beyondbrics

Talk about Latin America’s rising stars and the focus is often on Peru or Colombia. But don’t overlook the little countries: Paraguay and Uruguay are punching above their weight – and both have just been upgraded by rating agency Standard’s & Poor’s.

That’s a tribute to their economic performance: Uruguay rode out the global crisis without recession, while Paraguay is growing at its fastest rate in 30 years. Both are also catching the attention of some foreign corporate investors.

After 2.9 per cent growth in 2009, Uruguay is now on course for 6.5 per cent this year.  The country still has its weaknesses – the ratio of government debt to GDP is one – but S&P has moved its sovereign debt rating to double B minus.

That’s within two notches of investment grade, which is what Uruguay lost in 2002 during an economic crisis that spilled over from neighbouring Argentina. Its president, José Mujica, wants to regain the status before his term ends in 2014.

S&P expects Uruguay’s fiscal deficit to remain close to 1 per cent of GDP this year, which is within the government’s target.

Uruguay last month hosted a business promotion seminar organised by the Council of the Americas, whose president, Susan Segal, said US investors were looking with interest at agriculture, biotechnology and technology exchange opportunities in the Atlantic-coast country.

Uruguay sees natural resources as key to future growth: it is already exploiting a gap in the market left by declining Argentine beef production, and is seeking to develop what it believes are large offshore hydrocarbons resources. But Mujica has also appealed for young people to “fall in love with maths and scientific analysis” to lay the foundations for a tech-savvy future.

Paraguay, a landlocked country whose population is unique in Latin America by still speaking the language of its Indian ancestors, Guaraní, is also emerging as a promising investment destination. Rio Tinto Alcan is planning to invest $2.5bn in an aluminium smelter – a massive project for the poor country and a diversification into industry from its current strengths in soya, beef and electricity.

To give a sense of the project’s scale, the investment is equal to virtually half the reserves of the central bank.

What’s more, Paraguay’s economy is on fire – set to grow at around 9 per cent this year, a 30-year-high according to Gabriel Torres, analyst at Moody’s Investor Service.

Central bank reserves have doubled in the last three years and political stability has increased under the presidency of Fernando Lugo, who took office in 2008 after 61 years of one-party rule.

Against that backdrop, S&P upgraded Paraguay last month to B plus from B, its first upgrade since 2007.

As S&P noted:

Since 2007, when we raised the ratings to ‘B’ from ‘B-’, the central government has largely run fiscal surpluses, which helped lead to a decline in the net general government debt burden to an estimated 4% of GDP in 2010 from 22% in 2007.”

Paraguay and Uruguay need look no further than Chile to see that small can be very beautiful. Despite its devastating February earthquake, Chile has continued its top-of-the-class economic performance and in July posted the fourth consecutive month of growth since the earthquake.

In addition, as Goldman Sachs analyst Alberto Ramos notes:

Inflation pressures have been markedly benign as they are yet to show any meaningful demand-pull pressure on prices despite very buoyant domestic demand.

Chile knows it got where it is through hard work, careful fiscal management and prudence. A lesson to the little countries, indeed.

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