Buenos Aires and Montevideo — Despite the fact that most Latin American countries have managed to leave currency exchange and inflationary crises behind, the US dollar remains at the center of the scene for analysts and economists in these latitudes. And not only for experts. In Uruguay, the Latin American country with the strongest currency, the greenback is still king for savers.
The data reflect this. Despite the fact that the Uruguayan peso has appreciated by more than 8% against the dollar so far in 2022, the best performance for a Latin American currency, and by almost 10% since March 2020, more than 74%, $27.38 billion, of bank deposits as of August this year were in US dollars.
This is practically the same proportion reported by Uruguay’s central bank (BCU) a year ago.
In this sense, the strength of the peso, driven in part by repeated rate hikes by the BCU, and supported by the increase in the global prices of commodities exported by the country, is failing to generate a change in the savings preferences of Uruguayans.
Not even the most educated save in pesos
Nor is a transition to savings in pesos being seen in a segment of the Uruguayan population that can be considered educated in matters of personal finance and economics.
For five years now, economist Ignacio Munyo has been asking his MBA students how many of them choose the local currency over the greenback, and those who answer in the affirmative never exceed 3%.
“People still have an inexplicable confidence in the US dollar, from today’s point of view, but it does have a historical explanation,” Munyo told Bloomberg Línea.
And the executive director of CERES added: “It is very culturally rooted in a country that has had inflation in the past, although a person under 30 or 40 has not lived with hyperinflation. There is no inflation like that seen in Argentina that makes people seek refuge in the dollar”.
Jerónimo Nin, investment manager at Nobilis, expressed the same opinion: “Uruguay has lived through many years of high inflation and successive exchange crises that have turned the dollar into a tool with which families try to shield themselves from this phenomenon”.
Why is the dollar still king in Uruguay?
According to analysis by the BCU, saving in dollars is due to several reasons, and among them is the trauma of high inflation experienced in the country in recent decades.
“First of all, there is the scarring of historical episodes of inflation in the past, and the persistence of high inflation,” the BCU’s communications area responded when contacted by Bloomberg Línea.
Over the last decade, price increases in Uruguay in annual terms have ranged between 4.5% and 11.5%, while they could close 2022 at around 9%.
The monetary authority currently headed by economist Diego Labat also pointed out “a phenomenon of cultural dollarization linked to the dollarization of real estate and durable goods prices, mostly imported”.
And finally, the bank warned that “Uruguayan households have learned that savings in dollars have hedging properties, while in past episodes of crisis sharp declines in household income associated with the business cycle were associated with capital gains on savings in dollars”.
The problem of the dollarization of savings in Uruguay
For economist Munyo, the high level of dollarization of bank deposits in Uruguay “is problematic”, because “a bi-monetary economy limits the possibilities of monetary policy”.
“There is always a greater expectation that the dollar may rise, although if one looks at historical series, it can be shown that it was convenient to save in inflation-indexed units, by far”, he added.
Furthermore, he pointed out that, in a context in which inflation in the United States is running at an annual rate of 10%, Uruguayans who save in dollars face a “very significant loss of purchasing power” but which “they do not realize”.
In the last few years, this loss in purchasing power at international level totals 20%, according to the director of CERES.
“Improving this is a very slow process of financial education, which is not very much embedded in the Uruguayan educational system today,” he said.
Measures to encourage savings in pesos
For Nin, of Nobilis, “the high degree of dollarization is a characteristic that is difficult to modify in the short term, and which must be faced with a lot of commitment, a strong institutional framework and good management by the BCU”.
“One factor that has helped in the last 20 years was the creation of the indexed unit, which allows investors to save in local currency, but with protection against inflation,” he added. “Let’s not forget that its creation is relatively recent”.
Like Munyo, he also emphasized the need for financial education.
“There is still a lot of ignorance about the advantages of saving in local currency: we have studied the last 50 years and we see that inflation has been higher than devaluation, and that is why we believe that saving in indexed units should be an obligatory question in every investment conversation,” he said.
- The best investment in pesos today in Uruguay: “This particular scenario makes us prefer short-term investments or what we technically call the short end of the nominal curve, more precisely between 90 and 180 days, since they provide an attractive yield, both in nominal and real terms, while minimizing the price risk to which we are exposed. We believe that perhaps in a few months it may make more sense to take more duration or interest rate risk in the nominal peso curve, but that it is not yet the right time,” Nin said.
- Instruments in Indexed Units: For Nin, “this tool continues to be a very good alternative for all those individuals who wish to obtain a return that allows them to cover their expenses in pesos, since returns have increased and Uruguay pays attractive real interest rates”.
The central bank’s position
When consulted by Bloomberg Línea, the BCU maintained that encouraging savings in pesos is a priority for the entity.
“At present, the BCU has among its initiatives to identify potential regulatory changes that may contribute to encourage savings in pesos”, the central bank pointed out, adding that “in 2022, one of those measures was included in the bank’s accounting, which lowers the IRPF rates for investment options in domestic currency”.
Furthermore, although the central bank believes that dollarization does not represent a “systemic risk”, it pointed out that the bank has “a set of more than 10 regulatory review initiatives under consideration”.
“The growth of the financial system has to be based on the growth of the domestic currency markets”, the bank said.