Latin America Should Exit Fiscal Stimulus First, IMF Says

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By Joshua Goodman

Oct. 23 (Bloomberg) -- Latin American and Caribbean countries should unwind their fiscal stimulus measures before addressing monetary policy as economic recovery in the region gains momentum next year, the International Monetary Fund said.

The IMF, in a report on the region's economic outlook, reiterated its forecast for regional growth of 2.9 percent in 2010, after an expected 2.6 percent decline this year. Mexico, the country hardest hit by the crisis, will grow 3.1 percent in 2010, less than the 3.3 percent the IMF estimated Oct. 1 at its annual meeting in Istanbul. Colombia will grow 0.3 percent instead of contracting by that amount.

Policy improvements such as lower debt levels and flexible exchange rates helped shield Latin America and the Caribbean from the financial crisis, the IMF said. Had they not been in place, the region probably would have lost an additional 4 percentage points of GDP, based on the experience of previous global recessions, the IMF said. Commodity exporters, including Brazil and Chile, are likely to rebound faster and withdraw stimulus earlier, according to the report.

"A few countries may soon be facing strong capital inflows, and at some point could experience stronger currencies and even overheating," said the report, entitled "Crisis Averted-- What's Next?." "This would speed up the need to remove stimulus and is another reason for reversing fiscal easing earlier than monetary easing."

Several countries used savings accumulated during the past decade's commodity boom to cut taxes, boost public spending and help buffer the poor from the worst of the crisis, the IMF said.

Countercyclical Policies

Room to implement such countercyclical fiscal policies is limited in many countries facing high debt levels, and more work is needed to prepare for future external shocks, the report added.

While countries were better prepared for the crisis, they may still suffer adverse consequences such as restricted access to international capital markets due to growing debt and weak consumer demand in the U.S.

Foreign direct investment, which the IMF forecasts will slow to $72 billion this year from $125 billion in 2008, is unlikely to return to pre-crisis levels for "some time," the report said.

Growth will depend more on domestic spending than exports and will pick up more slowly in net commodity importers, especially countries in the Caribbean and Central America that are dependent on tourism and immigrant remittances.

Brazil, with the region's largest domestic market and a diversified export base, will lead the recovery with growth of 3.5 percent in 2010 after shrinking an estimated 0.7 percent this year. Venezuela is the only major regional economy expected to contract next year, shrinking 0.4 percent, the IMF said.

Argentina IMF

Argentina yesterday said it would re-open an offer to restructure $20 billion in defaulted bonds in a bid to regain access to international capital markets for the first time since it stopped payment on $95 billion in bonds in 2001.

As part of that process, Economy Minister Amado Boudou has said repeatedly he wants to improve relations with the IMF.

Argentina has blocked the IMF from completing a so-called article IV consultation of its economy since 2006. Boudou yesterday said he wouldn't allow any IMF mission to "act like a viceroy" and question the government's policies.

Nicolas Eyzaguirre, the IMF's Director for the Western Hemisphere, told reporters Oct. 19 in Washington that the IMF was in a "flexible mood" in its attempt to re-engage the government in talks. Argentina, like all IMF members, must undertake the periodic review though it isn't required to publish its findings, he said.

"This is not an auditing," he said. "What we do is hear directly from authorities what is their policy intention framework going forward and to seek from other members of the country their own views about those programs."


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