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Mexico swoons and Brazil rallies in response to US shutdown

Why did Mexico and Brazil, the two largest economies in Latin America, see their currencies swing in opposite directions last week as the US inched closer to a default?

The US government shutdown is rippling across Latin America, seesawing regional economies as markets and analysts take toll of the immediate and long-term impacts from the crisis in Washington. 

Mexico and Brazil, the two largest economies in Latin America, saw their currencies swing in opposite directions last week as the US inched closer to a default. The Mexican peso fell to a month-low on concerns over weakened US demand for Mexican goods, while the Brazilian real rallied on speculation that the shutdown would prolong the US Federal Reserve’s stimulus program that has pumped cheap dollars into emerging markets. 

The divergence underscores the greater reliance in Mexico on US economic growth, which is estimated to lose up to 0.4 percentage points for every week of the shutdown. Mexico sends 78 percent of all exports north of the border, while Brazil sends just 11 percent of exports to the US. 

“What affects the Brazilian real is more international financial flows, and what impacts the Mexican peso is more economic growth prospects in the US,” says Jefferson Finch, a Latin America analyst at Eurasia Group. 

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Other Latin American nations that primarily export to the US include Venezuela (39.3 percent), Colombia (39.4 percent), and the Dominican Republic (46.1 percent), according to the CIA World Factbook. Countries less reliant on the world’s largest economy include Argentina, Chile, and Peru, which send 5.8 percent, 12.2 percent, and 15.5 percent, respectively, of their exports to the US. 

“The impacts will be idiosyncratic depending on the country,” says Mr. Finch. 

A case in point: Tourism to some Latin American countries may actually get a boost from the shutdown, as all US national parks and monuments from the Statue of Liberty in New York City to Yosemite National Park in California are indefinitely closed. The US Travel Association said in a statement last week that the shutdown could cause “serious and immediate harm” to the industry, and some tourism agencies have already announced they will opt for Latin America destinationsover the United States.

The greater concern to world economies is the potential for US Congress to fail to raise the $1.7 trillion borrowing limit by Oct. 17, which would leave the government without enough cash to pay creditors. The subsequent default and likely US credit downgrade would undermine global economic growth and particularly commodities companies. Mining giant Vale and steelmaker Gerdau SA have both seesawed on the concerns.  

Pinpointing what markets or companies will be impacted from the US shutdown and debt ceiling crisis would require tracing the demand-and-supply chain from Washington back to Latin America, says Finch, adding that he has never seen such a study. In a recent report, Standard & Poor’s said “it is difficult to ascertain the impact at this time [of a US default], given the unprecedented nature of this event.” 

One thing is for certain, the current uncertainty is unwelcome, says Roberto Izurieta, head of the Latin America Department at The George Washington University’s Graduate School of Political Management. 

“A wide-reaching negative factor of the shutdown is the economic uncertainty it brings,” he says. “This will be felt more deeply if Congress does not raise the debt ceiling. The recovery of the world economy depends, in great deal, on the recovery of the US economy.”

US embassies are cutting back on some services but for the most part are able to continue operating self-sufficiently as long as “there are sufficient fees to support operations,” according to a statement from the State Department. The greater harm abroad now for the US is against the country’s image, mocked as a dysfunctional banana republic unable to live up to its own standards of government rule. 

“But that is democracy,” says Mr. Izurieta. “Not at it’s best, but democracy nonetheless.”