Argentinanomics

The impact of cross-border spending sprees on Uruguay’s economy.

In 2023, Uruguay experienced a significant surge in spending by its citizens in Argentina, reaching approximately USD 1.3 billion, well above the historical average of around USD 500 million annually. This unexpected trend has raised concerns about its impact on Uruguay’s economy, affecting VAT revenues, various economic sectors and prompting responses from both governments. 

Uruguayan consumer spending in Argentina skyrocketed in 2023, constituting over 60% of the USD 2 billion spent by Uruguayans abroad. “Uruguayans completed around 5 million journeys abroad in 2023 and 3.5 million of those were to Argentina,” confirmed a senior consultant to a firm offering financial and economic advice to businesses. 

The consultant continued, “regarding geographic areas, those closer to Argentina had suffered especially the impact of harming relative prices,” with sales in shopping centres, clothing and toiletries stagnant compared to 2016 levels. Also, as a director at the Uruguayan Chamber of Trade and Services pointed out, “People may travel the bridges over the Rio Uruguay in less than an hour not only to do some shopping, but also to visit the dentist, optician, hairdresser etc.” 

This cross-border spending trend has put considerable pressure on Uruguayan businesses, particularly affecting small and medium enterprises (“SME”). “Since Uruguay is nowadays perceived as an expensive country in the region, some professional services are been hired in Argentina and other places, such as engineering and architectural designs, IT and back office services,” confided the Economic and International Trade Research director.

This competition from Argentina has led consumers to shift their spending, impacting businesses in border towns. “The Uruguayan government has been very active with Custom controls.” The research director continued, “People trying to cross the borders with merchandise to sell are exposing themselves to heavy controls.”  

“people trying to cross the borders with merchandise to sell are exposing themselves to heavy controls.”  

Director of Economic and International Trade Research, Uruguay

However, some affluent areas, like Punta del Este, have seen dynamic growth due to relocating Argentinians “funding companies and launching projects in Uruguay attracted by the country’s macroeconomics stability and high degree of transparency.” 

The Uruguayan Chamber of Commerce and Services highlights the struggles of local supermarkets, pharmacies, hotels and non-durable goods industries due to the lack of control over large category prices. “Apart from fiscal exemptions for some businesses and custom controls, the Chamber of Commerce is advocating for changes that will ease price formation in Uruguay,” emphasised the Economic Trade Research director. 

Imports from Argentina have not experienced a significant increase due to challenges faced by Argentina’s manufacturing sector, including a scarcity of foreign currency. “The situation could change with a more stable currency in Argentina, which will enable its industry to operate normally,” highlighted the Uruguayan director. A notable concern is the impact on Uruguay’s brewery industry, “one of the largest breweries in Uruguay had to stop some of its production during the first months of the year due to fierce competition from Argentina and Brazil.” 

The Uruguayan government, recognising the adverse effects on tax revenues, employment and salary levels, has implemented measures to mitigate the impact. These include “fiscal exemptions for some businesses and custom controls, the Chamber of Commerce is advocating for changes that will ease price formation in Uruguay.” 

The director of Economic and International Trade Research at the Uruguayan Chamber of Trade and Services expanded, “On one side relative prices with Argentina inflation are still high and devaluation smoothing are showing a better perspective for Uruguay. There has also been a certain novelty effect on travelling to Argentina which is already fading.” 

“relative prices with Argentina inflation are still high and devaluation smoothing are showing a better perspective for Uruguay.”

Director of Economic and International Trade Research, Uruguay

President Lacalle Pou declared in October 2023 that procedures for importing goods directly from Argentina should be facilitated, “which should reduce the attraction of Uruguayans crossing the borders to consume in the neighbour country.” 

Despite the challenges posed by cross-border spending, Uruguay’s Minister of Economy and Finance, Azucena Arbeleche, remains optimistic about the country’s resilience. She acknowledges the impact on tax revenues and growth but highlights the contribution of non-traditional service exports, such as software, in maintaining equilibrium regarding remittances. 

Looking ahead to 2024, analysts predict a continuation of the trend but suggest that it may not become a new normal. “Although inflation can be reduced, it will still be very high (over 150% in 2024) and no big improvement should be expected before 2024 second half,” reported the senior consultant from a firm offering financial and economic advice to businesses operating in Uruguay. Argentina’s economic stability and the success of proposed measures by President Milei are uncertain factors that could influence the situation. 

While Uruguay faces economic challenges resulting from increased consumer spending in Argentina, the government is actively implementing measures to alleviate the impact on businesses and tax revenues. The evolving economic landscape, coupled with the success of governmental strategies, will determine whether this cross-border spending trend becomes a lasting challenge or a transient phase for Uruguay. 

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