Analysis: Can Mexico Weather S. American Financial Storm?

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Last updated at: (Beijing Time) Wednesday, August 07, 2002

Analysis: Can Mexico Weather S. American Financial Storm?

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The flu of financial crisis which first broke out in Argentina late last year has recently caught Brazil and Uruguay. It's a matter of concern whether the disease will spread northward to reach Mexico, one of the major economies in Latin America.

Mexican Treasury Secretary Francisco Gil Diaz was pessimistic about his country's economy. An Argentina-style crisis seemed to be probable unless Mexico carries out tax reform and improves the situation of its public revenues, Gil said recently.

The government, which faces serious shortages of public revenues, has to sell public assets to meet budget needs. According to figures released by the departments of foreign relations and the Navy, several Mexican consulates had to be shut down and some warships and planes suspended and grounded.

In fact, Mexico's economy has not been in good shape over the past two years because of the US economic slowdown.

According to a report released recently by the Latin American Economic System, Mexico's economy was dealt a heavy blow by the USeconomic downturn. Mexico's exports to the US dropped from 147.7 billion US dollars in 2000 to 140.3 billion dollars in 2001. The latest data from the National Statistics Bureau shows that Mexico's exports in the first six months of this year dropped 2.8 percentcompared with the same period last year. In June, the total exports of Mexico's manufacturing industry to the United States fell by 2.9 percent.

The government has for several times revised down its growth forecast for this year.

Judged by the amount and the speed of the outflow of capital, there is no clear indication that the financial turmoil in South America is spreading further around. However, investors' confidence in the whole Latin American region is undoubtedly shaken by the financial storm.

According to a report released recently by the Santiago-based UN's Economic Commission for Latin America and the Caribbean (ECLAC), Argentina's economic crisis has already affected foreign direct investment (FDI) in this region.

FDI in Latin America dropped from 105 billion dollars in 1999 to 80 billion dollars in 2001. And the ECLAC predicted that it would stand only at 56 billion dollars this year.

According to the report, the economic growth of this region shrank 3 percent during the first half of the year while employment 9 percent. And the region's growth rate this year is predicted at minus 0.8 percent.

Analysts said Mexico is facing the same problems seen in Argentina, where the economic crisis has resulted in the lack of confidence, outflow of capital, and sharp decline of FDI.

The Central Bank of Mexico admitted that FDI in Mexico declinedin the first half of the year, because foreign investors were still taking a wait-and-see attitude, expecting reforms in tax, energy, and labor.

Although the government has said that Mexico would not ask for emergency loans from the International Monetary Fund, economic analysts point out that unfavorable financial prospects for Argentina, Uruguay, and notably, Brazil would definitely adverselyaffect Mexico. At least in the short term, they will inhibit a quick revival of Mexico's economy.

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