MercoPress. South Atlantic News Agency

Lower commodity prices and poor infrastructure cut Latam growth prospects says IMF

With heightened capital flow volatility, safeguarding financial stability is a key policy priority for Latam

The International Monetary Fund on Tuesday cut its economic growth forecast for Latin America and the Caribbean, blaming, at least in part, poor infrastructure and lower commodity prices. In its latest World Economic Outlook report, the IMF noted that emerging markets generally were facing a dampening of growth amid “less supportive external conditions and domestic supply-side constraints.”

The multilateral organization lowered its gross domestic product growth forecast for the region to 2.7% in 2013 and to 3.1% in 2014. Both numbers were revised down 0.3 percentage point from the July WEO update.

Overall, the IMF stressed that “policies should aim at improving the quality and sustainability of growth and reducing domestic financial volatility.”

It added that, although downside risks remained, adjusting exchange rates to take into account changes in fundamentals could offset tougher financial conditions with continued gradual fiscal consolidation an additional positive element.

“With weaker growth prospects and heightened capital flow volatility, safeguarding financial stability is a key policy priority,” the report said, blaming “infrastructure bottlenecks” for slowing down the region.

Turning to the region's largest economy, the IMF said that “in Brazil, growth picked up on the back of stronger investment, including inventories.”

The IMF projected Brazil's economy would expand 2.5% in 2013, unchanged from its July estimate growth, and cut its 2014 forecast by 0.7 point to 2.5%.

For the Latam region, the IMF said it saw inflationary pressures as “broadly contained” while regarding growth as moderating “to more sustainable levels” with strong wage growth and relatively low jobless rates aiding consumption while credit growth was set to remain “relatively strong.”

On debt, it said that “external current account deficits are projected to widen further in 2013 as commodity prices have softened and domestic demand continues to outpace output.”

The IMF said it saw growth in commodity-exporting countries remaining solid, (Colombia, Peru, Chile and Bolivia) except for major oil producer Venezuela, “where energy shortages and exchange controls are curtailing economic activity.”

Still, the Fund warned about the region's “strong dependence on commodities” and the risk of a sharp drop in commodities prices. It suggested slower growth in major economies outside of the region, especially from China, could reduce demand, slicing regional growth by about a half percentage point.

The IMF also criticized Argentina, where although a strong harvest had boosted the economy, “activity continues to be constrained by foreign exchange and other administrative controls.”

Overall, the IMF said that global growth is in ”low gear”.

The IMF recommends Latam countries to implement policies based on realistic assessments and warns of the ‘danger of keeping unsustainable high growth rates through fiscal stimuli’ which weakens public finances and the current account deficit.

The world economy does not leave much margin to counter and thus countries must proceed “to a gradual fiscal consolidation that protects crucial public investment and social expenditure”

In the medium and long term IMF recommends consolidating competitiveness in Latam, improving productivity and increasing savings without reducing investment.

Paraguay leads the region in economic growth with a spectacular 12% this year declining to 4.4% in 2014. The land-locked country is followed by Peru, 5.4%; Chile, 4.4% and Ecuador, 4%.

Disappointing however is Mexico, Latam’s second largest economy will is forecasted to grow 1.2%, down from 3.6% last year, although it could reach 3% in 2014, boosted by manufacturing and US demand, greater government spending and some structural reforms.