Learn about our plans and enjoy El País without limits.If you are already a subscriber you can login with your username and password.This content is exclusive to our subscribers.From the "Index of the three little pigs" to assess how Latin American countries are standing in the face of a potential higher rise in interest rates, global inflation and in Uruguay, the growth of the Gross Domestic Product (GDP), pending reforms , from public spending to the inconvenience of advancing -at this time- in a trade agreement with China.The executive director of the Center for the Study of Economic and Social Reality (Ceres), Ignacio Munyo, spoke about all this and more in an interview with El País.-In his presentation a few days ago, he showed the so-called "Index of the three little pigs", what does it consist of and how did the idea come about?-This index arises from something that is latent in the world, which is a potential rise in the interest rate higher than expected, which is still a low-probability scenario, but at this point no one can rule it out.This naturally generates an impact on all emerging economies, in Latin America and also in Uruguay, because interest rate hikes beyond expectations have always had consequences on access to financing, on capital flows that arrive in Latin America. .The famous "sudden stop", which is an abrupt cut of access to financing, as it is today, almost unlimited.So, we thought of an illustrative way of ordering Latin American countries based on how prepared they are for an interest rate hike.We compare the available resources against the short-term maturities (the debts that expire in the next 12 months that have amortizations and interest payments) plus the fiscal deficit that is necessary to obtain financing.We came up with the analogy with the three little pigs, because one can order the countries before the blow of the wolf, that is, the wind that implies a rise in the interest rate greater than expected, among those who have the straw house, a house that if the wind starts to blow it blows away, those who have a wooden house, who hold out unless there is a catastrophe and then there are those who have a brick house, who have reservations for one and a half times the maturities of short-term, and they calmly endure an extreme scenario of a sharp rise in interest rates.Uruguay is luckily located in the brick house, other Latin American countries as is the case, for example, Argentina, remain in the straw house and there they are ordered on the map.-Some analysts mention that with the rise in interest rates in the main economies of the world, there is a risk of slowing down and perhaps even stagnation of the global economy, how do you see it?-Clearly the problem is global inflation, which is an issue that until last year was discussed as a transitory phenomenon and today no one doubts that this is permanent and that measures must be taken.There is a phrase that I really like from former Federal Reserve Chairman Paul Volcker who said: “the problem with inflation is that when you are careless it takes on a life of its own”.That life of its own is that through the expectations of those who make decisions, indexing begins and it is already believed that prices are going to be higher.Tomorrow, then, an inflationary inertia is self-induced that becomes more difficult to reverse later.There the concern obviously transcends the United States, Europe, there are also inflationary pressures in Japan.The advanced world is paying the bill for having had a monetary issue never seen before.That issue was put on top of a financial system that continued to function during the pandemic, so you have a financial multiplier, that is, the banking system continues to lend as before and you still put a mountain of money injections into it.That generated a gigantic liquidity much larger than what had happened in the global financial crisis in 2008 and 2009. Today the president of the United States Federal Reserve Jerome Powell is being criticized a lot, for example, and (the president of the European Central Bank, Christine) Lagarde because they are taking late or tenuous decisions to attack the problem, but they are asking for an impossible mission.Because they ask three things at the same time.Not only do they ask you to stop inflation, but at the same time not to generate a very deep recession, so the rise in interest rates has to be careful and still not generate international financial turmoil like the ones we saw three years ago, two weeks ago.-And how is Uruguay standing in this inflationary scenario?Because it already came with its own inflation problems -Since we have the inflation targeting system, more than 18 years ago, only 10% of the time Uruguay has achieved inflation within the target range.And this has transcended all governments of different profiles and different colors.But, when one sees the current situation, the inflationary acceleration in Uruguay is one of the lowest in Latin America.Brazil has 12% inflation, when it normally had less than 5% in all these years.Chile, Peru, Colombia, which had inflation permanently within the target range between 3% and 4%, jumped to the level of Uruguay, and in Uruguay it rose between one and two points.This does not mean that it has not generated problems in a good proportion of the population that their income has to be used to buy food and products that are especially affected by the rise in prices.The GDP is going to grow close to 5% this year in Uruguay and here there is obviously this discussion about whether the famous spillover of a growing GDP ends up having a positive effect or not on people's pockets when it comes to having to go to consume and be able to buy at the end of the month.There are data that show that in some sectors sales have contracted, mainly in May in the main supermarket chains in the country, but there are other indicators also focused on consumption and credit that do not show a deterioration in any aspect.There is data that shows that the sectors that are driving the economy have a more important presence in the interior than in Montevideo.This is clearly seen in the creation of jobs, where the vast majority of new jobs in the last two years or a year and a half are in the interior of the country.Obviously, the pulp mill is in the interior of the country and the entire agro-export sector, which benefits enormously from a very favorable price context, has a contracting base in the interior.-With this context, the government defines an increase in spending of US$ 226 million in Accountability and some of its colleagues say that there is not so much fiscal space, especially considering the risks that we mentioned before at the international level.What do you think about that?-I believe that the magnitudes of the increase in expenses that are on the table are reasonable and not excessive, that is, I do not see an excessive expense.I believe that it is necessary, that it is necessary at this time to increase public investment in different sectors and fundamentally to leverage some reforms that need some financing, such as the case of educational reform, which is latent, is silently being processed and is going to have, from now on, to jump the most important fences.Now we have to put the meat on the grill, when there is the famous change in the curricular framework that basically is that all Primary and Secondary programs change, the way it is taught.This requires a first effort from the teacher because he has to change what he had been doing to do something different, but it is designed to give students better content, more adapted to reality.What must be understood here is that we have a problem to solve, and now there is a proposal, which may be liked more, less, some may not even like it, but what no one can doubt is that this has been needed for a long time.Putting it off for nothing is not an acceptable scenario.If this is blocked, the population should demand that an alternative plan B be automatically sought, to overcome this, because what we cannot do is ignore that for decades the vast majority of young Uruguayans have been being taught things that are not useful. to enter the current job market.Some of the Surrender resources are going to go toward that, so I think that's fine.-Some analysts say that they are increases in spending that are taking place with increases in income that are transitory because in reality the growth potential of the economy has not changed, it is still low between 2% and 2.5%, what do you say to the regard?-Growth potential is very difficult to determine.The long-term historical average is usually taken, that is, let's take that number with a grain of salt.Nor can it be said that the potential has not changed, because things have happened here and the international context has changed.The potential is also determined because today the post-war world of Ukraine is a world where Uruguay in particular and Latin America have a great opportunity to be a first-rate supplier of food and energy to Europe, in a context where Europe is food insecure. and an energy insecurity that I didn't have.There are different forums in Europe where the central issue is the relationship with Latin America, as if to say: “here we have a new partner with whom historically there are ties that had been forgotten, but now, as it got complicated on the other side, we began to look at it” .So, he wants to generate a deeper relationship in commercial and investment matters in the region and Uruguay appears as the best in the class.We have a world that looks very favorably on Uruguay to invest, so part of that growth potential that one has is going to depend on these investments being made and that investments come, not only depends on Uruguay doing things correctly and the changes internal, but it depends on changes like this, which is that the world began to look at Uruguay.There is an interest that is genuine, as has never been seen for a long time, to invest in Uruguay.There it will depend on how much of these investments are used to improve the potential growth of the country.The clear example is Argentina.The current government does practically the opposite of what should be done to take advantage of a tremendously favorable context.That is why I see with eyes of optimism what we are experiencing and that transcends the discussions that we can have here internally.When one looks up a little, one realizes that we have to wake up and play the game that Uruguay has to play today, and transcend whether it is 150 or 200 million dollars that can be increased in this Rendering of Accounts.The match that Uruguay has to play is much bigger.-Uruguay has opted to negotiate a trade agreement with China, has raised the issue at the Mercosur level, even seeing the flexibility to do it on its own.Ceres did a study showing that the dependency on China is not so great, if one also includes the view of service exports.But how does that play out in the current geopolitical context?-I was emphatic last year when the government announced an important possibility of making an FTA with China, just as it had been in 2016 when the government of Tabaré Vázquez had announced something similar because considering the costs and benefits of that moment, the balance economy was very favorable to Uruguay.The costs associated with revenue from Chinese products and the potential destruction of jobs due to Chinese competition were going to be considerably less than the profit generated by improving the revenue to one of our main export product clients.The world changed.The global context with the war in Ukraine, with China's position in the war in Ukraine has changed radically.And a crack has opened that is going to be difficult to close in the short term and could last a very long time and it is very clear who is on one side and who is on the other side of that crack.Very strong recent signs are being seen, for example the United States with a mega infrastructure package to support a part of the countries that are on its side of the crack, let's say to oppose in some ways what China was quietly doing at the time for many years.The war in Ukraine is really minuscule from the long-term geopolitical and geo-commercial point of view, compared to the war between the United States and China, which is what is underlying and will be increasingly so.In this framework, the cost of generating a free trade agreement with China has increased.Because if one also looks at total exports, not just exports of goods, China continues to be the first destination with 22%, but the United States appears with 18% of total exports and Europe with 15%.Software services obviously appear there, professional services, which must be added.So if you add the United States and Europe, they are bigger than China as Uruguay's trading partners.They are numbers that must be kept on the table.We are seeing a historic possibility of a relationship with Europe and we are also seeing a concern from Europe towards the situation in China.We are seeing that trade with the United States is already important and can always be improved, not with an FTA that is no longer on the United States' table, but a very great relationship in more specific aspects.There is Mexico, a country with which Uruguay has an FTA and trade with Mexico is tremendously underdeveloped.And there is the Middle East, where the United Arab Emirates and Saudi Arabia are two markets, tremendously complementary, attractive, for Uruguay, where the exchange that exists but that lies ahead is totally marginal, if the effort is made by the private sector, provide quality food to all areas of the Gulf and bring investors because they are interested in diversifying their income so as not to depend on oil.We have Japan, which is interested in opening its economy, to start reducing tariffs, and it has a very good relationship with Uruguay and is also a very good market for Uruguayan production.We have Korea that is also in a similar situation.So we have that whole map to go forward with right now.So concentrating energy on stepping up the accelerator now, right now, with China would not be the most advisable thing for foreign policy.Circumstances changed.Here we must be aware that the global dynamic conditions processes that were initiated and must be analyzed.Being transparent is very important in the entire relationship with China, maintaining a very high level of transparency in agreements and contracts.-There is another reform in the pipeline, which is retirement, which is quite late.What risks are there if a bill is not presented and approved?-Expenditure on social security is the largest item of expenditure, which has a situation that has prevented this expenditure from increasing.Because basically, the average salary index in real terms, which is the pension expense, did not increase in these two and a half years.Because liabilities are adjusted by that average salary index, which grows less than inflation.So, in real terms, there is a liquefaction of the biggest spending that the public sector has.To the extent that real wages begin to rise, that spending begins to recover automatically without doing anything at all, nor will it be able to stop it.When one sees the reports from the risk rating agencies, they all say the same thing: we salute, we applaud the government's effort in reducing the deficit, we applaud the effort to have slowed down a trajectory of debt growth that was not sustainable over time, but they always say that it is pending to give stability in the long term to this effort.And that is with a reform of the pension system, because the truth is that the contributions are not even enough to pay half of the pension expenditure.The social security reform would also free up resources that are tolerable by risk rating agencies, so as not to deteriorate our current credit rating.To comment on the news you must log in with the username and password chosen at the time of registration.If you are not registered yet, you can do so by going to User RegistrationDo not you remember your password?you can access Reset PasswordFrom this point you enter a virtual environment intended for the responsible exercise of freedom of expression.The messages will be instantly visible and will not be supervised by the El País newsroom.It is a self-regulated space for readers, who have mechanisms to report abusive use of it.Zelmar Michelini 1287, CP.11100, Montevideo, Uruguay.Copyright ® EL PAIS SA 1918 - 2022We think you are using an ad blocker and we want to tell you that advertising is one of our ways of generating income for doing journalismIt's usually in the upper-right corner of the screen.You may have more than one ad blocker installed.You may need to select an option from a menu or click a button.