argentina and the diversion of consumption

To its turn, Vallcorba pointed out that “the most important impacts for Uruguay “are occurring due to the adjustment in relative prices that has occurred in recent months,” after the assumption of Javier Milei in the neighboring country.

In that sense, he explained that “between December and March, Argentina had a 90% increase in CPI andin the same period, the Dolar blue’, which is relevant to analyze the consumption diversion of Uruguayan households, remained practically stable.”

“The combination of these two factors, high inflation and stability of dollar, determined that Argentina became more expensive for the Uruguayan tourism. Although it continues to look ‘cheap’ for Uruguayans in a historical perspective, the price gap Measured to the blue dollar, it is at the lowest levels of the last five years,” he pointed out.

Thus, according to the Exante economist, the increase in prices “discourages trips to that country, reducing the diversion of consumption and discouraging border consumption, favoring commercial activity of Uruguay”. This, in turn, “allows greater collection of the government, associated with greater local consumption,” he observed.

The recession in Argentina can be felt in tourism

When analyzing the effects of this situation, Bonilla admitted that “as the recession continues and the economy declines, it may have a negative impact on the tourist activity, thinking especially about the summer season of 2025.”

“That may be the main impact on the Uruguayan economy in the medium term, although we must see if signs of reactivation can be seen until the end of this year and the beginning of next year,” said the CED economist.

Vallcorba shared that “currently, the most relevant channel is related to the export and import of services and, in particular, tourism” and, with regard to responsive consumption, analyzed: “Both effects play, the economic recession could discourage income to our country, but at the same time the relative cheapening of Uruguay “It would encourage Argentinian travel.”

“In our opinion, the most important effect is that of relative cheapening. In fact, our models point to higher incomes from Argentines for the remainder of the year and for next season,” Vallcorba added.

However, he admitted that the projections include “a high level of uncertainty, since what ultimately ends up happening will depend in part on how deep and prolonged the recession is, as well as the success of the economic stabilization program.”

The political and economic course of Argentina

Finally, Bonilla considered that “the application plan, both adjustment as monetary policy, “In order to control inflation, it was essential to seek to balance public finances, but with recessionary effects on the economy.”

Regarding the situation in the neighboring country, he considered that “it is reasonable rebound expected for next year”, since the OECD anticipates growth of 2.7% in 2025 for Argentina, something that will happen “to the extent that the positive effects of the stabilization of the economy begin to be seen and consumption can recover, but above all investment”.

The director of the CED observed that this “is the key for the medium term, if the conditions of stability political and economic that reactivate the confidence of investors in the Argentine economy.”

Source: Ambito

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