Thomas White Global Investing
Mexico
Mexico Stamp
May 4, 2009
A Postcard from the Americas
Mexico: Swine Flu has Economies Shivering

The swine flu has spread all across the globe

The U.S. Congressional Budget Office estimated that a severe flu pandemic could infect 90 million people in the U.S., and would cause a 4.25% drop in the nation’s GDP.

In the last few days, Mexico has reeled under a sudden and vicious outbreak of the little known swine flu also known as Influenza A H1N1, leaving an estimated 100 dead in Mexico and 658 worldwide. But in a globalized world with advanced communications, panic spread equally fast as reports of afflicted people came in from all over including the U.S., Israel, Germany and even far flung New Zealand.

The situation is most comparable to the SARS pandemic of 2003, which caused Singapore and Hong Kong to slip into recession. According to the Asian Development Bank (ADB), SARS eroded the nominal GDP of East and Southeast Asia by about $18 billion or 0.6 percentage points of the 2003 GDP. In an estimate that the World Bank released in October 2008, a flu pandemic has the potential to wipe out $3 trillion from the world economy.

Fear is already wreaking havoc with stocks and the market in general. Oil prices have dropped by 3% since the threat of a pandemic was raised in the last few days. Trade, which is already in a fragile condition due to the global recession, is especially vulnerable. Nine countries including Russia and China have already imposed bans on pork imports from Mexico, and states in the U.S. like California.

Mexico, of course, has suffered the hardest of setbacks. Food industries have been the worst hit as the Mexican government has ordered restaurants to remain closed to the public allowing them to maintain only a trickling take-out service. This measure is to be followed until May 5th and is expected to affect more than 30,000 businesses. Mexico City wears the look of a ghost town with bars, nightclubs, gyms and cinemas, centers of the famous Mexican jollity, being ordered to shut down.

Just as the 2003 SARS panic drove tourist arrivals down massively by 20% to 70% in the affected countries, Mexico’s tourism industry is already showing signs of waning. In a nation where tourism is the third largest source of income, drawing $13.3 billion into the economy in 2008, the prospect of bulk cancellations or postponement of travel by visitors is extremely worrying. It was only recently that the International Monetary Fund (IMF) predicted that Mexico’s economy would shrink by about 4% this year due to the global recession. The peso had its biggest tumble in six months sinking by about 6.2% in the last two days. Now, Mexico might have to fall back on a $47 billion lifeline of credit, offered by the IMF sometime ago.

But the swine flu outbreak has touched the global economy in various ways, and some stand to benefit.. For instance, shares of pharmaceutical companies that manufacture anti-swine flu medicines like Tamiflu and Relenza have surged. Ultimately, the swine flu outbreak will probably result in a spike in sales of vitamins, over-the-counter cold meds, hand sanitizers and surgical masks. Long simmering immigration issues have also boiled up to the surface with some staunch advocates of tighter immigration rules in the U.S. calling for the closure of the border with Mexico.

The last time a pandemic caused pandemonium was when the ‘Hong Kong flu’ struck in 1968, killing an estimated one million people worldwide. The more recent SARS scare paled in comparison, affecting only 8,000 people worldwide. But this time, the potential of a pandemic striking in tandem with a raging global recession has cast economic shivers globally as well.

 

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