MercoPress. South Atlantic News Agency

IMF tells Latam to be prepared for a “triple shock”, in the worst of scenarios

Eyzaguirre said “relatively high” commodity prices are likely if EU and US contain their crises

Latin American policy makers must be prepared to use interest rate cuts and consider fiscal measures to protect their economies in the event that the global economy stalls, the International Monetary Fund said.

Should recessions in Europe and the US materialize and spill over to Asia, commodity producers in the region may face a “triple shock” from weaker terms of trade, declining exports and tighter global credit markets, the IMF warned in a report released this week.

Fiscal easing should only be utilized if the “severe downside risks” of lower crude oil and metal prices is induced by a slowdown in Asia, and Europe’s debt woes unleash a credit crunch similar to that which followed the 2008 bankruptcy of Lehman Brothers Holdings Inc., the report said.

“Given the complexity and uncertainties surrounding the global economy, policy makers must stand ready to adjust policies should downside risks materialize,” according to the 93-page report.

“In countries with credible monetary frameworks, where inflation pressures have abated, monetary policy can be more flexible, serving as a first line of defense.”

Increased risk aversion, which wiped 10 trillion dollars off global equities in the third quarter, has had a limited effect on the region’s growth prospects so far, and it’s premature for governments to loosen policies, as fiscal positions weakened by the 2008 crisis need to be rebuilt, the IMF said.

The IMF predicts Latin American economic growth will slow to 4.5% this year and 4% in 2012, compared with a 5% expansion in the first half of this year.

The economies of Mexico and Brazil will each grow 3.8% this year, down from forecasts of 4.5% and 4.6% in the IMF April report. Mexico, Brazil and Venezuela will lag behind the rest of the region in 2012, with 3.6% growth each, while Panama will post the fastest expansion, 7.2%.

“Strong” growth in Latin America and “relatively high” commodity prices are likely provided Europe contains its debt crisis, the US resolves its budget problems and Asia avoids a slowdown, said Nicolas Eyzaguirre, director of the International Monetary Fund’s Western Hemisphere department.

“China has the capacity to keep stimulating its economy in the short term and therefore we think the raw material prices will remain relatively interesting,” Eyzaguirre said at an event in Lima. “In the medium term, if the US and Europe don’t bounce back, nor China’s exports to these markets, raw material prices could go belly up.”

Commodity exports represented 10% of South America’s GDP in 2010, up from 6% in 1970, according to the report.

Latin America would be among regions most affected by the spillover from a banking crisis in Europe, the IMF said. Chile would be the most affected if Europe’s banks take higher-than- expected losses on loans from the European periphery, followed by Brazil and Mexico, the report said.

The IMF urged governments to maintain their guard against overheating. While slower global growth has reduced such a risk, there’s still danger that near-zero interest rates in advanced economies could spur capital flows to Latin America if the European debt crisis is contained.