Foreign Direct Investment in Uruguay - Uruguay XXI

Foreign Direct Investment in Uruguay April, 2014

Table of Contents

I.

EXECUTIVE SUMMARY ............................................................................................... 2

II.

FDI IN LATIN AMERICA.............................................................................................. 3

III.

FDI IN URUGUAY ..................................................................................................... 6

IV.

FDI IN URUGUAY BY COUNTRY OF ORIGIN...................................................................... 8

V.

FDI IN URUGUAY BY ACTIVITY SECTOR .........................................................................10

VI.

RECENT FDI TRENDS IN URUGUAY ..............................................................................14

VII.

REGULATION TO PROMOTE INVESTMENT IN URUGUAY .....................................................16

VIII.

INVESTMENT OPPORTUNITIES IN URUGUAY ..................................................................19

IX.

OUTLOOK FOR FDI IN URUGUAY ................................................................................23

URUGUAY IN SYNTHESIS (2013) ............................................................................................25 MAIN ECONOMIC INDICATORS 2008-2013 ........................................................................... 25

Foreign Direct Investment in Uruguay

I.

Executive Summary

Once again 2013 was a record year for Uruguay in the attraction of foreign direct investment (FDI). In terms of private productive investment, US$ 2,796 million entered the country, 4.1% more than in 2012. Thereby, a decade of uninterrupted growth of foreign direct investment has become consolidated. This takes place in a complex international context. Although 2013 was a year of global FDI flow recovery and inflows to Latin America rose, the South American sub-region underwent a decrease in FDI attraction. Particularly in 2013, flows to South America decreased by 7% due to a drop in the main FDI host countries (Brazil, Chile and Peru). Uruguay has positioned itself as a trustworthy and attractive destination for foreign investors, by virtue of a favorable investment climate and promising macroeconomic performance. In fact, in 2013 Uruguay is the second largest FDI recipient (5% in terms of GDP) after Chile. Uruguay's inward Foreign Direct Investment has as its main origins in Argentina, Brazil, Spain, USA, Canada, Netherlands and Belgium (2012). In the past years, the strong inflow of productive FDI focused mainly on construction, the agricultural and industrial sector, in particular in relation to the agroexporting sector, while investment in the services sector has also gained importance.

continue to expand in various sectors and come from numerous origins. Strong FDI inflows have consolidated in recent years due to a very favorable legal framework for investment promotion, in which foreign and domestic investors are granted the same benefits. The publicprivate partnership regime and the Social Housing Law embody new opportunities for the development of investments in infrastructure and construction. Multiple investment opportunities exist in diverse sectors with various projects that are underway or in the pipeline. For the 2013-2020 period there are investment projects in queue for approximately US$ 20,000 million among public, private and mixed projects. Projects in logistics, mining, energy and agroindustrial infrastructure stand out. In a not so favorable regional context, due to its macroeconomic stability and strong growth, Uruguay continues to exhibit positive prospects for investors. This is amply demonstrated by the main credit rating agencies who have maintained the investment grade of the Uruguayan debt and their favorable vision of the country. On balance, in spite of a less favorable regional context, the positive business climate, the favorable regulatory framework and investments already undertaken, guarantee that Uruguay will continue to attract high levels of FDI in the medium term.

Based on the announcement of new investment projects by foreign companies and the growing number of inquiries made to Uruguay XXI's Investment Promotion Agency by foreign investors in this past year it can be assumed that FDI shall

2

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II. FDI in Latin America

Europe grew while those to the US dropped once again.

Over the last decade, Latin America has become an important Foreign Direct Investment (FDI) attracting region. According to the last report from the United Nations Conference on Trade and Development (UNCTAD)1, inward foreign direct investment in the region increased for the fourth consecutive year, reaching a new record high of US$ 182 billion in 2013, US$ 294 billion if the countries of the Caribbean are taken into account.

Meanwhile, FDI to developing countries has also increased 6.2%. Latin America and the Caribbean was the emerging region that reported the highest increase in inward flows, driven by the FDI inflows to the Caribbean and Central America.

2013 was a year of recovery for global FDI flows. Inward foreign investment grew in all regions, increasing 11% globally. Even though flows to developed economies rose in 2013, they remain at historically low levels since they only account for 39% of global flows. Flows to

Particularly in 2013, flows to South America decreased by 7% due to a drop in the main FDI recipient countries: Brazil (1.9%), Chile (-31%) and Peru (-17%)2. The fall in international prices of raw materials, which is expected to continue in the medium term, and the downturn in regional growth may explain the plunge in flows to South America.

Chart II.1- FDI by region (Billions of US$) 600

576

500 406

2012

400

2013

294

300

200 126 100

56

Developed economies

Emerging Asia

Latin America and the Caribbean

Transition economies

Africa

Source: Uruguay XXI based on UNCTAD

2

1

Global Investment Trends Monitor Nº 15, 2014, UNCTAD.

According to data collected by the central banks of each country. From figures as at closure September 2013, flows to Argentina have also dropped, whereas to Colombia and Venezuela they have increased.

3


Foreign Direct Investment in Uruguay Chart II.2-Top FDI recipients in the region (Billions of US$) 70

64.0

60 50 2012

40

35.2

2013

30 20.9 16.8

20

10.2

10.2

10

4.7

2.8

2.3

Brazil

Mexico

Chile

Colombia Argentina

Peru

Panama Uruguay Costa Rica

Source: Uruguay XXI based on Central Banks of each country. Data on year ending in September 2013 are displayed for Argentina and Costa Rica.

However, the region continues to receive historically high investment flows, due to a process that has taken several years and is grounded on several factors. On the one hand, uncertainty in developed economies after the global financial crisis in 2008 shifted part of the investment to emerging markets. On the other hand, the Latin American local context seems particularly favorable and attractive for global investors. High commodity prices allow for increased profitability, whilst the internal markets of countries in the region have benefited from many years of sustained growth and offer great business opportunities for the development of the service sector. Despite the decrease in flows in 2013, South America has shown an outstanding performance as the sub-region’s major recipient, accounting for 74% of Latin America´s total FDI, with Brazil receiving over half of the FDI inflow. Furthermore, many South American countries continue receiving high levels of investment; such is the case of Chile (US$ 20,869 million), Colombia (US$ 16,772 million), Peru

(US$ 10,172) million).

and

Uruguay

(US$ 2,796

In Central America, Mexico stands out doubling inward flows and reaching US$ 35,188 million in 2013. This has been boosted by new investments which have quadrupled in said period. The acquisition of Grupo Modelo by AB Inbev is the most notable, in the second quarter of 2013, for an amount of US$ 13,249 million. Anyway, excluding this transaction FDI inflow to Mexico increased 73% in 2013. The main industries attracting FDI vary according to countries of destination3. In South America, companies invest mainly in natural resources, except for Brazil which has the manufacturing industry as main destination, with a focus on the metallurgical industry and food and beverages. Alternatively, Mexico, Central America and the Caribbean’s major FDI attraction is in the services and manufacturing sector. 3

To distinguish between economic sectors for FDI destination and countries of origin, data from 2012 have been used, which are the latest available. Source: Foreign direct investment in Latin America and the Caribbean, 2012, ECLAC.

4



Chart II.3 displays the main FDI sources in Latin America. In 2012, United States was the most important investor, followed by Latin America, Netherlands4, Canada, Spain and Japan5. It is worth noting the growing prominence of Latin America as a source of foreign investment flows, which shows the increasingly important role played by Latin American multinational companies, socalled trans-Latin companies.

with a significantly larger percentage than other Mercosur member countries. Chart II. 4 – FDI in South America (GDP % 2013) Chile

7.4%

Uruguay

5.0%

Peru

4.9%

Bolivia

4.8%

Colombia

Chart II.3- FDI in Latin America by source country (share %)

Brazil

2.9%

Mexico

2.8%

Argentina

Latin America 14%

USA 24%

Neherlands 11%

Canada 6%

2.1%

Venezuela

1.4%

Paraguay

0.8%

Ecuador

0.8% 0%

2%

4%

6%

Source: Uruguay XXI based on central banks.

Spain 5%

Japan 4%

4.4%

Other 36%

Source: Uruguay XXI based on ECLAC data

When comparing FDI inflows as a percentage of South America's GDP, it can be seen that in 2013 Chile ranks first, followed by Uruguay and Peru. In 2013 Uruguay improved its relative position, since FDI flows into the country remained at around 5% of the GDP. Such figure not only shows the significance of FDI in the country but also positions it as one of the major investment flow recipients in the region, relatively speaking,

4

Due to its status as a hub for investments carried out from foreign countries. 5 A high percentage of FDI cannot be traced to its economy of origin due to the way in which transnational companies channel their outward investment through affiliates overseas.

5



III. FDI in Uruguay6

In 2013, FDI flows in terms of GDP placed Uruguay as the second largest investments recipient in the region after Chile.

In the last few years, Uruguay has positioned itself as a trustworthy and attractive destination for foreign investors, by virtue of a favorable investment climate and promising macroeconomic performance. From the minimums recorded after the financial crisis in 2002, FDI flows have increased steadily.

FDI inflows into the country have recorded a growing trend after the significant volume received in 2005, connected to a strong investment mainly pertaining to the installation of a pulp mill7.

Chart III.1 - FDI inflow to Uruguay (Millions of US$ and GDP %) 3,000

2,796

8%

2,687 7%

2,504

millons of US$ (left axis)

2,500

2,289

% of GDP (right axis)

6%

2,106 2,000

5% 1,529

1,493

1,500

4%

1,329

3% 1,000

847 2%

500

416 297

332

1%

194

0

0% 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Uruguay XXI based on Central Bank of Uruguay's data.

In fact, FDI in terms of GDP has increased from an average of 2.2% for the 2001-2004 period to 5.7% for 2005-2013. 6

Methodological note: Uruguayan FDI information is gathered from the Balance of Payments quarterly publications issued by BCU [Central Bank of Uruguay]. Capital contributions, profit reinvestment and net financing between headquarters and their branches or subsidiaries, as well as real estate investment in the seaside city of Punta del Este have been included. As from 2003, direct investment estimations in the primary sector (land) have been included. Such data allow identifying reverse investments, i.e. investments of subsidiaries in their own headquarters.

After the decline in 2009, as a result of the global financial crisis, 2013 was the fourth consecutive year of growth in FDI flows and reached an all-time high. In 2013, Uruguay received by way of FDI US$ 2,796 million, 4.1% more than last year. 7

Botnia's (currently UPM) investment was of approximately US$ 1,200 million, which was ascribed to FDI figures between 2005 and 2006.

6



As shown in Chart III.1, the most significant period of FDI inflow into Uruguay has been as of 2008; during this period it has attracted an average annual investment of over US$ 2,000. Chart III.2 - FDI Stock in Uruguay (Millions of US$ and GDP %) Year

In millions of US$

FDI Stock/GDP

2002

1,403

10%

2003

1,800

15%

2004

2,110

15%

2005

2,844

16%

2006

3,899

20%

2007

6,356

27%

2008

7,998

26%

2009

10,668

35%

2010

12,479

32%

2011

15,147

33%

2012

17,547

35%

compelled to retain earnings under the Uruguayan law. In fact, 30% of the total FDI flow derived from this source, approximately US$ 852 million. This is because of the high return on investments (7%8) in a context in which international interest rates remain low.

2013 37% 20,334 Source: Uruguay XXI based on Central Bank of Uruguay's data. Estimated data for 2013. When considering FDI stock in relation to GDP, Uruguay also has one of the highest ratios in the region, mirroring the process of large accumulation of foreign investment experienced in recent years. Particularly, in 2013 FDI stock achieved US$ 20,334 million, which accounts for 37% of Uruguay's GDP. This ratio exceeds that of Argentina (25%), Brazil (32%), Colombia and Peru, but is lower than Chile's (80%). Due to the substantial increase of FDI stock in the past years, caused by the surge of FDI previously analyzed, earnings received by foreign companies have also sharply risen. A significant portion of these earnings have remained in Uruguay as reinvested profits (63% of 2013 profits), even though foreign companies are not

8

Measured as FDI returns to FDI stock ratio.

7



IV. FDI in Uruguay country of origin

by

A breakdown of the FDI received by Uruguay shows the importance of the countries in the region and of some developed economies. Chart IV.1 - Top ten FDI sources in Uruguay - Year 2012 (share %) Argentina

36.5%

Brazil

8.5%

Spain

5.3%

USA

4.7%

Bahamas

4.5%

Netherlands

2.8%

Canada

2.5%

Belgium

2.2%

Paraguay

1.9%

New Zealand

1.8%

Source: Uruguay XXI based on Central Bank of Uruguay's data.

Argentina, historically, has been within the three main FDI sources with an average share of 23% in the 2001-2012 period. In the 2002-2005 period, flows from the neighboring country began to weaken due to the 2001 economic-financial crisis. But, from 2006 onward, the inflow of Argentine capitals has become stronger, achieving record levels in 2012 of US$ 980 million, almost 36% of the total. The last few years have been a time of great dynamism and investments undertaken during this period have been directed towards the agricultural sector and real estate and hotel industries.

On the other hand, Brazil in the early 2000s did not represent a significant source of FDI. However, as of 2005 it began to have a greater share until it reached in 2008 its peak for the period (8.7%). After receiving lower flows in the following years, in 2012, record levels were received from the neighboring country, US$ 228 million, 8.5% of the total. Brazilian capitals have mostly been invested in the agroindustrial sector seeking to complement its production chain, through the acquisition of large domestic companies. These acquisitions have primarily taken place in the meat, beverage, rice, chemical and plastics industries. Meanwhile, Chile that is not yet a major source in 2012 (0.7%) emerges as having potential for greater growth driven by the acquisition of companies in the retail and entertainment industry, discussed below. With regard to Europe, although it continues to be a relevant source, FDI flows from this continent represent a smaller share than a decade ago. The economic slowdown and recession experienced by Europe explains part of this decline. Anyway, in 2012 they gained ground and with a value of US$ 407 million they represent 15% of the total.

Spain is one of the main sources, despite having lost significance in recent years as a consequence of its complex economic situation. During the 2001-2012 period it ranked second as source of FDI into Uruguay, with an average share of 9%. Although the amount of FDI received in 2009 and 2010 decreased significantly, in 2011 and 2012 the level of investment received rebounded and is currently around 5% of the total. The services, financial and construction and infrastructure industries 8



are the ones that concentrate the majority of the Spanish investment.

idea of the investments.

Investments from Netherlands and Belgium also stand out, accounting for 5% of total flows received in 2012.

Since 2004 India, Japan and China are responsible for greenfield projects in Uruguay for an amount of US$ 790 million, 5% of the total. These investments are geared towards the industrial (automotive) and services sector.

Moreover, the two mega forestry investments undertaken since 2005 come from Europe. In 2007, the UPM pulp mill (formerly Botnia) began operations, a company of Finnish capital, and in early 2014 Montes del Plata, a company of Swedish-Finnish (Stora Enso) and Chilean (Arauco) capital, shall follow suit.

significance

of

these

In 2012 United States was the fourth most important source of FDI. Even though in 2010 and 2011 flows from this country declined, in 2012 they rebounded and reached US$ 126 million, 4.7% of the total. Additionally, it is likely that most of the flows recorded as coming from Bahamas are from U.S. capital9. Investments from the U.S. are directed towards a wide range of business sectors, the most relevant being the services and industry sectors. In the last three years, flows from Canada have also risen to prominence, representing 2.5% of the total FDI in 2012. Finally, the recent dynamism of the inflow of Asian capital is also worth noting. Even though these sources have not been directly identified by the BCU [Central Bank of Uruguay]10, based on greenfield project announcements data11 we can have an 9

Bahamas serves as a major international financial hub from where large multinational companies channel their investments. 10 The Central Bank includes these investments as “other sources” since they were undertaken by companies that are exclusive to the country for the purpose of respecting the statistical secrecy. 11 Greenfield projects are those which have to be designed from inception or, if they already exist, they should be completely modified. Source: FDI Markets (Financial Times).

9



V. FDI in Uruguay activity sector

by

This section describes the recent FDI development according to the investment's sector of destination12. Chart V.1 – FDI in Uruguay by sector 2012 (share %)

Construction

38%

Other sectors

22%

Manufacturing industries

14%

Agriculture, livestock, hunting and forestry sectors

8%

Transport and communications

7%

Financial services

6%

Retail, hotels and restaurants

5%

Source: Uruguay XXI based on Central Bank of Uruguay data.

(towers and buildings). These investments were mainly from Argentine origin; therefore they could slow down in 2013 and 2014 due to the constraints suffered by Argentinians to invest in other countries13. Moreover, since 2011, under the new legislation (see section VII), investors have taken advantage of the opportunities that have arisen in the construction segment of middle class housing. In the construction sector, it is worth noting TEYMA, from the Spanish group Abengoa. This company was in charge of the Montes del Plata pulp mill construction and is currently developing three wind farms and numerous civil and industrial works projects. Likewise, in 2012 the U.S. based Trump group announced real estate investments in Punta del Este of approximately US$ 100 million. Finally, companies from numerous origins are involved in several undertakings related to the cement industry in the department of Treinta y Tres. Among them the Catalan group Molins, the Brazilian Votorantim and the Argentine Loma Negra.

Construction

Agriculture, Livestock and Forestry

The construction sector has received the most FDI inflows in 2012 with an amount of US$ 1,034. Since 2007, said sector has shown significant activity with a share of over 30%.

Since 2003, the agricultural and forestry sector has had a significant impact on investment, albeit declining. While in 2003 the sector's FDI accounted for 47% of the total, in 2012 the US$ 203 million received accounted for 7.6%.

Montevideo and Punta del Este's luxury segment has been the main focus of these investments, especially through the development of large condominiums 12

FDI data by country and by sector has been made available by the BCU only until 2012. Note: “Other sectors” include those companies that were exclusive to their sector, for the purpose of respecting the statistics secrecy.

In the agricultural sector the Argentine companies stand out, being the first large multinationals with participation in the sector. However, in the past years there have been other business groups from 13

Please refer to Real Estate Sector Report, Uruguay XXI, 2014.

10



other origins with investments in the sector. The presence of the largest global grain traders (ADM, Bunge, Cargill and Louis Dreyfus), mainly in the stockpile and trading stage, mirrors the importance gained by the agricultural sector in recent years. A significant proportion of FDI in the sector corresponds to the purchase and sales of lands. In 2012, foreigners invested US$ 90 million in land. Given movements recorded in the forestry sector, trends are expected to continue in 2013.

Industrial sector Most investments in the industrial sector are associated with agribusiness. On the one hand, data from 2012 shows the impact of the Montes del Plata pulp mill construction, a project carried out with Chilean and Swedish-Finnish capital14. This investment involves an amount of approximately US$ 1,900 million and will be also noticed in data collected for 2013. In addition, a project for the construction of a third plant of cellulose in the center of the country is in the pipeline. Said investment will take place in 2016 (please see section VIII). Beyond these large investments, under the manufacturing industries business category, the main sub sector is the manufacturing of food and beverage products. In recent years strong investments have been received by the meat processing and agro-industrial industry, and the manufacturing of chemical substances and products.

After the industrial sector's slowdown in 2010 and 2011, in 2012 it reemerged and accounted for 14% of the country's total FDI. In the meat industry, the Brazilian group Marfrig stands out, owners of 5 meat processing plants and 51% of the Zenda Leather tannery, until June 2012 when they sold their share to the Brazilian group JBS. The latter group also acquired the area of semi-finished leather of Bader, the German leather tannery. The food group Camil acquired the Uruguayan rice company SAMAN in 2007 for US$ 160 million. The Venezuelan group Zambrano in 2013 took over Frigorífico Florida [meat processing plant] for US$ 7 million. In addition, in March 2014 the acquisition of Frigorífico Carrasco by the Brazilian group Minerva was confirmed for an amount of US$ 37 million15. Meanwhile, the Spanish group Viscofan, international leader in the production of collagen casings for sausages, opened in 2014 a plant to supply said product to the region. This plant is the first of its kind in Latin America and implied an investment of US$ 37 million. This investment was declared as promoted by the authorities and benefited from all exemptions provided for in the investment promotion law (please see section VII). In the food sector, in 2013, it is also worth noting the acquisition by the Chilean group Linzor Capital Partners16 of 85% of Pagnifique, the bakery products company, and the partnership between Los Nietitos company and the French company Andros.

14

In order to respect statistical secrecy the BCU does not include data from this investment under the paper and other paper product manufacturing businesses. Said information is instead included under other businesses. Data for 2013 shall also reflect part of this influence.

15

The Minerva group has been in Uruguay since 2011 with the acquisition of Frigorífico PUL. 16 This same group acquired for an estimated amount of US$ 90 million the Farmashop drugstore chain.

11



The automotive industry has been one of the most attractive to Asian investors. In particular, the presence of the Japanese group Takata should be underscored, with the opening in 2012 of an industrial plant for the manufacturing of airbags to supply its assembly plant operating in Brazil. Geely International, China's largest private automotive company, through an industrial cooperation agreement with Nordex Uruguay invested in the development of an assembly plant, which opened in October 2013. Furthermore, the Chinese company Chongqing Lifan is in the process of expanding its production of vehicles intended for export to Brazil and is currently building an engine assembly factory. In the chemical sector, the American Chemical ICSA was acquired by the Brazilian group Ultrapar Participações S.A for US$ 79 million in late 2012. In 2013, Vibrac, the French company, acquired 100% of the shares of the animal health laboratory Santa Elena.

Services In the services sector, in particular the export of global services, Uruguay has experienced a growing presence of major multinational companies since 2002 when the Indian company Tata Consultancy Services, leader in information services, business process outsourcing and consulting, established its regional operations center. Since then Uruguay has become an important market for the export of global services. Sabre Holdings, Globant, APAC Costumer Services, Tenaris, Mercado Libre, Louis Dreyfus and Smart Cube are only some examples of the

companies who have chosen to establish themselves in the country17. Another outstanding investment in services refers to the presence of Grupo Codere, leader in the private gaming sector in Europe and Latin America. Since 2002, under the name Hípica Rioplatense S.A.18 they run the Hipódromo de Maroñas in Montevideo and betting outlets and gaming machines, acquired for over US$ 80 million. In 2009, the CODERE group added to its portfolio of activities the restoration and management of the Hotel Casino Carrasco in Montevideo, to be carried out in conjunction with the French hotel chain Sofitel, with an approximate investment of US$ 75 million19. In the entertainment sector, emphasis should also be placed on the purchase of 45% of the block of shares of the Punta del Este Conrad hotel for US$ 139.5 million, by the international Chilean hotel chain Enjoy, in 2013. The company is already executing an ambitious investment plan which includes the expansion and modernization of its casino. Moreover, Enjoy's option of acquiring the remaining 55% ownership in three years was set forth in the business deal. In the financial service sector, the Spanish Banco Santander and BBVA and the Brazilian Banco ITAU account for 65% of private banking. In recent years, the financial sector is undergoing a process of 17

For more information visit:: Global Services Exports, Uruguay XXI. 18 Hípica Rioplatense S.A. is a group conformed by Sociedad Argentina de Medios S.A. of the Sociedad Latinoamericana de Inversiones [Latin America Investment Partnership] and CODERE. 19 The city government of Montevideo awarded the restoration and 30-year concession of Hotel Casino Carrasco to the consortium formed by CODERE, together with the Argentine company AGG, other international investors and the hotel operator Sofitel.

12



consolidation with a series of mergers and acquisitions. Furthermore, the domestic brand ABN AMRO Bank was acquired by Banco Santander for US$ 250 million in 2008; BBVA took over the local subsidiary of Credit Agricole S.A. for US$ 125 million and ITAU recently acquired the retail banking operations of Citibank Uruguay N.A. for US$ 20 million. In addition, in December 2013, the acquisition process of Lloyds TSB business operations in Uruguay by the Swiss bank Heritage was concluded. On the other hand, HSBC bank and Discount Bank plan to sell their local subsidiaries.

country has managed to substitute flows of Argentine capital for FDI from other countries. With regard to the target sectors, construction is the one that has received the largest share of FDI. However, other sectors such as agriculture and industrial (specially agro-industrial) have become very dynamic. Actually, the likely slowdown of inflow from Argentina shall have an effect on the flows destined for the construction sector.

With regard to the Administrators of Pension Funds (AFAPs: Spanish acronym) there have also been significant changes. The Colombian group SURA joined the arrival of the Venezuelan BANDES in 2006 and the Brazilian ITAU in 2008. SURA acquired Afinidad AFAP (currently AFAP Sura) from the ING financial services dutch group, by late 2011. This same group, through its subsidiary Sura Asset Management, acquired the Uruguayan investment holding Tublyr in October 2013. In short, based on the official data released by the BCU and publicly available information it can be observed that in recent years the inflow of productive FDI has been steady. Although the origins of these investments are diverse, the region's share remains high, particularly by the weight of Argentina. FDI flows into Uruguay are expected to be affected if the challenges faced by Argentines when trying to send funds abroad endure. In fact, it is likely that data for 2013, which will be known in detail by country by late 2014, will already exhibit this effect. Nevertheless, the fact that foreign investment continues at historically high levels shows that the 13



VI. Recent FDI trends in Uruguay Announcement of greenfield projects in Uruguay This section was prepared with information obtained from FDI Markets (Financial Times)20. When considering the greenfield projects announced by foreign companies in Uruguay in 2013, it is observed that the most significant investment announcements are related to the construction of power generating plants (see Chart VI.1). Chart VI.1 - Greenfield projects announced in Uruguay by sector (2013, millions of US$) Renewable energy

1,222

Consumer goods

82

Entretainment

78

Textile

70

Financial services

In the consumer goods sector, the investment announced in 2013 by the Chilean company Falabella stood out. In the entertainment and leisure sector the investment of the Codere group also stood out. In terms of origin, the main investments considered come from the European Union, which accounts for 72% of the total, mostly in the aforementioned energy generation. Chart VI.2 - Greenfield projects in Uruguay announced by origin (2013, millions of US$)

62

Plastics

34

Business services

622

21

Software & IT services

21

Automotive Components

12

Communications

10

253 253 249

20

Source: FDI Markets. It should be clarified that: i) this is only with regard to greenfield projects therefore, no merges, cross-border acquisitions or reinvested earnings by foreign companies have been included; ii) these are investment announcements that are not necessarily undertaken; iii) they are press releases that possibly reflect the most optimistic project estimates; iv) the value is allocated to the year in which the announcement is made even though the investment may be distributed throughout the coming years.

31

20

3

United Kingdom

31

United States

42

Bermudas

46

Chile

Argentina

Francia

Germany

Spain

Namely, from the information obtained it is worth highlighting the investments

70

Japan

Source: Uruguay XXI based on FDI markets data.

Denmark

7

Hong Kong

Food

announced in the renewable energy area for US$ 1,222 million. Four companies explain this figure: the Spanish company Abengoa, the French company Akuo Energy, Juwi from Germany and Corporación America from Argentina, all of these with investments in several countries at an international level.

Source: Uruguay XXI based on FDI markets data.

14



Inquiries received by Uruguay XXI 21 Based on inquiries received through Uruguay XXI's Investment Promotion Office, it is also possible to analyze last year's trends. Throughout 2013 over 300 inquiries were received from potential foreign investors and more than 150 foreign investors directly visited Uruguay XXI offices, were they were provided with the necessary support for the realization of their projects. The number of queries dealt with exceeded those recorded for 2012 by 5%.

As can be seen in Chart VI.3 inquiries from neighboring countries and United States increased in 2013. Chart VI.4 - Inquiries by sector (share %)

Other 2.5% 6.4% 3.5% 8.3%

12.7%

29.6%

Chart VI.3 - Main sources of inquiries (share %) Argentina

16%

Spain

16%

Services Construction & infraestructure Agrobusiness

15%

Brazil China

4%

India

4%

2013 2012

4%

Portugal Germany

3%

South Korea

3% 3%

Japan

0%

5%

10%

15%

Industrial Energy Real State

Source: Uruguay XXI

15%

United States

36.9%

20%

Source: Uruguay XXI

Inquiries received in this period came from almost 37 countries, mainly from investors located in Latin America (36%), Europe (33%), North America (15%) and Asia (14%). The main origin was Spain and Argentina, followed by the United States, Brazil, China and India.

Investment inquiries come from companies in different sectors. The service sector plays a prominent role, accounting for 37% of total inquiries made (logistics, global export and financial services among others). These were followed, in order of importance, by those related to the industrial sector with 30% of total enquirers received (food, automotive, auto parts, pharmaceutical, medical, machinery manufacturing industries, etc.) Inquiries were also answered in the areas of construction and infrastructure (13%), energy (8%), among others.

21

Based on data collected by Uruguay XXI's Investment Promotion Office.

15



VII. Regulation to promote investment in Uruguay Uruguay boasts a comprehensive legal framework to promote investment. Its political and social stability cannot be matched by any other country within the MERCOSUR region. If the attractive tax benefits are added to the free repatriation of capital and profits through a flexible financial system, combined with a regime that does not discriminate between the domestic and foreign investor, as a result we obtain an investment promotion scheme unparalleled in the region. Outlined below is a brief description of the main tools offered by Uruguay to promote investments.

Investment Promotion and Protection Law Foreign investors enjoy the same benefits as national investors and do not require prior authorization to operate in the country. Law 16,906 of January 7th, 1998 declares the promotion and protection of domestic and foreign investment of national interest. Decree 455/007 and 002/012 updated the regulations of the law. By virtue of this law and for any investment projects submitted and promoted by the Executive Branch, between 20% and 100% of the invested amount is exempt from Corporate Income Tax (IRAE), depending on the type of project. The IRAE nationwide flat rate is 25%. Personal property included in fixed assets and civil works are exempt from Wealth Tax. VAT included in the purchase of materials and services for civil works can be recovered. Moreover, the import of personal property included in fixed assets which is not competitive with the national

industry is exempt from import taxes or duties, as declared by the law. It should be noted that this regulation does not apply to projects that are intended exclusively for construction and subsequent sale of real estate. Nevertheless, those projects that have the construction of a building as part of a promoted activity (tourism, expansion or creation of new productive activities, etc.) can take advantage of the incentives offered by this regulation. The application to enter the investment promotion scheme is to be submitted to the Private Sector Support Unit (UnASeP), with all the information required by the Investment Law Application Commission (COMAP), who will determine which will be the Ministry and agency in charge of assessment, based on the nature of the project and the corresponding activity.22

Public-Private Partnership Contracts Public-Private Partnership (PPP) refers to all contracts in which a public administration office commissions a private company, for a given period, to carry out the design, construction, operation and/or financing of infrastructure. Law No. 18,786 of July 2011 sets the regulatory framework applicable to this scheme. These contracts may include the development of infrastructure in the following sectors of activity: Road, rail, port and airport works Energy infrastructure works Waste disposal and treatment works Social infrastructure works, including prisons, medical centers, educational establishments, social housing, sports complexes and 22

http://www.mef.gub.uy/comap.php

16



improvement works, urban supply and development. The contracting procedure involves several stages: public or private initiative process, prior appraisal, approval of research by the Office of Planning and Budget (OPP) and the Ministry of Economy and Finance (MEF), request for tenders, submission of bids, review and contract awarding. With regard to these types of contracts, the institutional framework comprises several institutions. The Public-Private Partnership Unit operates in the Ministry of Economy and Finance (MEF) and its duties include, but are not limited to, the follow-up of the economic and financial aspects of the bid in relation to the previous research carried out on the project. On the other hand, the Public Administration is responsible for the design, structuring and execution of PublicPrivate Partnership contracts, as well as monitoring the appropriate execution and compliance with obligations undertaken by the contracting parties. The National Development Corporation (CND) is responsible for the promotion of the Public-Private Partnership projects and the preparation of the technical guidelines applicable to such projects. In turn, the Office of Planning and Budget (OPP), among other duties, is in charge of ensuring the proper development of each project according to the conditions and key features of the PPP contract model23.

Social Housing Promotion Law Another attractive scheme to invest in Uruguay is that conveyed in Law No. 18,795, which promotes investment in the construction of social housing; such 23

Refer to Public-Private Partnership Contracts, Uruguay XXI.

scheme is aimed at providing middle and low-income sectors with the possibility to access housing. In this context, it encourages private investment in construction, refurbishment, renovations or enlargement of a minimum of two and up to one hundred dwellings per registered plot. These may be intended for sale or rent, with tax exemption and access to a credit guarantee fund to enable access to bank financing (FOGADI)24.

Other Promotional Schemes Uruguay features various schemes that give rise to an even more attractive regulatory framework. Within these schemes are the Law of Free Zone, Free Ports and Airports, Industrial Parks, Temporary Admission, Customs 25 Warehouses , and industry-specific regulations (See Chart VIII.I).26 It is worth noting, that the Free Zone scheme is under revision process. In July

2013, the Executive Branch submitted the Special Economic Zones Bill27 to parliament and is in the process of being approved. This new law seeks to encourage high quality employment, generation of domestic value added, the development of high-tech and innovation activities, decentralization of economic activities and regional development. Moreover, labor requirements are more flexible than those established by previous regulations. A particular system called Thematic Service Zone has also been included, which plans to promote activities 24

Refer to Infrastructure and Construction Report , Uruguay XXI. 25 Refer to Logistics Sector Report, Uruguay XXI. 26 For more information, please refer to Private Sector Support Unit (UnASeP) of the Ministry of Economy. 27 Refer to Special Economic Zone Bill.

17



in the area of health care, leisure and entertainment, and audiovisuals.

International Agreements Uruguay has 28 bilateral investment

agreements in effect and 14 agreements to avoid double taxation, and many about to enter into force, in addition to other treaties for market access preference (see Uruguay Agreements, Uruguay XXI, 2014).

Box VII.I - Other incentives In order to boost specific sectors, tax benefits have been established for companies engaged in activities related to certain specific sectors. Some of these sectors are: Renewable Energies28: activities such as power generation from non-traditional renewable sources, electrical power generation through co-generation, transformation of solar power in thermal power, national manufacturing of machines and equipment intended for the activities mentioned above, among others. Shipbuilding industry and Electronics Industry29: ship and water vehicle building, maintenance and repair activities fall within the shipbuilding industry. The electronics industry promotes manufacturing of electronic components, telematics, professional electronic and consumer equipment as well as industrial and domestic electric equipment. Teleservice Centers30: activities such as services rendered by telemarketers receiving or making phone calls, Internet messages and other kind of communication channels. Condominium Hotels31: destined to offer lodging services in order to attract the tourism demand. Tourism32: investments related to civil works corresponding to Tourism Projects, including activities destined to offer lodging, cultural, commercial, congress, sports, recreational, amusement or health services or investments related to the acquisition of goods destined to fitting out Tourism and Hotel Projects, Apart Hotels, Motels and Tourism Farms. Biotechnology industry33: is involved in the development of biotechnological products, services and processes aimed at strategic productive sectors, giving priority to the agricultural, environmental, human health and animal sectors. Machinery and Agricultural Equipment Manufacturing34 Treatment and final disposal of industrial solid waste35 Installation and deployment of point-of-sale terminals36 Universal accessibility to public passenger transport 37 Vehicle manufacturing and freight transportation equipment38

28

Decree No. 354/009 , Law No. 18.585 and COMAP [Commission for the Application of the Investment Act] general operation criteria, Decree No. 23/014 29 Decree No. 532/009 and subsequent amendments Decree No. 127/011 and Decree No. 58/09 30 Decree No. 207/008 and subsequent amendments Decree No. 379/11, Appendix VIII 31 Decree No. 404/010 and subsequent amendments Decree No. 59/012, Appendix X 32 Decree No. 175/003 33 Decree No. 011/13 34 Decree No. 346/009, subsequent Decree No. 6/010 and COMAP [Commission for the Application of the Investment Act] general operation criteria 35 Decree No. 411/011 36 Decree No. 459/011 and subsequent amendments Decree No. 293/012 37 Decree No. 412/011 38 Decree No. 210/010

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VIII. Investment Opportunities in Uruguay For the following years there are multiple investment opportunities in various sectors with several projects that are already being executed or next to bgin. According to the National Directorate of Industries, from the Ministry of Industry, Energy and Mining (MIEM) in the period 2013-2020 there are in the pipeline investment projects for approximately US$ 20,000 million considering public, private and mixed projects. Outlined below is a description of some of the main projects and investment opportunities for private investors on several sectors.

Transport and Logistics Under the Public-Private Partnership (PPP) framework and at different stages of the bidding process, a prison facility (US$ 87 million) and the highway corridor for routes 21 and 24 (US$ 200 million) are being developed39. Strong investments in the field of logistics are also expected in the form of publicprivate partnerships in the coming years. In particular, the construction of a deepwater port in the Atlantic, that has already been approved by law and is in the design phase of the project. It is estimated to be an investment of approximately US$ 1 billion40

39

See Public – Private Partnership, Uruguay XXI. For more information refer to Deepwater port Inter-ministerial Commission. 40

Furthermore, beyond some specific public sector initiatives for the rehabilitation of some particular sections, the development of a better railway system in conjunction with private actors is an important government goal. In this regard, the participation of private investors under the PPP framework or other form will be the key to the development of the sector.

Mining A mega-investment project in the iron industry is in the final stage of approval and a contract between the national State and a private company is about to be signed for a mining project at the east of the country. In this regard, on September 2013 the Mega-Mining Law that regulates the industry's activity has been promulgated (Law No. 19,126). In addition, an investment of US$ 360 million for the extraction of iron and pig iron production is planned in the department of Rivera, carried out by the Australian company Gladiator Resources. Associated with the significant increase in the supply of iron driven by these projects, important possibilities emerge for the development of industries at different stages of the chain of industrialization of this mineral. In this regard, two Asian companies have already shown interest in producing pig iron, steel billet or steel in Uruguay.

Energy In 2013, progress was made in the field of renewable energy projects in line with the objective of diversifying the national energy matrix. Wind energy investments are estimated at a total of US$ 2,000 million by 2015, mostly deriving from foreign sources. Investment opportunities have also arisen in solar photovoltaics and 19



biomass generation, in many cases with UTE, the state company responsible for the generation and distribution of electricity.41 On biomass generation it is expected to sum between 250 and 300 additional MW until year 2015 with a private investment of US$ 500 million42. At the end of 2012, UTE executed a contract with the South Korean company Hyundai Engineering & Construction (HDEC) awarding them the construction and maintenance (for seven years) of a second combined cycle thermal power station in Punta del Tigre, for an estimated investment of US$ 530 million over the next three years. Moreover, in May 2013 the Franco-Belgian company GDF SUEZ was contracted for the construction and operation of a regasifying plant to be installed in the west region of Montevideo. The total current expenditure for the construction, operation and maintenance of the plant is estimated at US$ 1,125 million and the project is already being executed. Opportunities are also emerging in the field of hydrocarbon exploration in partnership with the state-owned company ANCAP. In 2009 and 2012, Ronda Uruguay I and Ronda Uruguay II [bidding rounds] took place, whereby ANCAP executed contracts for the exploration and exploitation of hydrocarbons in ten offshore areas of the Uruguayan coast with several foreign companies. In Ronda Uruguay I, exploration contracts were executed between YPF (Argentina), Petrobras (Brazil) and Galp (Portugal) and ANCAP. During Ronda Uruguay II, the companies BP (UK), British Gas (UK), Total

(France) and Tullow Oil (Irish), the latter in partnership with Inpex (Japan), joined in and committed to conducting exploration works for US$ 1,560 million in 2013-2015. In 2013 the Dutch Shell bought Petrobras` share of the offshore area. In onshore exploration ANCAP executed exploration and prospecting contracts with YPF and Shuepbach Energy LLC, an American company. On December 2014 it is expected the launching of Ronda Uruguay III where new offshore areas will be offered, in similar conditions as in the previous stage43. Should they be successful, it is expected that the mentioned industry sector becomes a strong foreign investment destination in the coming years.

Cement Plants Meanwhile, in the department of Treinta y Tres, a series of ventures related to cement production are being developed. Between public and private projects, investment are planned for up to US$ 500 million.

Retail Sector This sector was also very dynamic in 2013. The Chilean company Falabella announced its entry into the Uruguayan market with the opening of two stores of its SODIMAC chain in Montevideo, planned for late 2014. This will involve an initial US$ 40 million investment. This adds to the acquisitions mentioned above by the Chilean Linzor Capital Partners and positions this country as an important source of foreign capital. Moreover, the Spanish company Inditex opened its first store of the brand Zara Home in the country. In addition, on April

41

Refer to Renewable Energy Report, Uruguay XXI. Source: Principales proyectos de inversión en Uruguay, DNI, 2014. 42

43

For additional www.rondauruguay.gub.uy

information

see:

20



2014 it expanded its Zara store in Montevideo Shopping, which became the largest in Latin America.

Servicies Another sector that shows a major expansion is the global export services as large international companies continue to find attractive the country as a platform to offer their products or locate part of their business. On June 2013 Trafigura, an international export services company, announced the installation of a regional logistics center that will employ 250 people and will involve investments in 2014 and 2015. Furthermore, the Swedish company SKF, that already had a distribution center in the country, decided to expand its activities and move its shared service center and other activities from other countries in the region. In addition, associated with the abovementioned hydrocarbon exploration, many international companies opened offices from which they provide back-office services to carry out their activities in the country. This also opens the possibility that some of these companies start to provide engineering services to the region from Uruguay. Given the importance of this sector, Uruguay developed a Program to Support Global Export Services, which is run by Uruguay XXI with financial support from the Inter-American Development Bank (IDB). This program aims to contribute to the development of a market for export global services in Uruguay through actions of investment and export promotion, building of capacities, modernization of the

regulatory framework and support to specific sectors for the industry growth44. With the future adoption of the new Special Economic Zones Bill (see section VII) new opportunities in the services sector will emerge. In fact, private investors have already submitted projects or expressed interest in creating thematic areas of audiovisual services, health and recreation. The tourism services related sector is another segment that shows a strong dynamism. In addition to multiple investments in the hotel industry in the east and west of the country, there are projects for two major convention centers which in turn will generate related opportunities45. In April 2014 the construction of the Convention Center and Fairgrounds from Punta del Este was awarded to the Spanish company Teyma, while management will be conducted by Ciepe, a consortium of Uruguayan and Argentine capitals.

Agriculture and Agribusiness In the agricultural and agro-industrial sector, beyond the movements mentioned in section V, significant opportunities continue to appear in land sales. For example, in 2013 the American groups GMO and Harvard acquired forested areas of the Chilean company Arauco and Spanish group Ence for US$ 200 million. Finally, in 2013 the construction of Montes del Plata’s pulp mill in Conchillas (Colonia) came to an end. The work involved an investment of more than US$ 1,900 million and will allow the Chilean-Swedish-Finnish

44

For further information see: http://www.uruguayxxi.gub.uy/serviciosglobales/ 45 See Tourism Sector, Uruguay XXI.

21



company to produce up to 1.3 annual tons of pulp for export. Nevertheless, the industry continues to present opportunities for similar megainvestments and interests have emerged in this regard for the construction of a third large-scale mill. This plant would be located in the departments of Durazno, Cerro Largo or Tacuarembó and will involve an investment of about US$ 2,500 million.

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IX.

Outlook for Uruguay

FDI

in

Following 2012, which was a year marked by a decrease in global inflow of FDI, in 2013 flows rebounded46. While FDI inflows to Latin America also grew, it was not a great year for the South American subregion. However, Uruguay managed to keep record levels of FDI flows in 2013. According to the IMF,47 global activity leveled off during the second half of 2013 and is expected to continue improving in 2014–15, largely due to the recovery of advanced economies. After a global growth for 2013 of 3%, the latest IMF projections indicate that by 2014 the world will grow 3.6%, rebounding to 3.9% in 2015. In emerging economies the increase in external demand by advanced economies fosters growth, but the reduction in international liquidity and internal weaknesses continue to be a source of concern. In coming years China's economy will continue to slightly slow down, which together with the strengthening of the U.S. dollar, is expected to put pressure on commodity prices. Given the importance of the primary sector for South American economies, this could have an impact on FDI flows into the region if these flows are not channeled into other sectors. Positive signs come from the U.S., who continues its steady growth course. Europe is expected to begin recovery, although in the short term the old continent will not be a major engine of growth.

46

Global Investment Trends Monitor Nº 15, 2014, UNCTAD. 47 IMF world economic outlook, April 2014.

With the U.S. recovery, the Federal Reserve already began the gradual withdrawal of monetary stimulus. In the medium term, as the availability of strong international liquidity is reduced, less capital will flow into emerging countries. However, as interest rates will remain at low levels in the near future, emerging markets will continue to be more attractive in relation to developed countries. In turn, emerging multinationals, particularly Trans-Latin corporations, will continue to play an increasingly prominent role as FDI sources. In this context, according to UNCTAD, in 2014 global FDI flows shall grow by 10%, and then 13% in 2015. However, it has been noticed that these figures could be affected by various risks, such as a hasty withdrawal of the monetary stimulus of the United States and the fragility of the diverse economies under development. Although Latin American and Caribbean countries will continue to grow faster than developed economies, ELAC48 anticipates a period of stagnation or a downturn in FDI inflows, due to expectations of a slowdown in global demand for commodities. Latin American growth is expected to remain moderate. After growing 2.7% in 2013, it will grow 2.5% in 2014 and is expected to rebound slightly to 3% in 201549. Particularly, the most relevant countries for Uruguay (Argentina and Brazil) are expected to continue a sluggish growth. However, this also represents an opportunity to attract investors from these countries that see in Uruguay an alternative destination to grow.

48

Preliminary Overview of the Economies of Latin America and the Caribbean, January 2014, ECLAC. 49 IMF world economic outlook, April 2014.

23



The main credit rating agencies have maintained the investment grade of the Uruguayan debt and their favorable vision of the country. This is based on the country's recent great economic performance, good macroeconomic management as well as the reduction of vulnerabilities and the dependence on our neighbors50. To the extent that projects that are in the pipeline and the many emerging opportunities that have been mentioned are fulfilled, Uruguay ensures foreign investment levels will remain high. On balance, the positive business climate, the favorable regulatory framework and investments undertaken, guarantee that Uruguay will continue to attract high levels of FDI in the medium term. Insofar, as companies continue to reinvest part of their earnings, the country is assured a significant flow of FDI. The high FDI stock, at historically high levels, and the confidence shown by companies which have started operating in the country and are expanding their activities enable to envisage that this will be the case.

50

See statement by the Fitch agency on 03/04/2014: Press Release.

24



Uruguay in synthesis (2013)51 Official name Geographic location Capital city Area Population (2013*) Population growth rate (2011) GDP - per capita (2013*) Currency Literacy rate Life expectancy at birth Government type Political division Time zone Official language:

Oriental Republic of Uruguay South America, bordering Argentina and Brazil Montevideo 2 176,215 km . 95% of the territory is productive soil, suitable for agriculture and cattle breeding. 3.39 million 0.40% (annually) US$ 16,421 Uruguayan peso ($) 98% 76 years Democratic republic with presidential system 19 departments GMT - 03:00 Spanish

Main economic indicators 2008-2013 Indicators

2008

2009

2010

2011

2012

2013

GDP (% Annual Var.)

7.2%

2.4%

8.4%

7.3%

3.7%

GDP (Millions of U$S)

30,367

30,461

38,882

47,237

50,004

4.4% 55,708

Population (Millions of people)

3.33

3.34

3.36

3.37

3.38

3.39

GDP per Capita (U$S)

9,108

9,107

11,584

14,017

14,792

16,421

8.0%

7.7%

7.2%

6.3%

6.5%

6.6%

20.9

22.6

20.1

19.3

20.3

20.5

-10.7%

7.7%

-11.1%

-3.7%

5.2%

0.8%

Consumer Price Index (% annual variation rate)

9.2%

5.9%

6.9%

8.6%

7.5%

8.5%

Exports of goods and services (Millions of US$)

9,372

8,711

10,719

12,868

13,398

13,603

Imports of goods and services (Millions of US$)

Unemployment Rate - Annual Average (% EAP [Economically Active Population]) Exchange rate (Pesos per US$, Annual Average) Exchange rate variation (Annual Average)

10,333

8,191

10,089

12,779

14,685

14,964

Trade Surplus / Deficit (Millions of US$)

-961

521

630

89

-1,287

-1,361

Trade Surplus / Deficit (% of GDP)

-3.2%

1.7%

1.6%

0.2%

-2.6%

-2.4%

Overall Fiscal Balance (% of GDP)

-1.6%

-1.7%

-1.1%

-0.9%

-2.8%

-2.4%

Gross capital formation (% of GDP)

23.2%

20.1%

18.9%

21.1%

23.6%

23.6%

Gross Debt (% of GDP)

58.3%

75.4%

61.4%

57.2%

62.3%

59.5%

Foreign Direct Investment (Millions of US$)

2,106

1,529

2,289

2,504

2,687

2,796

Foreign Direct Investment (% of GDP)

6.9%

5.0%

5.9%

5.3%

5.4%

5.0%

*Estimated data

51

Sources: GDP data was taken from the IMF, foreign trade data from IED, foreign exchange rates, international reserves, and foreign debt come from the BCU (Central Bank of Uruguay), the population growth, literacy, unemployment and inflation rates come from the INE (Statistics National Bureau).

25
