Mexico could keep shrinking until 2010

MEXICO CITY (Reuters) - Mexico's economy will shrink in the third quarter from a year earlier and might not grow again until the first quarter of 2010, Finance Minister Agustin Carstens told Reuters on Friday.

Speaking at the Reuters Latin American Investment Summit in Mexico City, Carstens said Mexico's recession was extending longer than previously expected. The country's economy is in freefall because exports to the United States have collapsed.

"The two hardest quarters will be the first and second of this year and afterward the GDP will continue to be negative in annual terms," Carstens said. He added that there will be no growth "until the fourth (quarter of this year) or maybe the first quarter of next year."

Carstens also said the exchange market for Mexico's peso currency is working "rather well" since the government and central bank began selling dollars from the country's currency reserves in daily auctions and intervening more directly.

"The truth is I think the market is working quite well," Carstens said. "What we are interested in is having orderly markets where there's volume and liquidity."

The minister, who sits on a commission that decides on interventions, declined to say whether Mexico would halt its daily dollar sales to boost the peso.

The Mexican currency plunged last year as the economy slipped and investors retreated from emerging markets. But it has strengthened to nearly 13 to the dollar in recent days.

Mexico's economy, which relies heavily on U.S. demand, contracted 1.6 percent in the first quarter from a year earlier and a much steeper drop is expected in the period between April and June.

The swine flu outbreak that killed dozens of people in Mexico and shut down the economy for five days is expected to shave up to half a percentage point from gross domestic product in 2009.

(Additional reporting by Luis Rojas Mena and Alistair Bell; Editing by Dan Grebler)