New ECLAC study analyzes the impacts of the war in Ukraine on the Uruguayan economy

What were the impacts of the war in Ukraine on the Uruguayan economy? A new publication of the Research and Perspectives Series of the ECLAC Office in Montevideo analyzes these effects.

The research titled Economic impacts of the war in Ukraine: A look from the region and Uruguay initially confirms that this war represents a crisis of great proportions that overlaps with others that are also very significant, such as the 2008 financial crisis and the pandemic crisis – which represent what ECLAC has called a “crisis cascade”. As a result, the world and Latin America and the Caribbean in particular have seen their GDP and trade growth rates fall, and experience high levels of inflation that have not been recorded for a long time, especially in developed countries. Although there are demand components, elements act on inflation, above all on the supply side, associated with the disorganization of value chains, transportation costs, and shocks in the supply of energy and food.

Going forward, a world that is more fragmented, more uncertain and with more resources allocated to security compared to those allocated to development is envisioned, the document indicates. Latin America and the Caribbean should strengthen regional integration and its voice to reduce these conflicts and find greater space for its development policies. There are global threats that mean that cooperation must prevail over geopolitical competition, emphasizes the publication.

In Uruguay, the crises and the increase in inflation had an impact on poverty. The National Institute of Statistics (INE) observes that during the first semester of 2022 poverty in the country was estimated at 10.7%, two points above the year prior to the pandemic, for which reason 380,000 Uruguayans were below the line of poverty. Poverty levels are two percentage points higher than those registered in 2019 (8.6%), and lower than those estimated for 2020 (11.8%).

The effects of the war on Uruguayan exports to Russia and the Ukraine have been relatively limited since trade with these countries is not high, the report added. Data from Uruguay XXI indicate that in 2021 these destinations represented 1.2% and 0.01% respectively of total Uruguayan sales abroad. In the last decade, the Russian Federation has been losing relevance as a destination for Uruguayan exports: from 400 million dollars exported in 2011 to 118 million in 2021 (13th place as destination market).

The publication warns that the net effect of the war on Uruguay’s terms of trade has been negative. The favorable aspect was the increase in exports. Data from the Central Bank of Uruguay show in the accumulated of the first nine months of 2022 that exports of goods (including free zones) grew almost 31%, totaling 10,423 million dollars. The dynamism of sales is given by bovine meat, cellulose and soybeans, and is largely explained by the favorable price effect achieved by these goods, in addition to the favorable prices of milk and wheat. In the opposite direction, the increases in the costs of fuels and fertilizers acted, in such a way that Uruguay’s terms of trade fell 1.8% in the second quarter of 2022 compared to the first quarter of 2021, and fell 8.9% in the year-on-year comparison.

Finally, the document indicates that the resurgence of inflation and the increase in interest rates in the central economies led the Central Bank of Uruguay to raise its reference interest rate. This increase, in combination with a more restrictive fiscal policy, could jeopardize the dynamism of the economy next year.