SUDDEN IMPACT.

FINANCE

UNCERTAINTY DRIVES DECISION-MAKING BY BOTH U.S. CONSUMERS AND INTERNATIONAL INVESTORS. CONSERVATISM REIGNS.

U.S.-LATIN AMERICAN TRADE Make no mistake, Latin America will feel the coming U.S. recession. Some analysts have revised 2002 growth estimates for the region downward to 0% from 4.9%. The most affected countries and regions will be Mexico, most of Central America and the Caribbean. Further south, economies are not as linked with the United States, nor is U.S. trade as important, with the exception of Chile. Nevertheless, "Chile is perhaps the safest," says Valentin Carril, head of Latin American equity research for Santander Investment in New York. "Its exports go everywhere, unlike Mexico where almost all the exports go to the U.S."

CAPITAL FLOWS The retreat from emerging markets will pick up speed. The International Institute of Finance predicts net private capital flow toward emerging markets will plummet US$61 billion, to $106 billion, this year. Analysts disagree on which major Latin American countries will be hurt the most by this trend. Mexico and Chile, for example, need much less international financing so they should fare better, says Carril, at Santander Investment.

Gustavo Canonero, senior economist for Latin America at Deutsche Bank, says Mexico has more to lose than Argentina. The country had access to international capital markets for most of the year, while Argentina did not. Now, Mexico may be hard-pressed to get funds, while the Argentines have public financing needs covered through September of next year, thanks to the $8 billion aid package from the International Monetary Fund. "Mexico will be affected because of the U.S. economic recession, but integration into the U.S. economy is a long-term trend that could make the country appear a safe investment" says Canonero.

Brazil trades less with the United States than Mexico does. And multilateral institutions have already agreed to a $15 billion aid package for Brazil's public finances. Concern centers directly on foreign investment, which the country needs to finance its current account deficit. Spain's Telefonica announced it would abandon a $875 million plan to buy local cellular phone company Celular CRT because of "the exceptional events of recent days." More of the same would definitely complicate 2002 for Brazil.

EXCHANGE RATES Like most countries in Latin America, Brazil's immediate reaction to Sept. 11 was to buy U.S. dollars. As a result, the real devalued before stabilizing. Most analysts believe, however, that exchange rates will continue to respond to domestic conditions more than international uncertainty. Indeed, some suggest that Argentina will do away with the peso and adopt the dollar to quiet ongoing rumors of a devaluation. "Eliminate the peso, and you eliminate the rumors," says Carril, of Santander Investment.

OIL PRICES The attacks on New York and Washington, D.C. drove up consumer gasoline prices in some markets on fear in the hours immediately after the disaster, but a number of unrelated factors should hold prices steady for oil and gas over the medium term. First of all, no points of supply were damaged in the attacks. Secondly, even during the Persian Gulf conflict, U.S. allies like Saudi Arabia made up for shortfalls, something that could occur again if necessary.

Oil exporters such as Venezuela have pledged to up production if necessary to shield weak world economies from spiking per-barrel prices. Whether OPEC allows its members to increase output remains to be seen, but Venezuela began storing extra crude in tanks even prior to the attacks because it is un-economical to reduce production, says George Martin, chief editor for Latin American markets for energy information service Platts. That extra oil could potentially be diverted for U.S. emergency needs.

Oil prices have increased to about $26 a barrel and are expected to remain there for the rest of the year. "If the estimates are off, they will be too low, not too high," says Canonero at Deutsche Bank. Oil exporters Venezuela, Ecuador, Mexico and Argentina will benefit from steady crude prices while oil importers Brazil and Chile will suffer.

POLICY

THE NEW WAR ON TERRORISM WILL PUT MANY LATIN AMERICAN ISSUES ON THE BACK BURNER.

FREE TRADE The Free Trade Area of the Americas was supposed to take shape in 2005, but now even Chile's hopes for a free trade agreement with the United States seem shaky. The fight for fast-track approval will likely take a back seat to funding for domestic and international security.

Contrarians predict that U.S. Rep. Bill Thomas (R-California), chairman of the lower chamber's Committee on Ways and Means, might use current strong support for the president to push fast-track legislation through Congress. And, at the very least, many Latin American countries could get attention on specific bilateral issues in return for their support of U.S. policy on terrorism.

Surprisingly, Venezuelan President Hugo Chavez, whose lukewarm U.S. relations initially worried some, pledged firm support to the U.S. effort. "In the short term, there's no halfway point. Chavez has to take the anti-terrorism side," says Robert Bottome, head of think tank Veneconomia.

IMMIGRATION Proposals for immigration reform, guest worker visas and amnesty for illegal aliens are unlikely to see daylight soon. President George Bush says he hasn't forgotten U.S.-Mexican immigration reforms, but the U.S. Congress is calling for stricter--not more liberal--border controls. "If [Mexican President] Vicente Fox's dream of open borders was miles away before, it's now light years away," says Jerry Haar, a Latin America researcher at the University of Miami.

In the first days after the plane hijackings, the number of illegal immigrants picked up at U.S. borders dropped by half, despite stricter security that meant more likelihood of detecting them. The conclusion? They fear a backlash against immigrants.

MILITARIZATION Watch for the United States to take a stronger position with at least three Latin American countries involved in terrorism: Cuba, which is listed by the U.S. State Department as a state sponsor of terrorism, Colombia and

Paraguay, which both have terrorist groups operating within their borders. The U.S.-sponsored Plan Colombia is also at risk as President George Bush may push his country's policy of no negotiation with terrorists. "The FARC and ELN are on the U.S. list of terrorist organizations," says Latin America policy analyst Steve Johnson at Washington, D.C.-based Heritage Foundation, referring to Colombian's anti-government forces. "This puts the U.S. at odds with the peace process and will require some adjustment."

Tom Cash, an executive with security firm Kroll Associates, disagrees. He says Plan Colombia and the fight against terrorism are different, although there are elements of terrorism in the FARC actions. "Plan Colombia is a solid and mature plan of assistance and most probably will not be largely disrupted," he says.

SECURITY Executives and corporations should review their plans and seriously consider their exposure, especially U.S. firms doing business abroad, security firms warn. Bottom line: Concentrate on the fundamentals. That means investing in guards, locks and intelligence, says Luis Reveiz, associate director of the security services group at Kroll Associates.

Countries with porous borders and lax passport control are often gateways for extremists who enter and then travel to neighboring capitals. No place is "low risk," as the bombings of U.S. embassies in Africa--and the most recent attacks in New York, and Washington, D.C.- proved.

The biggest immediate risk in Latin America is in Buenos Aires, according to Control Risk Group's Armando Lara. U.S. and Jewish interests in Argentina should exercise special care in case there is retaliation following whatever action the U.S. military takes in the coming months.

SECTORS

TRANSPORTATION AND LEISURE INDUSTRIES FEEL MOST IMMEDIATE IMPACT WITH SLOWING GLOBAL CONSUMPTION IN THE AFTERMATH OF THE ATTACKS.

TOURISM Watch for a nosedive in leisure and business travel between the United States and Latin America. Brazilian travel agencies expect U.S.-Brazil travel to drop as much as 40%. Hardest hit first will be countries like Mexico and Costa Rica, where the United States is a big part of the tourism formula. Still, some of the decline may be offset by increased domestic and in-region travel, especially in Brazil, where the weakened real makes it a more appealing destination.

HOTELS "You can throw away the forecast for the rest of 2001 if you're a hotelier," says industry analyst Scott Berman at PricewaterhouseCoopers. Cancellations were immediate throughout the Americas after the terrorist attack. The good news: Unlike airlines, most hotels have not announced massive layoffs. The bad news: That doesn't mean they won't. Before the attacks, hotels were already wounded by a softening global economy. While hotel projects under construction are likely to continue, those still on the drawing board may stay there.

AIRLINES The horrific forces that pushed the U.S. carriers into crisis have had a grim effect on Latin American airlines. In the first days following the attack, Latin airlines racked up $30 million in losses daily--a dramatic expense for carriers already struggling with financial troubles. For the year, cumulative airline losses in the region could hit the $1 billion mark. Already, a call has gone out for government aid not unlike that lined up by the United States for its national carriers.

Although service cuts and some 100,000 layoffs surfaced almost instantaneously among U.S. carriers, most steered away from eliminating profitable Latin American routes.

AIR CARGO The three-day suspension of air traffic in the United States had a drastic affect on many countries, including Ecuador, which lost $1.3 million a day in fish and flower shipments. At the same time, one of the first security measures imposed by the U.S. Federal Aviation Administration-a ban on cargo in passenger planes-struck at a key component in regional logistics. Although the order was rescinded, it was in place long enough for exporters to scramble. As a precaution, some companies are now turning to air service that is cargo-only. That means operations like DI-IL, Federal Express and United Parcel Service will be jammed with work. But it could hurt passenger-cargo airlines. Watch for air cargo costs to rise.

TRUCKING "Before [the attack], the U.S. and Mexico were doing $500,000 of business every 60 seconds, and 80% of it was done by truck:' says Garry Petty, president and CEO of the National Private Truck Council in the United States. Immediately after, trucks were bottlenecked for up to four days as they underwent new border scrutiny. That havoc, especially for "just-in-time" companies, cost major money- and that's a disincentive for Nafta trading partners. Mexican trucking industry chamber Canacar fears throngs of small truckers will go under. It has also resigned itself to the idea that the fight to let Mexican truckers enter the United States-stalled by the U.S. Congress on safety grounds-has been relegated to the back burner. But the United States won't be able to ignore Nafta. "If there's a substantial reduction in the volume of free trade between the countries, it's going to have a huge impact on American stock value and American prosperity, as well as jobs:" warns Petty.

PORTS Maritime cargo between Argentina and the United States experienced a four-day delay-costly to shippers-in the wake of the terrorist attack and the closing of U.S. ports, but maritime activities quickly returned to nearly normal. Chile, in fact, saw almost no change in its sea cargo, although security was greatly bolstered at the so-called triple border of Argentina, Brazil and Paraguay. Beefed-up port security promises to push up the cost of transporting goods on north-south routes. Intermodal shipment costs, in particular, could jump because of additional security and clearance steps at each leg. But the biggest slam will be the general market decline in response to a worsening U.S. economy. That will slow the demand for exports-and cargo traffic-from Latin America.

METALS AND MINING Brazil and Mexican steel producers face weaker worldwide demand combined with near 20-year global price lows. Before the tragedy, prices were already off 35% to 40% from May 2000, says steel analyst Mario Pierry at JP Morgan Chase in New York. The United States had been investigating steel exporters worldwide on dumping complaints; now it is squawking about cheap steel imports damaging U.S. steel production capability during wartime, a sure sign tariffs will ensue.

Gold stocks are the bright spot as investors seek safe havens from uncertainty and wobbly currencies. But if economies stabilize, the effect will be short-term. Gold prices have been consistently depressed as world currencies increasingly trade against each other rather than rely on precious metals for backing. "Political instability does affect the gold price, but the principal driver is the weakness of the U.S. dollar," notes Geoff Stanley, senior gold analyst for Nesbitt Burns in New York, Unless the global currency system crashes and there is a wholesale flight back to a gold standard-a highly unlikely scenario-the metal will not permanently sustain artificially higher prices. At press time, it was up $10 to $15 an ounce to just around $290 an ounce on the bad news. That's still below highs of recent years of $315 an ounce.

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