A tale of two central banks as Uruguay rises and Argentina slides

Diego Labat, Central Bank Governor of Uruguay, poses for a picture during an interview with Reuters, in Montevideo, Uruguay September 8, 2023. REUTERS

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Diego Labat, Uruguay’s central bank chief, is sitting pretty. Inflation is at the lowest level in nearly two decades, the currency is one of the region’s strongest, and the country is leading a regional pivot towards interest rate easing.

That’s a sharp contrast to just across the Rio de La Plata estuary in Buenos Aires, where inflation hit 124% in August, the highest since 1991, capital controls are barely holding back a fall in the currency, and net reserve levels are in the red.

It’s also a sign of a tectonic shift over years: strong, independent institutions and political stability helping Uruguay’s economy increasingly detach from its larger neighbor, where the two once rose and fell in tandem.

“Uruguay has done its homework,” Labat, 53, told Reuters at his office near the bustling port of Montevideo, adding that the country had been much more susceptible to economic shocks from Argentina just a few decades ago.

In 2002 the small farm-driven economy suffered bank closures, high unemployment and soaring poverty during a devastating financial crisis in Argentina, due to a direct “link” between the two financial systems that has weakened since.

“A problem in Argentina back then was a problem in Uruguay,” Labat said. Argentina was then Uruguay’s second biggest trading partner. Today it has fallen to number four, after China, Brazil and the European Union.

“Today a problem in Argentina is no longer a problem here.”

The opposing fortunes of the two countries is stark.

Uruguay’s annual inflation rate was 4.1% in August, the lowest since 2005 and less than a third of Argentina’s rate of 12.4% in the single month of August alone.

Uruguay’s peso, similarly valued to Argentina’s in 2018, now gets you almost 10 times as many dollars officially, and closer to 20 times in reality, with most Argentines trading on parallel markets as formal access to dollars is tightly limited.

Argentina’s net central bank reserves are also estimated to be in the red, hurting its ability to make payments as it battles to keep a $44 billion International Monetary Fund (IMF) program alive. Uruguay’s meanwhile have been stable at around $8 billion.

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