China’s slowdown putting L. America into recession

IMF says rate of growth set to decline for fifth year before 2016 rebound.

October 8, 2015

LIMA, Peru — Latin America’s economy is likely to go into recession this year for the first time since the end of the global financial crisis as China’s slowdown lessens demand for the region’s commodities, threatening to undo recent progress in reducing poverty, the International Monetary Fund (IMF) said.

The Washington-based lender, in a report released at its annual meeting in Peru, said the rate of economic growth in Latin America and the Caribbean is set to decline for the fifth consecutive year before rebounding in 2016.

Pulled down by a deep recession in Brazil and Venezuela, two of South America’s largest economies, and by a smaller contraction in oil-dependent Ecuador, the economies of Latin America and the Caribbean are expected to shrink 0.3% this year.

Venezuela’s economy is predicted to contract 10% as it copes with widespread shortages and the world’s highest inflation, around 200%, the IMF said. IMF managing director Christine Lagarde said she “hopes and prays” for Venezuela to regain its footing, but said the fund’s outlook is hampered by the lack of information from authorities, who haven’t published price or growth data since last year.

“It’s a very dire situation,” Alejandro Werner, the IMF’s top official for Latin America, told The Associated Press in an interview. “It’s very hard to see an economy in the world performing as poorly as Venezuela.”

In what the IMF officials characterized as a reflection of the cash crunch facing the oil-rich nation, Venezuelan President Nicolas Maduro’s socialist government has this year withdrawn more than $1.8 billion from a special holding account all nations have at the IMF.

“We almost never see that because we almost never see a country that reaches that extreme situation because of a lack of foreign exchange availability,” said Werner.
Distortive policies such as heavy foreign exchange controls and unsustainable printing of money to fund government spending are fueling double-digit inflation and depressing economic activity in Argentina, the fund said. The IMF forecasts South America’s second-largest economy to grow just 0.4% this year and contract 0.7% in 2016.

Brazil is projected to decline 3%, depressed by a corruption scandal that has paralyzed reforms needed to curtail years of runaway spending and tame inflation running at nearly 10%.

While Werner described the challenges facing Brazil as daunting he expressed confidence that authorities could rise to the challenge without seeking assistance from the IMF as some economists have suggested it should to stem an outflow of capital that has sent its currency plunging to a record low.

“Consensus has to be built locally,” said Werner. “In no way should we be a substitute for political consensus.”

It’s not all doom and gloom. A stronger US economy and lower commodity prices should help manufacturers in Mexico, Central America and the oil-importing countries of the Caribbean. Dollarized Panama is expected to grow 6% as a multibillion-dollar expansion of the Panama Canal is completed.

But even the region’s best-managed economies in recent years, such as Colombia and Chile, need to brace for a protracted slump in commodity prices and an expected interest rate rise in the US, which is likely to prompt an even faster exodus of capital from the region.

To withstand the turbulence, the IMF recommends policy makers undertake long-neglected reforms to unlock productivity since most central banks and governments in the region already spent their ammunition recovering from the 2008 global financial crisis.

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