Update from Uruguay: The consequences of ending bank secrecy with Argentina

Two months ago I wrote an article for International Man informing readers that Uruguay agreed to end bank secrecy with respect to Argentine tax investigations. The article described the likely negative economic implications of Uruguay's decision, particularly in the real estate sector, and why this is an excellent opportunity for expats interested in living or owning property in Uruguay.

Based on the debate and controversy surrounding my article, as evidenced by the high volume of emails I received, it is obvious that two camps have emerged: one camp that is seriously considering a move to Uruguay to capture this once-in-a-decade opportunity, and another camp that believes Uruguay is immune to any unraveling in the face of geopolitical events that are staring it in the face.

While it is true that Uruguay has done very well since the last crisis that was sparked from the Argentine debacle of 2001, it is questionable whether they can do so again. My first article pointed out some of the logical reasons why Uruguay would not be able to maintain the status quo, and based on current economic data, it appears that events are unfolding exactly as expected.

Argentina Begins to Implode

In Argentina, the situation continues to spiral out of control. The government there has effectively banned the conversion of Argentine pesos into U.S. dollars and has also instituted all-out capital controls to prevent the flight of all U.S. dollars still held in Argentina. As a result, the black market exchange rate for U.S. dollars is nearly 50% higher than the official exchange rate quoted by the government. Moreover, the Argentine government is so concerned about the flight of U.S. dollars that its citizens cannot exit the country without a blessing from the Argentine tax authority and a once-over by cash sniffing dogs.

Meanwhile, the real inflation rate is expected to top 30% in 2012, and promises by the Argentine government that they will not devalue the peso seem laughable to everyone but government officials. In an effort to prop up the peso, the Argentine government is forcing property owners and lenders to accept Argentine pesos in lieu of U.S. dollars. Fearful that all U.S. dollars left in the system may be confiscated, many Argentines are withdrawing whatever U.S. dollars they have and putting them in safety deposit boxes, leaving a shortage of available safety deposit boxes in Buenos Aires. Why Argentines believe their government will act with more restraint than the United Kingdom is unclear. (British Government Raids 7,000 Safety Deposit Boxes)

Uruguay Starts to Stall

Meanwhile, across the river, the Uruguayan economy has begun to cool as investors sit on the sidelines waiting to see what damage the Argentine fallout will have here. While things seem mostly normal in Montevideo, construction on half-built apartment buildings in Punta del Este has slowed significantly, as developers are scared that their Argentine investors cannot continue to make the necessary installment payments. As a result, construction sites that used to have 30 to 40 men bustling about have dwindled to 10 or 12. Large machinery sits idle. Real estate developers are hoping that if they slow the speed of construction, Argentine investors might have time to access U.S. dollars in order to meet their obligations.

Not surprisingly, Argentine capital is starting to flee the country in anticipation of bank secrecy ending. Uruguayan banks saw deposit outflows to other jurisdictions increase 19.5% in the first quarter of 2012, the first time there has been any quarterly increase since 2010. This reversal in capital flow highlights a remarkable turnaround. Even El Pais, the country's mainstream newspaper, admits that a "possible explanation" might be Argentine capital flight ahead of bank secrecy ending. And while the outflows are still relatively small in relation to the deposits still held within the banking system, the implication is clear: Argentines are starting to take action.

As a result of the construction slowdown, unemployment in Uruguay increased to 6.7%, its highest level since July 2010. And with continued government spending on social programs, inflation is beginning to accelerate, officially higher than the Central Bank's targeted annual inflation rate of 6%, and likely to finish the year at 8 or 9%.

The increased cost of labor is starting to have an effect on the economy. Last month, Pluna Airlines, Uruguay's government owned and operated airline, officially shut down, as it had been crippled by employee strikes and the rising cost of labor.

As a result of the slowing economic condition, the Uruguayan peso has started to weaken. When I wrote my article two months ago, a U.S. dollar was worth less than 20 pesos. Today it is worth almost 22. That's approximately a 10% move upward, making the cost of goods and services within Uruguay cheaper for foreign residents. If you notice an extra spring in the step of expats, you'll understand why. Gaining a decent amount of additional disposable income in two months is quite welcome.

Plant Your Flag Now

I think the conclusion is obvious. The Argentine boom/bust cycle is happening again, as it does nearly every decade. This time is no different, despite what Keynesian economists might say. Don't make the mistake of letting this opportunity pass you by. Lots of people are visiting Uruguay to see if it's the right place for them to plant a flag. Whether it's purchasing a getaway pad, finding a new country to call home, or even getting a second passport, now is the time to take proactive steps.

A Beginner's Guide To Uruguay

For more information about Uruguay, check out this on-the-ground and in-depth report from Ron Yoder, an American now living in UY. Originally from California, Ron now spends quite a bit of time in the country and has become known as a solid and knowledgeable resource for expats looking to resettle in that area of the world.

This guide is for the person who has never been to Uruguay. It will answer a lot of the basic questions that you might have about the country and possibly help you plan your first trip.

This report is available for members of the International Man Network. Click here for more information.

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