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Global Economic Slowdown To Hit Hard in Latin America - 2001-10-26

The worldwide economic slowdown, that has been made worse by the September 11 terrorist attacks on the United States, is expected to have dire consequences for the emerging economies of Latin America. Close trade links with the United States have proved to be both beneficial and troubling at this time of crisis.

The whole world is feeling the effects of September 11 and the dramatic slowdown in the U.S.economy. But nowhere is the effect quite as strong as in Latin America. Most of the economies in the Americas are linked to the United States through direct trade and through other ties having to do with geography and culture.

Mexico sends 85 percent of its exports to the United States and is tied directly to the U.S. economy through the North American Free Trade Agreement, known as NAFTA. But economists say structural reforms and a steady monetary policy will help Mexico weather the storm.

The will not be true for many other nations, particularly in South America, says USB Warburg economist Michael Gavin. "It looks a lot more serious, a lot more longstanding, a lot more intractable if you look at the rest of the region," he said. "Argentina is notorious, it is now in its fourth year of recession. People are less aware that Peru is in essentially as deep and as long-lasting a recession, that Chile has barely recovered, or had barely begun a meaningful recovery from the Asian shock, before it was hit by the current situation."

Mr. Gavin says policies adopted by some of these nations have made it harder for them to recover and he expresses the fear that some of them may not be able to wait for a worldwide recovery.

Even Mexico, with its ties to the globe's biggest economy has reasons to be concerned. All three of Mexico's main sources of foreign income are directly tied to the United States--oil, tourism and remittances, money sent back home by Mexican immigrants. This year alone, Mexican immigrants north of the border sent back $8 billion to family members back in Mexico. Judy Shelton, professor of International Finance at Monterrey, Mexico's DUXX Graduate School of Business Leadership, says these three pillars of the Mexican economy are all at risk now.

"All three have been hit hard by what has happened since September 11. Oil, because of the worldwide recession, could come down and that provides 37 percent of the federal budget here, those revenues," she said. "Tourism has been hit hard and on the remittances, they are okay for September as I understand, but they also are going to fall off because a lot of people working in the U.S. economy are in the hospitality industry, in hotels or restaurants, and they are losing their jobs because those companies are cutting back."

Mexican economist and commentator for the TV Azteca television network, Roberto Salinas Leon, acknowledges the problem, but, using the analogy of an automobile, he says Mexico remains on track.

"Our economic car was being driven at 90-kilometers-an hour and, all of a sudden, because of external contingencies, the U.S. economic slowdown, the global economic contraction in Japan and the European markets... this was all before September 11, and then with the external shock occasioned by September 11, the car necessarily has to go down on the highway from 90 kilometers an hour to maybe 10 kilometers per hour," he said. "That is very bothersome and that is a horrible adjustment, but the car did not go off the precipice."

Mr. Salinas says Mexico could also benefit from the reluctance of international investors to put their money elsewhere in the developing world. "Among emerging market economies, we are considered a safe haven. Investors are more likely to invest in Mexico than, say, in Turkey, Argentina, Brazil or other emerging markets that are suffering a similar fate," he said.

Mr. Salinas says Mexico's trade link to the United States through NAFTA has contributed to its downturn at this time, but that the same link will allow it to benefit even more when the U.S. economy turns around.