Wednesday, February 11, 2009

Latin American Economies Being Hit From Both East and West


On Tuesday stock exchanges across Latin America plummeted as concern grows over the Obama Administration’s recently announced bank bailout plan. Stock exchanges in Brazil, Mexico, Chile and Argentina took noticeable hits after Treasury Secretary Timothy Geithner announced the new plan. The fear on Wallstreet that Obama’s trillion dollar bailout plan will not be able to ease the tightened global credit situation. Overall, Latin American economies are being hit hard by tight credit and a drop in demand for commodities.

The drop in demand for commodities largely originates in Asia. Asia is a large importer of raw materials produced in Latin America as many Asian economies use the raw materials to produce goods that they export across the world. The global financial crisis has caused demand for Asian exports to decrease significantly. Taiwan, Singapore and Indonesia’s exports have all dropped anywhere from 20%-40%. As demand for Asian exports drops, the Asian demand for Latin American commodities and raw materials will also drop. Morgan Stanley refers to this drop in demand as “aftershocks” of the Asian slowdown, and said that Brazil is posed to fair the worst given its strong trading ties with Asia.

Amid these problems, some Latin American countries are exploring innovative ways to help stimulate their economies. The Chilean real estate industry, for example, has begun to offer “anit-crisis” discounts for consumers purchasing housing. Real estate companies are offering to pay for flights to Santiago in order to entice potential home-buyers, and are also offering up to 20% discounts during special night and weekend sales. During one such weekend sale, one company sold more units in two days then they had in the entire previous month. One salesperson said that consumers “realize this is a buying opportunity, at highly competitive prices, and the truth is that the sector has picked up." Despite such efforts analysts still predict a worse 2009 showing than previous years, but these strategies may help mitigate the pressures coming from both the East and the West.

1) One article said that Mexico will fair better than Brazil in terms of exporting raw materials because Mexico’s main trading partner is the United States and not an Asian country. Why do you think the United States demand for raw materials has not fallen off as steeply as in Asia? Do you think it is because the US economy is not export-driven?
2) How long do you think Chile will be able to offer discounts in its real estate market? Chile has thousands of new units that have not been sold. Will discounts not only help sell these unused units but also help spur new construction?

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