IMF warns LatAm growth recovery losing steam

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Friday, January 25, 2019

Economic activity in Latin America and the Caribbean continues to rise, but at a slower rate than previously anticipated, according to the IMF.

In a blog entry Friday, the organization's Western Hemisphere chief Alejandro Werner said the region's GDP growth recovery "is losing momentum", impacted by "the weakening global economy and rising policy uncertainty".

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IMF forecasts 2% GDP growth in 2019 and a 2.5% expansion in 2020 - "still well below peer countries in other regions."

Fiscal policy - which Werner said has become less accommodative - has led to roughly half of Latin American countries reducing their primary deficits as a percent of GDP in 2018. "But this has not been enough to put public debt on a downward path - except for Argentina," wrote Werner.

Policy uncertainty has increased following major presidential elections last year, said the IMF official, citing for example Mexico's decision to cancel a partially built international airport and some backtracking in energy and education reforms.

Werner warned that a narrow window for Latin American governments to complete reforms is closing due to slower global growth. He added that countries would need to press forward with debt and deficit reduction to ensure debt sustainability.

Looking at Argentina, Werner said the government's stabilization plan "should allow a gradual fall in interest rates, which together with higher real wages and stronger exports is expected to trigger a recovery of economic activity starting from the second quarter of 2019."

He noted that Brazil's new market-friendly government has helped to boost business confidence and improve growth prospects in the near-term, adding that country must now work to reform the pension system and shrink its budget deficit.

Werner said Chile's economy will perform strongly in 2019 and 2020, while adding that implementation of structural reforms would lead to an improved GDP outlook.

IMF sees Peru's GDP staying near 4% growth this year and next, with "robust private domestic demand offsetting a gradual fiscal reduction," Werner said.

He also acknowledged the ongoing economic and humanitarian crisis in Venezuela, saying that GDP is set to fall this year to half of what is was in 2013. Hyperinflation and massive outward migration look to further intensify amid evolving political developments, Werner added.

In the case of Mexico, Werner stressed that adherence to fiscal responsibility and debt reduction would be crucial ahead, as well as advancement on structural reform implementation.

Looking at Central America, Werner pointed to Costa Rica's fiscal problems and their potential impact on growth, as well as the negative growth impact from Nicaragua's ongoing social and political unrest.

The IMF sees economic activity picking up for Caribbean nations in 2019-2020, "thanks to robust tourism from the US, reconstruction from the devastating hurricanes of 2017 in some tourism-dependent countries, and higher commodity production in some commodity exporters."