Exporters Watch Peso With Concern

By DON LEE

Aug. 22, 1998 12 AM PT

TIMES STAFF WRITER

Turbulence in stocks and currencies across Latin America this week has sparked serious concerns among California trade officials and exporters who have increasingly come to depend on that region, primarily Mexico, to offset the slowdown in Asia and keep the state’s vital exports growing.

As the Mexican peso tumbled Friday amid worries that the financial crisis in Asia and Russia is now spreading to Latin America, California companies generally maintained a stoic confidence in Latin America, saying they have not yet felt a noticeable effect and that they would continue to shift resources to develop those emerging markets.

“We’ve gone through this before and we’re there to stay,” said Yolanda Escobedo, director of international marketing at HydroCal Inc. of Laguna Hills, a waste water treatment equipment maker with about $2 million in annual sales. This year, she said, the company’s shipments to Mexico and South America overtook those to Asia, and HydroCal has been diverting advertising dollars from elsewhere to beef up the Latin American market.

“We have completely turned our heads more toward Latin America,” she said.

But that shift may prove to be too late for some, if Latin American nations, under pressure from competition from cheaper currencies in Asia and low oil prices, cannot defend the latest threat to their economic stability. Plunging Latin American currencies mean U.S. goods become more expensive for those nations’ consumers.

“The problem with these things is that we won’t know until it happens,” said Richard O’Brien, economist at Hewlett-Packard Co., the computer maker based in Palo Alto. “Mexico is probably twice as important to California as it is to the rest of the country. If things do weaken significantly, we’re going to feel it more.”

Indeed, California’s economy has become even more intertwined with Mexico’s. As Mexico has bounced back from its currency problems in 1994, the country’s economy has grown steadily and strongly, opening up markets for many California manufacturers.

Asia accounts for about half of California’s merchandise exports, but Mexico has emerged as the state’s second largest market after Japan, in the last year overtaking Canada and financially crippled South Korea.

The state’s exports of goods to Mexico surged by 31% in the first quarter of this year, the latest available data, to $3.2 billion. That followed growth rates of 33% in 1997 and 23% in 1996. There is no clear indication yet that California’s exports to Mexico have slowed in recent months, although the latest national data showed a very slight decline in June.

“In the last year, our growth to Mexico was more than enough to offset all of the losses to Korea and Japan put together,” said Bruce Smith, economist at the state Department of Finance. He said exporters should be prepared for slower growth in Mexico. “They’ve gone through three years of strong growth, we always expect a pause after strong growth.”

California’s exports to Mexico have been fueled by rising demand for electronics and industrial machinery and computer equipment, partly from U.S. companies that have established factories there to take advantage of the North American Free Trade Agreement.

California does little trade with the rest of Latin America, although exporters in the state have sought to increase business in South America since Asia’s troubles surfaced last fall.

Lynn Reaser, an economist at NationsBank in Florida who tracks California’s economy, said Mexico’s more diversified, stronger economy is better positioned to weather the crisis than Venezuela and some of the other Latin American countries. But after seeing the Mexican peso fall at one point Friday by as much as 6%, Reaser said Mexico too is vulnerable.

“I think we’re at a critical juncture,” she said, noting that the next couple of weeks will tell. For California businesses, she added, “They should be worried. A substantial devaluation reduces purchasing power of Latin American countries and that would diminish their ability to import products from California. . . . That would have significant ripple effects on California.”

That is Tom Chung’s worry as well. Chung, president of Tri-Net Technology Inc., a Walnut-based maker of computer networking switches, said that in the short term he may benefit from the peso’s plunge. Earlier this year, Chung established a factory just across the Mexican border. The peso’s drop means it will cost him less to pay those workers’ wages.

But Chung said he was concerned about weakness spreading to Mexico and the rest of Latin America, which could dampen markets there. “At this moment it doesn’t effect us,” he said. “But we are intending to increase our exports to South America.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Leading California Export Markets

A look at the state’s leading export markets in 1997 illustrates how Mexico took up some slack for lost exports to Asian countries hit hard by the financial crisis there. Top five California export markets in 1997:

Japan:

1997 exports, in billions: $17.5

Percent change from 1996 to 1997: --7.5%

Mexico:

1997 exports, in billions: $12.1

Percent change from 1996 to 1997: +33.0%

Canada:

1997 exports, in billions: $11.4

Percent change from 1996 to 1997: +6.1

South Korea:

1997 exports, in billions: $7.0

Percent change from 1996 to 1997: --17.9