Overseas business risk for Uruguay

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Information on how UK companies can control risks when doing business in Uruguay.

1.General overview

Uruguay is a politically stable country with a strong democratic tradition and institutions. It is positioned at the top of the Democracy, Political Stability and Transparency rankings in Latin America.

Uruguay is a founding member of the MERCOSUR regional bloc (alongside Brazil, Argentina and Paraguay), which represents 60% of Latin America’s GDP. The Uruguayan government is looking beyond its traditional trading partners in the immediate neighbourhood and keen to open up new markets. In recent years, Uruguay’s economy has become more resilient and its exports more diversified thanks to sound macroeconomic policies, strong institutions and political stability.

The country’s GDP has increased at an average of 1.52% in the last decade, including a post-pandemic growth of 5% in 2022. In 2023, Uruguay confronted the impact of a once-in-a-century drought, causing significant direct losses to the primary sector. The economic situation in Argentina created further headwinds for Uruguay, although with no signs of financial spillovers. The economy remained resilient, owing to the authorities’ sound macroeconomic policies, the country’s political stability, and strong institutions. The current administration, in office since 2020, has implemented a significant upgrade of the fiscal and monetary policy frameworks and has advanced decisive structural reforms. Economic growth is expected to recover to 3.2% in 2024. The main economic challenges are lowering the debt to GDP ratio and maintaining the inflation targets.

To ensure continued economic growth in the medium to long term, experts state that Uruguay must address the lack of job opportunities, the relative size of the public sector (significant in a population of just 3.5 million), labour regulation and infrastructure gaps.

2.Political

Uruguay’s political party system is one of the most institutionalised in the world. Citizens choose their government in free and fair elections held every 5 years, based on universal, equal and compulsory suffrage.

After 15 years and 3 consecutive terms for the left-wing Frente Amplio party coalition, the centre-right opposition National Party, led by Luis Lacalle Pou won the 2019 elections with a majority in Congress for his multi-party coalition. Initial willingness to carry out important reforms led to the approval of an Urgent Consideration Bill in July 2020 which contained 476 articles and modified over 30 public policies. It included economic and political reforms, as well as relevant changes in social security, education, health, agriculture, among other sectors.

In 2022, the Economist Intelligence Unit’s Democracy Index ranked Uruguay 13th out of 167 countries, with a score of 8.85 out of 10 (its highest ever). This score ranks first in Latin America and deems Uruguay a “full democracy”, with strong institutions and transparency standards.

Uruguay works hard to endorse Organisation for Economic Cooperation and Development (OECD) standards. This includes signing several tax information exchange agreements, modification of the bearer shares system (Law 18,930 from 2012) and relaxation of banking secrecy provisions through the Law of International Tax Transparency, Prevention of Money Laundering and Financing of Terrorism. Uruguay became a member of the OECD Development Centre and a participating observer in the Fiscal Affairs Committee in 2015.

In 2018, Uruguay graduated from the Development Assistance Committee (DAC) list of eligible countries to receive official development assistance (ODA) from donor countries, due to having reached USD 17.165 per capita income for more than 3 years. In March 2021, Uruguay became associate member of the OECD’s Investment committee.

During 2013, Uruguay was in the international spotlight for legalising same-sex marriage, approving the continent’s most liberal abortion law, and becoming the first nation in the world to legalise and regulate the production, sale and consumption of marijuana.

In 2023, the Uruguayan parliament approved a social security reform that will reduce pressures caused by an aging population.The government also implemented an education reform to update and boost the educational system.

Uruguay will have general elections in October 2024 with a potential second round in November. The new government will take office in March 2025. In May 2025, there will be elections in the 19 municipalities across the country.

3.Economic

Uruguay is a country with a high Human Development Index (HDI), ranked 52nd out of 189 countries in 2022, according to the United Nations (UN).

Uruguay became a high-income country in July 2013 (World Bank). The inflation rate for 2023 was 5.11%; previously 8.29% in 2022 and 7.96%, 2021 (National Institute of Statistics).

The Uruguayan tax system includes indirect and direct taxes which apply the source principle. Tax is applied to all incomes originating within its borders for residents and non-residents. In 2023, the Uruguayan government approved tax reductions by increasing deductions from the Individual Tax (IRPF), and by increasing the non-taxable minimum of the Social Security Assistance Tax (IASS).

Since 2013, Uruguay’s economy has become more resilient and its exports more diversified. According to the World Economic Forum (WEF), it is the 3rd most competitive economy in Latin America and the Caribbean. Its GDP was worth USD 77 billion in 2023, according to the World Bank.

Commodities dominate Uruguay’s exports, principally beef (representing 18% of total exports in 2023), cellulose (17.5%) and dairy products (7%), according to Uruguay XXI.

British exports to Uruguay amounted £196 million in 2023. Main UK exports to Uruguay include Medical & Pharmaceutical products (19%), Beverages & Tobacco (18%), Specialised machinery (4.5%) and Cars (3%).

According to the United Nations’World Risk Reports 2023, Uruguay ranks 88 out of 193 countries (where number one is the most exposed and vulnerable). This ranking reflects the countries’ exposure and response to potential natural disasters.

As for Uruguay’s energy sector, renewables accounted for 93% of the electricity matrix between 2018 and 2022 (53% wind, solar and biomass and 40% hydro), significantly reducing greenhouse gas emissions. It has the second highest penetration of unconventional renewable energy in the world.

While hydropower led the renewable energy matrix since the beginning of the energy transition in 2008, wind energy has now become the main energy generation source. This is due to:

1. Uruguay’s “First Energy Transition”, which started in 2008 and focused on the diversification of the energy matrix
2. a 3-year drought that Uruguay faced between 2020 and 2023

Uruguay ranks 23rd in the Energy Transition Index and is one of the leaders in the region (World Economic Forum, 2023). It has potential for growth in the renewable energy sector, which is contingent on a consolidated electricity market. The country is also one of the first in the region to promote large-scale electric vehicle mobility. Energy Council (WEC),

Uruguay’s Energy Transition Plan is now in its second stage. Its main objectives are:

• direct electrification of end-use consumption
• development of a green hydrogen economy
• consolidate a Smart Grid to efficiently coordinate energy supply and demand
• continue to incorporate energy storage technologies
• expand the possibilities of generating energy from agricultural waste, transforming an environmental liability into an energy asset
• advance in the energy recovery of solid urban waste
• incorporate clean energy into the transport sector by applying the latest available technologies

Green hydrogen has become a priority to the Uruguayan government. It has set up a 3-phase roadmap (H2U Roadmap) for the establishment of institutional lines and work for the growth of hydrogen and its derivatives. This is currently in its first stage with aims to develop the regulatory scheme and attract pilot and first export-scale projects. This has led to the announcement of HIF Global’s US$4 billion investment (the largest in Uruguay’s history) for a green hydrogen production plant. The proposal aims to produce 180,000 tonnes of synthetic fuels per year, using 710,000 tonnes of carbon dioxide.

Uruguay is improving its energy demand matrix. Fossil fuels account for 40% of the country’s total consumption, with a high proportion corresponding to the transport and industrial sectors.

4.Foreign direct investment

A favourable environment for investment and good economic performance over the last decade has contributed to Uruguay being a reliable investment destination. With 1.52% annual average GDP growth in the last decade, the strong economic expansion has been characterised by a noticeable increase in the rate of investment of the economy. This is due to greater investment by the private sector, strongly driven by the inflow of foreign direct investment. Standard & Poor’s credit rating for Uruguay stands at BBB+ with stable outlook. Moody’s credit rating was last set at BAA1 with stable outlook. The perspective remains stable, reflecting Uruguay’s sovereign sustained and balanced growth and the economy’s solid external position, despite high general government deficits and dollarisation levels.

Uruguay has worked actively to maintain the characteristics that have made it appealing to investors: macroeconomic stability, attractive regulatory framework, transparency, institutional quality and financial and trade openness. It offers an attractive set of investment incentives, adequate infrastructure, qualified human capital and agreements to avoid double taxation (including with the UK). Uruguay does not impose any type of restriction for the repatriation of utilities, notwithstanding 60% of the profits of foreign companies are usually reinvested.

The main origins of foreign investment are from Southern Cone countries, the United States and Europe. In the same way as it has worked to diversify and open new markets for its exports, Uruguay is keen to attract FDI from the rest of the world, rather than just the immediate region.

Finnish company UPM made a US$3 billion-dollar investment in 2019 into a second wood pulp plant in Uruguay. This second plant is expected to permanently contribute 2% of the country’s GDP. In the business environment, Uruguay performs well in Starting a Business and Resolving Insolvency. However, it struggles with Dealing with Construction Permits and Protecting Minority Investors. There are some challenges in the labour market including significant taxation, recruitment, redundancy and flexibility in setting wages.

Uruguay is above the Latin American and Caribbean average scores in institutions, infrastructure, health, primary and higher education, goods market efficiency and technological readiness. Uruguay ranks 35th in UN E-Government ranking 2022, just behind Canada and the United States.

According to the results of the latest survey (2023) conducted by Uruguay XXI (the government trade and investment agency), the decisive factors for foreign investors in choosing Uruguay were:

• social, political and macroeconomic stability
• tax incentives and exonerations
• qualified human resources and short distances.

The managers surveyed expressed an elevated level of satisfaction with the business climate (84%) although 49% are dissatisfied with the higher prices and 20% with the slowness and complexity of other bureaucratic processes.

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