According to the report, foreign direct investment (FDI) will contract this year. Mexico and some Central American nations are already seeing exports slide. The drop in prices for fuel, metals, food and other basic goods will hinder trade prospects for the region, while the expected fall in tourism and remittances from migrant workers – both significant sources of revenue – will inhibit growth. Scarce credit and the rising cost of external financing have caused a strong depreciation in local currencies in several countries, upsetting their balance sheets and thwarting efforts to slow inflation rates further.

No region is immune from the international financial crisis sparked by the sub-prime mortgage debacle in the United States. With the worldwide credit crunch now poised to transmit its effects to the real economy, Latin America will likely see a significant decline in export revenues and foreign direct investment originating from the US over the next couple of years. The crunch also is likely to increase the costs of debt financing for the region. And it all comes against a background in which economic growth in Latin America was already beginning to slow.

Still, some Latin American countries are better prepared to weather the storm, notably Chile and Brazil, which have taken stronger steps to shore up their economies in recent years. They will now have to review their plans for spending and public-sector investment, and their policies for supporting production, combating inflation, and various social-spending policies. In contrast, countries such as Venezuela, Bolivia and Colombia, which are undergoing internal political conflicts, have less stable economies and will likely be more affected by financial developments in the US.

Latin America and the Caribbean region have come off of two of the best back-to-back years of economic growth in decades -- up over 5.5 per cent annually in 2006 and 2007. But even before the credit crunch the heady growth looked set to cool off. World Bank forecasts from June for the region already called for GDP growth to slow to 4.5 per cent in 2008 and 4.3 per cent in 2009. It will surprise no one if those numbers get revised down. The prospects for Latin American economies have always been tied closely to those of theUS. One key factor that could help limit any economic fallout from the credit crunch will be controlling inflation. Yet, some Latin American countries look unprepared to take inflation on forcefully.

IMF warned that inflation was spinning out of control in some emerging nations, and the IMF has forecast that Chile will finish this year with a 7.5 per cent inflation rate; Argentina will reach 9.1; Brazil will be at 5.6 ; and Peru at 5.4 per cent. Global price spikes in food and fuel have impacted the entire region, but in pockets of Latin America – notably Argentina and Venezuela – double-digit inflation has led to serious questions about their governments’ handling of the situation, and the political ramifications are already being felt. Grocery bills have also gone up in Bolivia and Nicaragua, making waning earning power the top concern of many Latin Americans – and perhaps the biggest challenge for governments.

Latin America enjoyed growing international confidence last year, when foreign investment in the region shot up 36 per cent to $126 billion, according to UNCTAD. Yet, much of this growth arose from sharply higher prices for oil and other commodities, and given forecasts for a slowdown in worldwide economic growth, those higher prices are now at risk. Still, the Latin American countries that have recently acquired the status of “investment grade,” including Brazil, have a certain cushion. These countries are better situated to take in foreign investment, which is the best way to protect the continuation of growth.

Mexico

Mexico is the second largest economy in Latin America after Brazil. It sends 80 per cent of its exports to the United States. Mexican immigrants are the third largest group in the United States to send remittances to their country after China and Russia according to the World Bank. Due to the current U.S. economic crisis, Mexico is likely to report a significant decrease to its gross domestic product which has not been seen since 2003. The US. economy has fallen into a deep recession, in large part due to the crisis in its financial system. This phenomenon of unprecedented magnitude has spread rapidly to all regions. In the last few months of 2008, the country has been experiencing a period of great difficulties in terms of economic growth, investment and employment.

Mexico’s economic growth is estimated at two percent for 2008, and is projected at a mere one percent or even a negative rate for 2009. Economists have slashed their growth forecasts for Mexico recently as the slumping US. economy dampens demand for imports and factories lay off workers. Mexico sends about 80 percent of its exports to the United States, which is reeling from a decline in its housing sector and turmoil in financial markets. Although Mexico’s banks were not involved in high-risk loans and toxic securities that have plagued the financial industry in the United States and other countries, the global financial crisis has seeped into Mexico as increased risk aversion reduces demand for the peso currency and pushes up borrowing costs.

Mexico’s jobless rate jumped to 4.47 per cent in November, the highest since at least 2000. Mexico’s economy is also suffering from a sharp drop in oil production, which makes up nearly a fifth of exports and provides about a third of government revenue. Analysts predicted 2008 headline inflation at 6.35 per cent, up from a previous view of 6.27 per cent, while next year’s inflation was seen at 4.56 per cent. The bank expects inflation to peak over the next few weeks and analysts see policy-makers lowering rates early next year.

Inflation at a seven-year high has kept Mexico’s central bank from cutting interest rates to boost the economy. Though it wouldn’t make sense to cut interest rates when inflation is still high, many economists expect the central bank will cut interest rates aggressively in 2009 as a recession in the United States hits demand for Mexican exports, but high inflation could complicate that plan. They expect the central bank to lower rates during the first quarter of 2009 once inflation begins to subside. The central bank has said it expects inflation, which is running at more than twice its long term target, will peak in January.

Mexican industry has already posted six straight months of decline through October, with the collapse of the U.S. housing market and tighter credit hurting Americans’ appetite for things made in Mexico like cars and refrigerators. Mexican factories have laid off more than 175,000 workers this year. The U.S. recession is increasingly weighing on growth prospects for Mexico. Meanwhile, Mexico posted a $2.834 billion trade deficit in November, the widest since at least 1991, when the current data series on trade began. Growth in aggregate demand slowed to 3.3 per cent during the third quarter from a year ago, down from 4.3 per cent growth during the second quarter.

The Mexican government announced a $54 billion economic recovery plan aimed at helping the local economy weather the global financial crisis, with measures like freezing gasoline prices and boosting spending on public works. Gasoline prices will be frozen for 2009, the price of natural gas will be reduced 10 per cent, and electricity rates for industry will be slashed by up to 20 per cent. The government will set aside financing to help poor families replace old appliances with more energy-efficient ones, and will increase spending on the construction of low-income housing and development of the countryside.

In addition, at least 20 per cent of government purchases will be from small and medium companies, and workers will be allowed to draw more easily on their retirement funds in private banks. The measures form part of a “national agreement in favour of the family economy and employment. The plan will be funded by an unprecedented proportion of oil revenues and taxes, and will generate a fiscal deficit for the first time since the mid-1990s, of nearly two percent. The aim is to ward off a recession, to which Mexico is particularly at risk because of its close economic ties with the United States, where the current crisis originated.

However, the analysts are of the view that it is “discouraging” that the anti-crisis plan does not include cuts in the public sector’s costly red tape and the bulky expenses of governors, legislators and government officials. Despite the current economic troubles, which include projections of a rise in poverty and unemployment, none of these sectors announced cuts in their own salaries or expenses. Nor are such cutbacks included in the “national agreement in favour of the family economy and employment”.

Brazil

Brazilian economic growth should decelerate sharply in the coming year under the effects of a global slowdown in economic activity, Brazil’s central bank said in its fourth quarter inflation report. The bank projected growth would slow to 3.2% in 2009 from 5.6 per cent growth projected for this year. The 2008 growth projection was revised upward from a previous forecast of five per cent. The bank noted that growth through the third quarter of the year remained strong but indicated the local economy should see a sharp slowdown going forward under the widening impact of a deceleration in international economic activity.

In the current environment, characterized by the prospect of an accentuated reduction in global growth, the maintenance of the solid macroeconomic fundamentals of the Brazilian economy doesn’t constitute a sufficient condition to avoid that the repercussions of the international crisis are propagated internally, for example, with repercussions on the balance of payments and activity. While activity would likely decelerate in 2009, the economy would continue to grow based on still-strong domestic employment and demand. Brazilian government officials have projected the country’s economy will grow four per cent in 2009.

With the aid of central bank measures, liquidity in local credit markets had improved since the deepening of an international credit crisis in September last year. Since September, Brazil’s central bank has cut banking-sector reserve requirements to free up more than 90 billion Brazilian reals ($38.29 billion) in liquidity to local credit markets. Additionally, the bank has sold more than $7 billion on the spot currency market and more than $12 billion in export credit to provide foreign currency liquidity. Reduction of inflation in 2009 should contribute to the buying power of wage earners, which is important for economic activity.

The central bank director rejected claims that the monetary authority has made excessively restrictive use of monetary policy, noting that inflation in Brazil has remained above official targets for more than 70 per cent of the time. Brazil’s central bank raised the country’s reference Selic interest rate by 2.5 percentage points early in the year and has left the rate unchanged at 13.75% annually since September. Given these factors, the bank said it was focusing attention to recent foreign exchange depreciation as the main short-term risk to the country’s inflation outlook, hinting it would remain especially vigilant to control pass-through effects from a weakened currency.

Inflation in Brazil will slow sharply in 2009 as the global downturn weighs on the economy, causes commodity prices to slide and domestic credit to decline. In its quarterly inflation report, the bank said that the benchmark IPCA consumer price index should rise 6.2 per cent in 2008, up slightly from a 6.1 per cent estimate in September. The index is forecast to rise 4.7 percent in 2009, near next year’s inflation target but lower than the 4.8 per cent forecast three months ago. The key point is that the bank sees lower inflation risks, while the possibility of even weaker economic activity has grown.

Brazil’s trade surplus fell sharply in 2008 as a strong currency for much of the year fueled a surge in imports that outweighed export growth. The surplus slumped 38.2 per cent from 2007 to $24.74 billion, falling for a second straight year after reaching a record $46.46 billion in 2006. Imports in 2008 surged 43.6 per cent to nearly $173.21 billion, far outpacing the 23.2 percent jump in exports to $197.94 billion. Both totals were record highs. Exports are expected to drop 17.7 percent to $163 billion in 2009, the first decline since 2000.

The decline will likely shrink Brazil’s trade surplus 31 per cent as the economic downturn deflates prices for Brazil’s top commodity exports, including iron ore and soy. Still, the surplus, $24.7 billion in 2008, will hover around to $17 billion because domestic demand for imports is due to slide along with Brazil’s own slowing economy.