1. Economc perspectives under the Financial Crisis of 2008 Prof. Alejandro Ibarra EGADE Monterrey, October 15, 2008

2. Intro In spite slowdown in US and European Economies, LA is resilient to shocks but co-moves (check models of Co-movement, such as Cointegration). Recession evident on 4th Q’08 in the US and EU, makes GDP adjustment for Mx at 0-0.5% in 2009 Resilience arose from commodity boom, but slower demand along with supply shocks create inflationary pressures, now receding. Policy options vary by country, to control for external shocks: Fiscal Monetary Financial regulations Social Policies

3. Housing watershed (extended speculation?) Subprime market concentrated in residential; contaminating financial markets, including some emerging ones. US economy slowdown to exp. 05% growth at the end of ‘08. Effects with lags (6 months) in main LA economies. Oil prices depend on a) weak dollar b) Speculation of contracts Liquidit problem turned to a credit problem and systemic crisis In all banking, pension funds, private debt.

4. Monetary “signaling” and “responses.” Liquidity injections spread out; Guarantees; interest rate downward Adjustments. How temporary? Central banks in Europe are moving swiftly; FED and Treasury in the US now following up (Oct 14 ‘08). No apparent protectionism! LA declining foreign debt is a plus (except Bolivia and Paraguay). LA central banks tightening mon. Pol. changes to adjust for aversion. What about exchange rates? (Mx peso will end up with higher floor of 11.5) What about fiscal policy? G can increase Iff fiscal discipline prevails.

5. US banks US regs injected liquidity to the financial system, but also made it obligatory to bring to balance, loans held in non-bank subsidiaries. These uncertain behaved loans Increase the credit-default-swap spreads, as shown here. LA banks and subisidiaries not much affected until now, as shown next

6. LA positive real interest rates Source of strain is the almost null issuance of external bond financing for LA govs and firms. Almost no IPO in developed financial markets, that has also contaminated M&As and IPOs within LA financial markets (increasing is the number of LA MNCs).

8. Effects of commodity prices on trade balances and terms of trade in LA Notice that commodity prices Have benefited LA in an uneven manner. Only Chile and Peru (mining, and grains), and Venezuela (oil) have ripped windfalls. Given slower world growth, LA economies have resorted to the domesic market. This places new (and old) challenges: Can we revert opening up with domestic markets? Are they perfect substitutes or not? Challenges for competitive domestic markets.

9. Changes in relative prices have effects on poverty rates and social conditions While some benefit from ToT improvements and government windfall income for social programs, other do not. In any case, poverty alleviation depends on sustained growth rates rather than rel. price impacts, as shown in Chile, Mexico, ad Brazil.

10. Contributions to growth (Agg D) have changed According to the IMF Report, slower growth is shown for 2008-09; Consumption is main source of growth, then investment. Remmitances come to the picture but mainly for Non-marketable parts of LA economies (El Salvador; Honduras; Mexico Poor government?

11. Fiscal surpluses shrinking, so fiscal response contained An important point to policy Responses is fiscal policy. In 2007-08, primary surpluses declined, both planned (stringent Fiscal stance) and non-planned (tax efficiency lower). Varies accross LA economies (check Cases!)

12. What about Trade and Investment Dynamics? Imports in Mx Mexico’s differentiated growth of imports shows Asian concentration from RoW (Asia), whereas non-maquila intermediate European goods, and Capital goods show high growth rates. The pace will depend on exchange rates, growth dynamics, and trade patterns in 2009. Type of Good NAFTA UE15 Rest of the World Intermediate 77.7 % 59.0% 73.3% Maquila 64.1 42.2 76.4 Definitive imports 35.9 57.8 23.6 Capital Goods 10.2 21.2 11.1 Consumer Goods 12.1 19.8 15.6

13. Mexican Export Dynamics with EU (Ger; Esp; NL; Rest of EU)

14. … and Import Dynamics with EU (main origins Ger; Esp; Rest)

15. Mexico’s Trade balance: North America and Europe