'While both countries are feeling the impact of Brazil's slowdown especially through a decline in exports, Argentina appears to be more vulnerable than Uruguay,' said Shelly Shetty, Head of Fitch's Latin America Sovereign Group.

'Argentina's economic woes have been exacerbated by Brazil's slowdown, with President Cristina Fernandez interventionist domestic policy possibly constraining the extent of its rebound in 2013, when Brazil's growth is expected to pick up again.

'Uruguay's good fundamentals which enable a strong capacity of policy response make this country more resilient to temporary shocks stemming from a drop in exports to Brazil, reduced tourism receipts, or a cyclical downturn in activity.

Brazil's slowdown has been deeper and longer than anticipated, with GDP decelerating to an expected 1.5% in 2012, from 2.7% in 2011 and 7.5% in 2010.

The spill-over effects of the weaker Brazilian economy on Argentina and Uruguay are mostly being felt through a decline in exports, the main transmission channel in terms of GDP and foreign exchange generation.

While the depreciation of the Real currency since July 2011 has had a negative impact on the competitiveness of exports from Argentina and Uruguay to Brazil, their exports appear to be driven primarily by Brazil's weaker domestic demand. Argentina's trade composition makes its exports more sensitive to Brazil's economic cycle, as a large portion consists of cars and auto parts exclusively traded with Brazil.

By contrast, commodity exports, which are more inelastic and can be more easily reallocated, represent a bigger share of Uruguay's exports to Brazil, making Uruguay's trade balance less sensitive to changes in Brazil's domestic demand.

MercoPress