Easy Come Easy Go

Posted on March 18, 2007
Filed Under Economy, Cost of Living, Expat Tips | 4 Comments

When researching Uruguay most people immediately notice that the cost of living in Uruguay is significantly lower than that of the US. Interestingly, most people do not realize that this has not always been the case. For example, in 1998 the cost of living in Montevideo was only slightly lower than in the US and Punta del Este was actually more expensive than most places in North America.

The current exchange rate for the Uruguayan New Peso (UYU) is 24.3 pesos to the dollar and has been fairly stable since the steep devaluation of 2002. However, if you have a dollar-based income and are making a decision to live long-term in Uruguay, it would be wise to prepare for a scenario in which the exchange rate is less favorable and the cost of living higher than it is now.

Uruguay is a very small country with strong economic ties with two neighboring giants, Argentina and Brazil. Because of this close relationship, the value of the Uruguayan Peso is often affected by fluctuations in the other two currencies and by the supply and demand for goods and services among those countries.

In the past, whenever Uruguayan goods and services became inexpensive for Argentineans and/or Brazilians, tourists and shoppers from these countries descended upon Uruguay bringing massive amounts of money into the Uruguayan economy, boosting the value of the peso and/or adding inflationary pressures. This effect has led to several boom and bust cycles in the tax free zones along the border with Argentina and Brazil.

Right now, Uruguay is somewhat inexpensive for Brazilians and about neutral for Argentineans; and the towns bordering Brazil are doing excellent business. If past trends hold, the peso could gain strength if Argentine and Brazilian economies continue to do well.

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4 Responses to “Easy Come Easy Go”

Torero on March 22nd, 2007 1:32 am

Great insight that is definitely usually overlooked by many people I have met during the past seven months living in Uruguay.

I have also noticed that price increases at some restaurants that I frequent have gone up over 15% since the end of the summer season. If these types of increases are the norm, one has to seriously wonder about inflation!
Brazzie on March 22nd, 2007 1:53 am

Wow, 15% is quite noticeable.

According to El Pais, the average inflation in Uruguay was 6.38% for 2006. So if the inflation in the US was around 2.2 percent and the exchange rate peso/dollar stayed the same, I think it means that the cost of living increased a little already for those with dollar-based income. Darn!
Yukoner on April 7th, 2007 1:51 am

The answer is to hedge your USD income. With relative ease you can inexpensively lock in on today’s exchange rates if you are concerned about Uruguay Peso going up.
Brazzie on April 7th, 2007 7:50 am

I think hedging part of your assets may be a good strategy, but there are several down sides that need to be taken into consideration. If you were to buy pesos, you’d need to find an investment vehicle in Uruguay that would give you a return above the Uruguayan inflation plus the local income tax. Also, the Uruguayan banks will not have the FDIC guarantee you would have in the US for example (not sure about Canada). So your nest egg could be at risk, in case of a bank failure.

Easy Come Easy Go

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