FOREIGN DIRECT INVESTMENT

FOREIGN DIRECT INVESTMENT October 2017

1. EXECUTIVE SUMMARY... 1 2. GLOBAL FLOWS OF FOREIGN DIRECT INVESTMENT... 3 FOREIGN DIRECT INVESTMENT IN LATIN AMERICA... 4 3. CHINESE INVESTMENT IN LATIN AMERICA... 8 4. FOREIGN DIRECT INVESTMENT IN URUGUAY... 10 FOREIGN DIRECT INVESTMENT IN 2016... 11 FOREIGN DIRECT INVESTMENT BY ECONOMIC SECTOR AND COUNTRY OF ORIGIN... 12 5. RECENT FDI TRENDS IN URUGUAY... 14 PROJECTS PROMOTED BY COMAP... 14 MERGERS AND ACQUISITIONS OPERATIONS WITH COMPANIES ESTABLISHED IN URUGUAY... 15 GREENFIELD PROJECTS... 17 6. INVESTMENT OPPORTUNITIES IN URUGUAY... 18 AGRIBUSINESS... 18 FORESTRY... 18 TOURISM... 19 GLOBAL EXPORT SERVICES... 19 LOGISTICS... 20 ENERGY..... 20 INFRASTRUCTURE... 20 7. INSTITUTIONAL FRAMEWORK FOR FDI IN URUGUAY... 22 ANNEX REGULATIONS TO PROMOTE INVESTMENT IN URUGUAY... 24 URUGUAY IN SYNTHESIS (2017)... 28 MAIN ECONOMIC INDICATORS 2012-2017... 28

In 2016, FDI received by Latin America and the Caribbean reached US$167,043 million, a 7.9% less than in 2015. According to the ECLAC, this drop was due to a decrease in the prices of raw materials, the low growth of the countries in Latin America and the Caribbean, and the global context of expansion of the digital economy and technological sophistication, that promotes the concentration of FDI in developed economies. In 2016, Brazil, Colombia, and Paraguay were the only countries in the region that documented higher FDI flows. China is the second largest FDI issuer worldwide. In a decade, its worldwide participation as a foreign investment issuer of FDI went from 1% (2005) to a 13% (2016). In 2016, for the first time, FDI flows issued by China exceeded the FDI flows it received. In Latin America, Brazil was the main recipient of FDI from China, followed by Peru, Argentina, Ecuador and Venezuela. While Brazil and Argentina receive FDI from China in different sectors, in Peru, Ecuador and Venezuela, Chinese investments remain focused on primary sectors. Even though China is Uruguay's main trading partner, China s investments in Uruguay are very limited. For a small and open economy such as the Uruguayan to attract foreign investment, it is essential to have a strong and reliable institutional framework. The successive Uruguayan governments have created an adequate investment climate, ensuring a friendly environment for doing business, an attractive and stable legal scheme and a regulatory and institutional framework that adapts to the investors needs. Uruguay is a country with Investment Grade, ratified by the main rating agencies (Standard & Poor's, Moody's, Fitch, DBRS, and R&I), which have improved the sovereign rating of the country in 2017. The strong economic growth in the last decade has led to investment opportunities in different sectors such as, agribusiness, forestry, tourism, global services, logistics, renewable energy, infrastructure, among others. Uruguay has positioned itself as a reliable and attractive destination for foreign investors. The positive environment for investment and the good economic performance of the country in the last decade have all contributed. FDI flows have grown considerably, which explain part of the strong growth experienced in the last decade. Between 2006 and 2016, FDI as a percentage of the GDP was an average of 4.9% per year. Said percentage, which has been falling since 2014, continues to place Uruguay among the economies of the region that gathers the most FDI in relation to the size of its economy 1. 1 The BCU (Central Bank of Uruguay) recently disclosed new Foreign Direct Investment (FDI) estimates based on the Sixth Manual of the Balance of Payments. The revised figures (from 2012 to 2016) are still being evaluated and compared for the purposes of a better analysis. 1

Uruguay also stands out as one of the countries in the region with the highest percentage of reinvested earnings. In the last decade, foreign companies in Uruguay reinvested an average of 58% of the annually generated profits. Uruguay has grown consistently over the past 14 years. In 2016, the economy grew more than expected (1.5%) and in 2017 and 2018 this increase is expected to exceed 3%; hence, a stage of economic acceleration is established, leaving behind the period of stagnation that was observed between mid-2014 and mid-2016. Consequently, this responds fundamentally to a greater confidence on the agents (consumers and business people), higher internal demand, and the reestablishment of goods and services exports. Private consumption is expected to boost the country s economic growth in 2017 and the next following years, based on lower inflation, higher real wage growth and a more appreciated local currency in the context of a weakening of the American dollar, internationally and nationally. Investments showed a minor recovery in 2016, pushed by the public sector and by a better-thanexpected performance of the private sector. It has been estimated that the best business expectations and economy growth will be reflected in higher levels of investment in the upcoming years. The rest of the infrastructure plan is expected to be executed, standing out for its amounts and strategic relevance, the completion of works in road infrastructure, social infrastructure and housing. It is expected that the FDI flows that Uruguay receives will increase in 2018 and 2019, reflecting that the public and private investment will regain dynamism, mainly within real estate investment (linked to regional impulse) and with UPM's second plant project. The international context is now more favorable for Uruguay, with higher international prices, better financial conditions, and economic reactivation of the countries of the region. However, this scenario is not exempt from potential risks that, if materialized, could have an impact on the country. That is, more protectionist trade policies by the world's leading economies, higher financial volatility, worsening of Brazil s political tension and growth difficulties in the region, among others, therefore, these could overshadow the external environment for a small and open country such as Uruguay. 2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Foreign Direct Investment in Uruguay 2016 was a year of global investment flows contraction. International flows of Foreign Direct Investment (FDI) were estimated at US$ 1.75 trillion according to UNCTAD data, which shows a 2% decrease if compared to 2015. Moreover, said decrease was mainly due to a drop in the income received by developing countries, which were 14% reduced in 2016 against a 5% increase in FDI flows received by advanced economies. To this extent, developing countries again lose places among FDI recipients. As seen in Figure 2.1, in 2015, the trend of reduction in the share received by the richest economies was halted. From the international financial crisis until 2014, the developing world had gained participation as a FDI recipient. Even though in 2007 only 28% of FDI flows were aimed to developing countries, in 2014 more than half of the direct investment was captured by these countries. In 2016, this percentage is almost 40%. Figure 2.1 Global Flows of FDI 2000 1800 1600 1400 1200 1000 800 600 400 200 FDI received according to level of development (Billions of US$) 0 Developing Economies Developed Economies Main IED Issuers (Part. of total global flows) United States China The Netherlands Japan British Virgin Islands Canada Hong Kong France Ireland Spain Germany Luxembourg Switzerland Korea Russia 13% 12% 10% 7% 5% 4% 4% 3% 3% 2% 2% 2% 2% 2% 21% Source: World Investment Report (2017), UNCTAD. If we focus on the origin of these capitals flows, the United States stands out as the main issuer of FDI (21% of the total), followed more and more closely by China. If foreign investment from China and Hong Kong is added, the FDI issued covers 17% of the global total. The European Union (EU) is the other major player within direct investment issuers. Considered as one entity, it exceeds the US as an issuer of FDI. Within the EU, the Netherlands is by far the largest issuer, although it is worth mentioning that this is due to the country s characteristic as an investment transit center. In addition, a large part of these flows corresponds to movements within the EU itself. Within the EU, the following countries also stand out: France, Ireland, Spain and Germany. 3

Other countries that are important issuers of FDI are Japan and Canada. There are also some very small countries that act as financial centers to process investments coming from main countries such as the British Virgin Islands and The Bahamas. In 2016, by third consecutive year, the inflow of Foreign Direct Investment (FDI) into the region decreased. According to the Economic Commission for Latin America and the Caribbean (ECLAC) 2 latest report, the FDI received by Latin America and the Caribbean reached US$ 167,043 million in 2016, a 7.9% less than in 2015. According to ECLAC, FDI decrease is explained by three factors: a decrease of raw materials prices, that discourage investments seeking natural resources; the slow growth of Latin American and Caribbean countries economic activity, that discourage investments seeking markets; and, last, the digital economy and technological sophistication global context of expansion, that promotes the concentration of FDI in developed economies. Despite the FDI decrease in the region, the ratio between FDI flows and gross domestic product (GDP) reached a 3.6%, which is above the global average of 2.5%. The result indicates the importance of FDI in the region. Regarding sectors receiving FDI, the flow towards natural resources extraction slowed down since the end of the commodity price boom, while the flow towards manufacturing and services increased. The new announced investments were focused on renewable energies (18%), telecommunications (14%) and the automotive industry. If we consider the investments locations announced by sector, it is confirmed that the amounts destined to the automotive industry are the most geographically concentrated, with 76% of them in Mexico, 11% in Brazil and 9% in Argentina. In the telecommunications sector, 59% of the announced amounts were destined to Brazil and Mexico. Moreover, of the total investments destined to the renewable energy sector, 33% went to Chile, while 32% went to Mexico. Considering the origin of the FDI, we can highlight a non-diversification in the region. A 73% of the total investment came from the United States (20%) and the European Union (53%). China represents only 1.1% of the FDI in the region. However, given the large operations carried out by China in the first half of 2017, its participation is expected to increase this year. In 2016, the average profitability of foreign capital stock in the region reached its lowest level in the last 15 years, decreasing to 4.2%. The most important decreases occurred in countries with mineral resources. Additionally, 55% of these rents were repatriated. It should be noted that the reinvestment of profits suffered a decrease for a second consecutive year (in 2016 the total was US$ 40.81 million). If FDI is analyzed by country, it is observed that results are heterogeneous, being Brazil, Colombia and Paraguay the only countries where FDI grew in 2016. Brazil With 47% of participation over the total FDI received in the region, it is the main recipient. FDI has risen 5.7%, due to an increase in loans between transnationals and not by new capital income. Most of the 3 FDI in Latin American and the Caribbean, ECLAC, 2017. Trinidad and Tobago and Venezuela (Bolivarian Republic of) are excluded, as there is no information available for 2016. 4

capital income (excluding profits reinvestments) was destined to the service sector. The share of FDI in the natural resources sector reached a maximum of 31% in 2010 and then steadily decreased until it reached 16% in 2016. The country is experiencing a long-term growth of FDI in manufacturing linked to the automotive industry. Mexico Second FDI recipient in the region with a share of 19%. In the country, FDI decreased 7.9%, failing to sustain the dynamism of previous years. The growth trend of FDI in manufacturing is linked to the automotive industry. Colombia Its FDI grew a 15.9%, which positioned Colombia as the third FDI recipient in the region with an 8% share. This increase is explained by a significant acquisition in the energy sector and higher investments in services, sector that reached 69% of the country's FDI share. In the last two years, FDI in extractive industries experienced a significant decline. Chile In the country, FDI decrease a 40.3%. This is mainly explained by a reduction in loans between companies, which suffered a 72% decrease. Despite this decline, the Chilean economy is the fourth FDI recipient in the region. The renewable energies sector is among the main ones that receive FDI. The mining industry went from having a share close to 50% of the total FDI received in the country in 2012, to an 11% in 2016. Investments in projects for the development of data centers and services on the cloud are noticeable in the telecommunications area. Although the amounts in this industry are of smaller magnitude, they are relevant because they promote new methods of production. Argentina In 2016, FDI income numbers show a 64% decrease. This decrease should be relativized given the change in regulations introduced in 2016. Said regulations eliminated existing restrictions in funds repatriation, which encouraged the reinvestment of profits. This flexibility made it possible to reduce debts contracted with parent companies and subsidiaries. It is important to highlight the new capital flow increase into the country that increased by 177% compared to 2015. In summary, both the decline in the reinvestment of profits and the cancellation of debts with parent companies and subsidiaries decompensated the growth of new capital entering the country. Regarding sectors, the telecommunications sector received the most FDI, reaching a 16% share. FDI could begin to see signs of recovery if the investments announced in 2016 actually occur. Peru FDI in Peru had a 17% decrease in 2016. It was due to a shortage in both capital inflows and intercompany loans. The main component was the reinvestment of profits (61% of the total), which increased 39% compared to 2015. Moreover, in 2016, the announcements of FDI projects increased after reaching the minimum in the last ten years in 2015. Those sectors with bigger shares in the announcements were transport and logistics, and renewable energies. When analyzing the sector from an investment destination point of view, it is necessary to differentiate regions. Central America and Mexico, under the influence of the United States, receive investments mainly in the manufacturing sector. 5

Figure 2.2 Origin of FDI in Latin America (Participation %, 2016) Brazil Colombia 5% 1% 12% 18% 9% 16% 16% 35% 71% 15% Mexico Central America and Dom. Republic 5% 6% 6% 20% 26% 39% 12% 12% 10% 32% 32% Latin America and the Caribbean Japan Canada Others Europe United States Source: ECLAC In terms of origin by country of FDI, in 2016, the United States was the main source for the region, with a 20% of the total, followed by the Netherlands with a 12% 3. Europe as a one bloc, led investments with a 53% share. Furthermore, in 2016, the flows issued by the countries of the region to other countries of the region decreased. Within the 20 largest FDI operations in Latin America and the Caribbean in 2016, there are 2 operations carried out by trans-latin corporations. In the 2010-2016 period, Brazil, Mexico and Chile were the main FDI issuers, occupying the first three positions respectively. In 2016, with a 18% share, Colombia displaced Mexico from the third place. Finally, in the last decade, some countries such as Chile, Uruguay and Peru, have consolidated themselves as important FDI recipients. 3 The Netherlands, together with other countries such as Luxembourg and some Caribbean islands, constitute investment transit centers from third countries. Many international companies make their investments through the so-called Special Purpose Entities (SPEs), companies without physical presence in these countries that are used as a source of financing or for holding assets and liabilities. 6

Chile Figure 2.3 - FDI in South America (GDP %, 2006-2016) 0% 2% 4% 6% 8% Uruguay 4,9% Peru Colombia Brazil Mexico Argentina Paraguay Source: Uruguay XXI based on UNCTAD. 7

After the United States, China is the second largest FDI issuer worldwide. China's role as an investment powerhouse is relatively recent. The Asian giant, which has traditionally been a FDI recipient, has become a net issuer. In 2016, for the first time, the FDI flows issued by China exceeded the FDI flows it received. In a decade, its participation as the origin of funds destined to direct investment went from 1% worldwide (2005) to a 13% (2016). In recent years, the importance and nature of Foreign Direct Investment flows received by Latin America from China has also changed. Until 2010, the presence of Chinese companies was small in just a few countries (Peru, Ecuador and Venezuela 4 ), and concentrated in the extractive industry sector. 30000 Figure 3.1 Chinese FDI in Latin America (Millions of dollars) 25000 20000 15000 10000 5000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Uruguay XXI based on China Global Investment Tracker, American Enterprise Institute. Since 2010, investments from China have expanded to the rest of the region's richer economies. Even though at first they were also focused on the primary sector, then they were diversified to other sectors. Currently, more than half of the Chinese investments in Latin America are in the services sector, especially transportation, finance, electricity, information and communication technologies (ICT s) and alternative energy 5. A unique feature of the investment made by China is the leading role of public companies. Although its mixed economy system, there are also private companies that invest in Latin America, in the period 2003-2016, 81% of the FDI received by the region from China was promoted by Chinese state-owned companies. The investments of private companies are restricted to some subsectors of services: financial, logistics and telecommunications. 4 Chinese Investments in Latin America: Opportunities for growth and diversification, Miguel Pérez Ludeña, ECLAC 2017. 5 Chinese FDI in Latin America: New Trends with Global Implications, Atlantic Council, OECD Development Centre, 2017. 8

Several recent studies, which quantify Chinese investments made in Latin America, agree on the recent importance of Mergers and Acquisitions (M&A) as a method to access the region. Since 2010, more than US$ 6,000 million per year have been invested under this modality in the region. In the 2010-2016 period, Chinese investments reached more than US$ 80,000 million, that is, around US$ 12,000 million per year 6. This figure is still a small proportion of the FDI received by the region but points out that China is beginning to play an increasingly important role. Brazil was the main recipient of FDI from China, followed by Peru, Argentina, Ecuador and Venezuela. As Table 3.1 shows, such is the case of Brazil and Argentina, there is a greater diversification of sectors, while in Peru, Ecuador and Venezuela investments are still focused on the primary sectors. Table 3.1 Chinese FDI in Latin America by country and destination sector (Millions of dollars) Chem. Ind. Real estate Tourism Finance Technology Total Agriculture Mining Energy Transport Brazil 1,930 3,150 32,960 1,500 1,710 1,260 2,110 450 45,070 Peru 9,490 2,890 12,380 Argentina 1,510 6,310 1,010 170 780 300 10,080 Ecuador 2,690 3,610 6,300 Venezuela 410 3,760 200 4,370 Mexico 1,810 1,810 Colombia 980 980 Panama 900 900 Rest ALC 310 610 1,040 - - - 990-300 850 Latin America and Caribbean 3,750 16,350 53,360 2,510 2,980 1,260 990 2,890 1,050 85,140 Source: Uruguay XXI based on China Global Investment Tracker, American Enterprise Institute. To sum up, as in the rest of the world, China has become a more relevant player in terms of FDI in Latin America. In recent years, China has invested in more countries, has diversified the sectors it has targeted and also its investment methods. The benefit of this new reality is for both sides. On the one hand, the Asian country diversifies its productive activities beyond its borders. On the other hand, Latin American countries obtain an important source of financing to cover their needs for infrastructure and technological improvement. China, who for several years has been the largest trading partner in the region, is also consolidating itself as a central investment partner 7. 6 The exact number depends on the estimate used. The official numbers published by the Ministry of Commerce of China (MOFCO) are not useful for characterizing investments in Latin America because many are channeled through third parties such as Hong Kong, the Netherlands or the Bahamas. There are several sources that, based on company-level data from Mergers and Acquisitions and Greenfield Projects, estimate the amounts invested by China in the region. For this document, it was decided to use the data available at https://www.aei.org/china-global-investment-tracker/, however, from http://www.redalcchina.org/monitor similar results are obtained. 7 Between November 30 th and December 2 nd, 2017, the main business meeting between China, Latin America and the Caribbean will be held in the city of Punta del Este, Uruguay. The China-LAC 2017 summit will bring together Chinese, Latin American and 9

Uruguay has positioned itself as a reliable and attractive destination for foreign investors. The positive environment for investment and the good economic performance of the country in the last decade have contributed to this trend. Since the lows recorded after the 2002 financial crisis, FDI flows have increased considerably, explaining part of the strong growth experienced in the last decade 8. This period of strong economic expansion (4% of the average annual GDP growth) has been depicted by a noticeable increase in the investment rate of the economy. While in 1998, the Gross Fixed Capital Formation (GFCF) was a 16% of the country s GDP, in 2016 it was 21%. This transformation is mainly explained by bigger investments of the private sector, strongly driven by the inflow of foreign direct investment. In fact, while in 1998 the FDI as a percentage of private investment was 5%, this figure stands now at almost 20% 9. Aforementioned, foreign investment is also often seen as a tool for innovation. In many cases, FDI favors the introduction of technological advances and improvements in production processes. This has an impact in the rest of the economy, causing other companies to invest in technology and also encouraging the country to this type of investment. A good example of this in Uruguay is the transformation that the agricultural sector has experienced in the last decade. Foreign investments introduced new productive and business practices and innovations, in seeds that were later adopted by Uruguayan producers, which resulted in a significant increase in the productivity of the sector. Another important example is the forestry sector. Based on regulations that encouraged investment in the first stage of the process, conditions were created to develop new activities with superior added value. The participation of large foreign companies, especially in the stage of wood chemical transformation, managed to transform the sector. Domestic and foreign suppliers give these large companies supplies and provide services. In addition, Uruguay's FDI has given an important boost to the export sector. Many foreign companies invested in foreign-oriented sectors and have helped to diversify the country's export offers 10. Caribbean companies from various sectors and industries aiming to strengthen trading relations and the Chinese investment in the region. More information: http://www.chinalac2017.com 8 The Foreign Investment Information in Uruguay is obtained from the Balance of Payments statistics compiled by the Central Bank of Uruguay (BCU for its Spanish acronym). It includes capital contributions, reinvestment of profits and net financing between the parent companies and their branches or subsidiaries, as well as the investment in real estate in Punta del Este. As of 2003, estimates of direct investment in the primary sector (land) are included. 9 Strictly speaking, not all FDI constitutes gross fixed capital formation (some direct investments are mere acquisitions of local companies by foreigners or land purchases). From the data of BCU it is not possible to differentiate directly how much of the FDI received by Uruguay corresponds to acquisitions of companies and lands. Lorenzi (2013) estimates that for the 2000-2011 period, this figure was 20%. Source: Lorenzi, N. R. (2013). Effects of direct foreign investment on investment in Uruguay. 10 Comportamiento Exportador de las Empresas Extranjeras en Uruguay (Exporting Info on Foreign Companies in Uruguay) (In Spanish, Uruguay XXI, 2014) 10

Lastly, it is important to highlight the high percentage of reinvested profits by foreign companies operating in the country. In this FDI boom period, companies spent an average of 58% of the profits generated each year to reinvest them, while the rest was transferred as dividends. This figure is high if compared to the region, especially considering that Uruguay does not have any type of restriction for profits repatriation (there is free exchange and there is no cap for dividend transfers). Figure 4.1 Reinvested Profits (% of total profits, 2006-2016) Mexico Uruguay Argentina Peru Chile Ecuador Colombia Venezuela Brazil Paraguay 0% 10% 20% 30% 40% 50% 60% 70% Source: IMF In 2016, FDI received by Uruguay totaled US$ 915 million 11. Said FDI, which represents 1.7% of the GDP, remains at historically high levels, therefore, consolidating more than a decade of direct foreign investment inflows. In 2016, according to revised BCU (Central Bank of Uruguay) figures, the annual decrease registered in foreign capital inflow through direct investments was 28.5%. If we analyze the 2006-2016 period, said analysis shows that annually, FDI as a percentage of GDP had an average of 4.9%, while the historical average up to the year 2000 is 0.6% (see Figure 4.2). This average, although reduced in the last two years, continues to place Uruguay among the economies of the region that receive the most FDI in relation to the size of the country s economy. The structural change observed since 2005 seems far from being reversed. Even considering the decrease experienced in the last two years, the high levels of received investments continue to be an important and stable source of external financing. 11 According to the Balance of Payments methodology (Fifth Manual), the statistics related to FDI are compiled by the Central Bank of Uruguay (BCU for its Spanish acronym). It records all economic transactions carried out between the country s residents and those in the rest of the world. The financial flows associated with direct investments, whether in the form of equity participations, reinvested earnings or debt instruments, are recorded in the financial account of the Balance of Payments. The FDI received by Uruguay mentioned in this section corresponds to the category "Direct investment in the reporting economy" of the Balance of Payments. 11

Foreign direct investment represents the value of the stock of direct investments that are kept at the end of the reference period. In 2015, the number reached US$ 21,750 million, a 41% of the GDP. If positions by country are analyzed, it is observed that the main countries of origin are those in the Southern Cone, the United States and some European countries. Figure 4.3 Foreign Direct Investment Position by Origin (Part. %, 2015) * Includes investments that due to confidentiality reasons the BCU does not classify them within their country of origin. * For Chile, Finland and Sweden, an estimate is presented based on the balances from UPM, Stora Enso and Arauco. For Colombia, an estimate is presented based on official Colombian sources. Source: Uruguay XXI based on BCU. 12 The Central Bank of Uruguay (BCU) is carrying out an Adaptation to International Standards Plan (PLAE for its Spanish acronym) to the statistics of the National Accounts System (SCN in Spanish), Balance of Payments and International Investment Position (BP and IIP), which includes new basic statistics, as well as the latest internationally recommended methodologies. According to the recommendations of the Balance of Payments Manual 6th Edition, the first product of the PLAE is delivering a preliminary version of a BP and PII compilation, for the data from the year 2012 and up to the present, both in annually and quarterly. When preparing this report, the totals by country of origin and economic sector were not available, so the data with the previous methodology are presented. It is expected that all data will be available in December of 2017 at the following link: http://www.bcu.gub.uy/estadisticas-e-indicadores/paginas/balanza-de-pagos.aspx (In Spanish) 12

As for the sectors, during the period between 2005 and 2015, construction and other industries stand out. Figure 4.1 Foreign Direct Investment by Sector Annual Average 2005-2015 (Part %) Construction 28% Industries* 25% Agriculture and Forestry 17% Commerce, Hotels, Restaurants 7% Financial Intermediation 6% Transport and Communication 6% Electricity Supply 4% Others 7% TOTAL 100% *Includes estimated investment on pulp mills 13

This section presents information from three complementary sources to describe the most recent FDI trends in Uruguay. The investment projects presented to COMAP (Investments Law Enforcement Commission) are reviewed, then the acquisitions of companies located in Uruguay by foreigners are detailed (based on EMIS Dealwatch), and lastly, the most recent greenfield investments are listed. Even though this compilation does not intend to include all FDI received by Uruguay, it is a good illustration of the trends in recent months and of the upcoming projects 13. Uruguay's investment promotion scheme provides a set of tax benefits for those projects submitted to the Investments Law Enforcement Commission (COMAP for its Spanish acronym), and if said projects meet certain requirements, they are promoted by the government s Executive Power (see Annex). Although the Investment Promotion Law does not distinguish whether the investor is a Uruguayan national or foreigner, based on the projects recommended by COMAP and the list of foreign companies in Uruguay XXI, it is possible to analyze the use of this tool by foreign companies 14. Since its entry into force in 2006, the scheme has been extensively used by foreign companies established in Uruguay. During the 2006-2016 period, 43% of the investments amount recommended by COMAP relates to foreign companies projects. In the first semester of 2017 this percentage was 41%. In the first half of 2017, the investment projects by foreign companies are in the food industry, livestock, telecommunications and wind energy sectors. The companies involved with the largest investments 3500 3000 2500 2000 1500 1000 500 0 Figure 5.1 Projects Recommended by COMAP By the capital s origin (Millions of US$ - Part %) Foreign National 53% 41% 2009 2010 2011 2012 2013 2014 2015 2016 1st sem 2017 Source: Uruguay XXI based on COMAP. 13 Some of the information presented is in the planning stage of the project, so the investment has not officially been made. 14 This analysis is biased by the fact that certain sectors are declared of national interest, regardless of whether or not they meet the requirements required by the Law. This is the case, for example, of renewable energies investments. Also, investments in Free Trading Zones are not included. The data refers to the investment recommended for its promotion, which does not necessarily match with what has actually been invested. 14

amounts within these sectors are of Argentine, Spanish, American, Belgian and Chilean origin. Figure 5.2 shows the projected investment amount by sector and by origin. In the food industry, the projects related to beverages production and manufacture stand out (95% of the projects). In the livestock sector, the figure shows an investment of Argentine origin. In the telecommunications sector, the graphic highlights the investment of a Spanish company aimed at expanding its cellular network. Lastly, the amount in the wind energy sector refers to the establishment of a wind farm by a US company. Figure 5.2 Foreign Companies Projects Recommended by COMAP (Millions of US$, first half of 2017) Sector Country of Origin Food Industry Livestock Telecommunications Wind Energy Paper Industry Others Chemical Industry Hotels United States Argentina Spain Chile Belgium France Others The Netherlands 0 10 20 30 40 50 0 10 20 30 40 50 Source: Uruguay XXI based on COMAP Mergers and acquisitions are a very common transaction in which direct foreign investments are made effective. When a local company is bought by a foreign company, domestic assets become property of a non-resident agent, creating a FDI flow. This section also presents sales between foreigners, and although they require a change in the capital s origin, they are not a new FDI entry. Regarding those companies that were national and transferred into foreign hands, acquisitions in the livestock sector are to be noted: Date Company Transaction Type 08-14-17 Rondatel SA; Lirtix SA Acquisition 06-30-17 Wintrillions.com Acquisition Buyer Sundiro Holding Co Ltd. Legacy Eight Ltd. Buyer s Country Seller Sector China - Food industry Bahamas Private Investor Leisure 15

06-13-17 Transgranel SA Acquisition 06-06-17 06-05-17 Pulsa SA; Frigomerc SA; Pul Argentina SA Timberland and manufacturing business of Weyerhaeuser Agencias Universales SA (Agunsa) Chile Organización Marítima Christophersen Transport, Warehouse and Logistics Acquisition Minerva SA Brazil JBS SA Food industry Acquisition 05-30-17 Bonafide SAIC Acquisition 05-09-17 05-08-17 05-03-17 04-28-17 04-05-17 03-23-17 Global sorghum portfolio of Nidera Seeds Maxi Mobility Spain SL (Cabify) Getty Images Latin America (Spain) SL Breeders and Packers Uruguay Bacardi - Martini Uruguay SA; Bacardi - Martini Chile SA Club Atlético Torque de Uruguay Acquisition Minority Acquisition Acquisition Acquisition Acquisition Acquisition Btg Pactual Participations Ltd (through its investment subsidiary: Timberland Investment Group) Empresas Carozzi SA Chromatin Inc. Brazil; United States Chile United States Weyerhaeuser Co Inversiones Agrícolas Buenos Aires SA COFCO Intl Ltd. - - - Getty Images Inc. NH Foods Ltd. (NHF) Cepas Argentinas SA Manchester City; City Football Group 03-15-17 La Jacinta Solar Project Acquisition Invenergy LLC 02-28-17 02-10-17 02-08-17 Portfolio of over 1,500 MW of solar PV assets in Latin America Aguada de la Arena gas block in Argentina MyCampaign/MiCampana.c om Acquisition Minority Acquisition Actis LLP United States Wood/Forestry Food industry Agriculture Transport, Warehouse and Logistics - Audiovisual Japan Private Investor Food industry Argentina United Kingdom United States United Kingdom Bacardi Ltd. Private Investor Fotowatio Renewable Ventures BV (FRV) SunEdison Inc. Beverage production Sports Energy Energy YPF SA Argentina Petrouruguay SA Gas Acquisition ADEXT Inc. United Staes - ICT 01-25-17 Carape I; Carape II Acquisition Saeta Yield SA Spain 01-13-17 Baluma SA Acquisition Enjoy SA Chile Source: Uruguay XXI based on EMIS Grupo Empresarial San José S.A.; Corporación América SA Caesars Entertainment Corp. Energy Hospitality 16

Based on different information sources 15, some of the main greenfield projects (completion date 2017 onwards) will be presented up next. As the following table shows, investments are made in different sectors and it highlights the UPM pulp mill project and others in the hospitality sector. Investment Completion Date Description Origin Estimated Amount US$ millions UPM-Kymmene 2020 Pulp mill Finland 4,000 Topshop (Arcadia Group) 2018 Retail United Kingdom 6 Nestlé 2018 Food Industry Switzerland 21 Hennes & Mauritz (H&M) 2018 Retail Sweden - Trump Tower dec-17 Residential Building United States 100 Navios South American Logistics apr-17 Transport, Warehouse and Logistics Monaco 21 Shopping Las Piedras apr -17 Las Piedras Shopping Center Uruguay 45-50 Wyndham Worldwide apr -17 Hospitality United States 65 Kypers (Kiss Me Eyewear) feb-17 Retail Spain 4 Adidas feb-17 Retail Germany 1 Sputnik News jan-17 Communications Russia 68 Sabre 2017 ICT and Software United States 16 Louis Dreyfus Company 2017 Fertilizer plant France 12 Carolina Herrera 2017 Retail and Accessories Spain - Desigual 2017 Retail Spain - Sandit S.A. 2017 Dairy Industry (dairy farm) Argentina; Venezuela 14 Sodimac 3 rd store 2017 Household Items Store Chile 19 BetConstruct 2017 Sale and Services Center for Latin America United Kingdom - Haras Los Palmares 2017 Hotel Resort Argentina 40 Solanas 2017 Hotel Resort Argentina 250 Hotel Playa Mansa - Figalsur S.A. 2017 Hotel Resort Argentina 105 WTC Free Zone 2017 Office Tower in Free Trade Zone Uruguay 25 Renner 2017 Retail (3 stores) Brazil 15 Conrad - Grupo Enjoy 2017 Hotel expansion and Casino Chile 220 Hammoudeh 2017 Dairy Industry Palestine 30 Abengoa 2017 Wind Energy Spain 145 Source: Companies announcements and different press. 15 FDI Markets, direct contact with investors, companies announcements, press, others. 17

Uruguay s economic growth in the last decade was boosted by different sectors, aimed to both the international and domestic markets, which have manifested a noticeable dynamism and have created attractive opportunities for foreign and domestic investors. Some of these sectors are described below, with links to the specific sectoral report prepared by Uruguay XXI. The Uruguayan agricultural sector presents clear comparative advantages over other countries. It has also traditionally been one of the main growth engines of the country. Mostly, in the last decade, in relation with the entry of great actors at a global level, the sector s productivity has multiplied. In addition, there have been backward and forward linkages that define opportunities within the agro-industrial chain, from animal and plant genetics, to high value-added food production. In fact, Uruguay produces food for 30 million people and has the capacity to feed 50 million people. Almost 80% of Uruguay's exports of goods correspond to the agro-industrial sector. In this sense, there are chances to increase production as new markets are allowed. In August 2013, the United States enabled the admission of citrus fruits, and, in September 2017, the sale of boned sheep meat. Additionally, the admission of Uruguayan beef into the Japanese market is imminent, which also creates opportunities to enter a highly sophisticated market. More information: Agribusiness Report In Uruguay, thanks to a historic 30-year-old forest policy, extensive plantations of eucalyptus and pine have been developed, and two large cellulose pulp mills of foreign capital have been installed which export worldwide and create associated businesses, such as plantations development, logistic services, energy production from biomass, among others. In November 2017 an investment pre-agreement was signed between UPM and the Uruguayan government for the installation of a third pulp mill. Said pulp mill would have a production similar to the total of the two already installed, and would contribute to position cellulose as the country s main export product. Furthermore, Uruguay would become the second world exporter of short fiber pulp. The project would require a US$ 4,000 million investment for the plant s installation and improvements in logistics. In addition, it would require a US$ 1,000 million complementary investment by Uruguay 16. In addition, important investment funds from the forestry sector such as GFP, GMO, BTC and Stanfford operate in Uruguay. There are also big opportunities in wood mechanical processing, with the exploitation of some species meant for this type of production, such as pines. There are already installed in the country groups such as BTG Pactual (ex Weyerhaeuser), COFUSA, URUFOR, FYMNSA and Frutifor. 16 https://www.presidencia.gub.uy/comunicacion/comunicacionnoticias/upm-gobierno-firma-contrato-segunda-planta-conferencia UPM estimates the need of 220 km of bituminized routes and railroads to transport production to Montevideo s port, as well as improvements in the fluvial terminal of the Uruguayan capital. Source: Government s website. 18

More information: Forestry Report Uruguay has traditionally been a country focused on tourism. In recent years, it has established itself as a destination of excellence for regional and extra-regional visitors and annually receives around 3.6 million tourists (even surpassing its own population). An amicable regulation for investment in hotel infrastructure and a national strategy to develop the sector, allow numerous investment opportunities in the tourism sector. The country offers very attractive natural conditions for various kinds of tourism, which are located a few kilometers away from each other, such as the traditional sun and beach tourism, urban tourism, tourism of rural areas and nature, thermal and relaxation, nautical, congress and events, among others. The improvements carried out over the last years in terms of infrastructure, connectivity and associated services, create good conditions for tourism and multiply opportunities. More information: Tourism Report Uruguay has not been oblivious to the advances of information technologies and the new business trends of tasks offshoring, which have allowed the development of a range of export-oriented services. These activities emerge from a company s decision to relocate a process initially carried out in their parent companies and transfer it abroad. Said practice is identified as Offshoring and the services provided are frequently described as Global Export Services. The growing importance of global export services from Uruguay is built on certain key sectors that have benefited from the advantages offered by the country for its business development. Mostly noteworthy are the corporate services (BPO, KPO, ITO), audiovisual, services associated with pharma and health, architecture and engineering, among others. In Uruguay, these business segments have found key transversal attributes for its development: macro-economic strength, clear and steady rules, workforce at competitive costs and a modern technological infrastructure. In this sense, Uruguay has positioned itself as the largest per capita exporter of ICTs in Latin America. Uruguay is a reliable platform for the provision of high quality services at competitive costs. This has led international companies to establish shared service centers that support the main activity of the company, improving their business processes and regional insertion Some reputable companies that have developed this type of operations are: Caterpillar Finning, Saber Holdings, RCI, Ocwen Financial Corp., Willis Towers Watson, Louis Dreyfus Commodities, SKF, Tenaris, Trafigura, Syngenta, Merck Serono, Roche or Basf. All of this has been complemented by public policies that aim to strengthen these qualities by generating specific training for the sector and coordinating the supply and demand of skilled work. In addition, there are important fiscal incentives, special schemes, and government support for the sector. More information: www.smartservices.uy 19

See also: Global Export Services Report, Business Services Report, The ICT industry in Uruguay, Pharmaceutical and Health Report and Architecture and Engineering Services. Together with the important movement of goods and its advantages as a service provider, Uruguay is positioned as an extremely attractive location for logistics activities development. These advantages, added to the regime of free ports - unique regime on the South American Atlantic coast - are used by companies that have decided to localize their logistics operations in our country, choosing Uruguay as their Regional Distribution Center. One of the government's priorities is strengthening the National Port System. Regarding this, the National Ports Administration (ANP for its Spanish acronym) plans numerous expansions and improvements within each of the ports. Montevideo, Nueva Palmira and Fray Bentos are the ports that will require major investments (public and private) in the short and medium term. More information: Logistics Sector Report Uruguay's energy policy has a strong commitment to renewable energies, with significant short-term incorporation goals and attractive tax advantages. Uruguay and its privileged location provide favorable natural conditions for solar and wind energy production that complement the already-in-use water resources. At the same time, it has a huge additional production capacity from biomass, associated with the agro-industrial production. Both the government and private entities, have made significant investments in the sector, that between 2010 and 2015 totaled more than US$ 7,000 million. This means that annually, the country invested more than 3% of the GDP in energy infrastructure. Moreover, the infrastructure 2015-2019 plan proposes to invest an amount of US$ 4,230 million in the sector. Different types of investment and financing currently exist, such as: private projects and public financing, traditional biddings, leasing contracts, public-private partnerships, projects financed by multilateral organizations (IDB, CAF, World Bank), bi-national and public projects financed by the capital market and pension funds. There are still opportunities to expand the creation and product capacity of the one already in place. Interesting opportunities have also emerged in the area of transmission and distribution of electric power. More information: Renewable Energy Report The Uruguayan government has established investing in infrastructure a priority, to ensure the sustainability of growth and productivity levels of the Uruguayan economy. Currently, for the 2015-2019 period, an ambitious infrastructure plan is being executed for an amount exceeding US$ 12,000 million. There is also an additional commitment estimated between US$ 1,000 and US$ 1,500 million that will respond to the necessary infrastructure to make mega investment projects viable. 20

These projects will be financed with both, public and private capital. It is expected that a third of them will be carried out under the PPP contract model within the framework of the law approved in 2011. The first projects are already being executed. Energy Roads 2015-2019 INVESTMENT PLAN Power transmission network, wind, solar and biomass production, Regasification plant National routes reconstruction, rehabilitation and maintenance Millions of US$ 4,230 2,360 Early childhood centers, educational centers, hospital and prisons infrastructure 1,870 Social Infrastructure improvements Housing Social housing 1,320 Communications Telecommunications network 750 Sewerage network, drinking water, Water and Sewerage wastewater treatment 550 Ports Docks, dredging, port terminals 550 Rail Roads and rolling stock 360 Development fund for the inland provinces, Others cement plants, other works 380 Total 12,370 More information: Infrastructure Report For more information on other sectors of investment opportunities in Uruguay, access the following link: http://www.uruguayxxi.gub.uy/inversiones/oportunidades-de-inversion/ 21

The following list reviews the institutional system of investment promotion and some recent changes that aim to improve the business environment. Uruguay s investment and export promotion agency. Among other duties, Uruguay XXI, free of charge, supports and advises foreign investors, both who are evaluating where to make their investment and those who are already operating in the country. It also manages the country brand, promoting Uruguay as an investment destination and highlighting its competitive advantages. ::Website:: www.uruguayxxi.gub.uy Program introduced in 2012, executed by Uruguay XXI with IDB financing. Its objective is to develop the global export services market in Uruguay throughout investment and export promotion actions, the creation of working skills, the update of the regulatory framework and the support of key sectors for industry growth. ::Website:: www.smartservices.uy/ Division within the Ministry of Economy and Finance (MEF) that advises national or foreign investors aimed to the development of the Private Sector. It provides information and advice on the new tax exemptions accessible when making an investment, as well as on the rest of the programs that the Government offers in this matter. UnASeP guides the investor in the process of presenting the project and advises on all requirements, making said process quick and easy. ::Website:: www.mef.gub.uy The Free Trade Zone scheme currently in force in Uruguay has been a very successful tool for economic development and very attractive to foreign companies. Aiming to adapt the regulations to the transformations that the economy has experienced in recent years, some modifications to the scheme will be introduced. The Special Economic Zones Bill that is being analyzed in parliament, encourages high-quality employment, national value-added production, the development of high technology and innovating activities, the decentralization of economic activities and regional development. It also includes a specific program called Thematic Areas of Services that looks to promote activities in the area of health care, leisure and entertainment, and audiovisual. ::Website:: zonasfrancas.mef.gub.uy/ The Productive Transformation and Competitiveness National System (SNTPC for its Spanish acronym) seeks to propose objectives, policies and strategies related to sustainable productive economic development, oriented to the national productive transformation and the improvement of competitiveness, including those linked to science, technology and innovation, applied to production and international economic insertion. Its objectives are to design and implement the equivalent programs, instruments and activities, as well as to monitor and evaluate the actions carried out on a permanent basis. Furthermore, it also aims to implement effective consultation and articulation methods for those involved in economic development. ::Website:: www.transformauruguay.gub.uy The Economic Development National Agency (ANDE for its Spanish acronym) is in charge of promoting and attracting strategic investments. This requires a deeper focus in terms of development objectives and the use of instruments to maximize the benefits of national and foreign investment, post investment services and supplier development programs. Moreover, the National Development Corporation (CND in Spanish) will be strengthened and shall have the role of an infrastructure agency and will act as a coordinator for private public participation and as a fund provider. 22