Latin America Is Poised for Slower Growth

September 25, 2013, 5:12 p.m. ET

Latin America Is Poised for Slower Growth

Potential U.S. Taper, Lower Commodity Prices Weigh on Gains

DAN MOLINSKI

BOGOTA—Latin America is poised for one of its slowest economic growth rates in a decade this year, a top official at the International Monetary Fund said Wednesday, as the U.S. signals that its easy-money policies that helped prop up the region could begin to taper off amid a drop in commodity prices. “We’ve already seen a significant slowdown in the region’s economies during the first half of this year,” Alejandro Werner, director of the Washington-based IMF’s Western-hemisphere department, said at a conference in Bogota. “Except for 2009, when Latin American economies shrank due to the global financial crisis, this year will see the lowest growth rate in 10 years.”Mr. Werner’s comments indicate the IMF could slash its official forecast for Latin American growth this year to less than 3% in its October report. The IMF’s May report pegged 2013 growth at 3.4%, up from 3% last year.

The IMF official, speaking to reporters after the conference, also said it is likely the U.S. Federal Reserve took into account how its actions would affect the global economy when it said last week it would continue its yearslong program of buying billions of dollars in government bonds to help boost the U.S. economy.

Most market observers expected the Fed to begin to taper its bond-buying, given that the central bank had previously suggested this was its plan as long as the U.S. economy continued to display a firm recovery path. The Fed’s surprising move to back off on the tapering led some to speculate that its decision-making also took into account how a reduction in bond-buying might affect countries outside the U.S. that were hurt when the Fed first began talking about its plans a few months ago.

“The Fed’s monetary policy responds first and foremost to developments in the U.S. economy, even if, as Chairman [Ben] Bernanke recently said, they watch global developments carefully,” Mr. Werner said. He added that while the IMF supports the idea that the Fed would consider how its decisions impact global markets, it didn’t lobby or try to pressure the Fed in closed-door meetings to keep the bond-buying program at full throttle to support emerging markets that suffered when the Fed began talking about possible tapering several months ago.

The IMF official, who served as Mexico’s deputy finance minister from 2006 to 2010, pointed to disappointing gross domestic product growth in his homeland, Latin America’s second-largest economy after Brazil, as one reason the IMF plans to revise downward its 2013 regional growth forecast. Mexico’s government now expects its economy to grow just 1.8% this year compared with a 3.1% forecast in July.

Latin America enjoyed strong expansion over the past decade, averaging about 4.5%, compared with 2.8% in the 1980s and 1990s. This has allowed millions of people to pull themselves out of poverty and has driven unemployment rates to record lows.

But the bulk of those gains came from external factors, including a boom in demand and in prices of the commodities Latin America produces, such as coal, iron, soy, copper, gold and coffee. The prices for these raw materials have fallen sharply over the past year amid lower demand from China.

Latin American leaders have for decades acknowledged the need to find ways to build economies that could allow the region to maintain high growth rates on its own without relying on erratic commodity prices in global markets.

Mr. Werner said little has been achieved on that front. “The region still depends heavily on the prices of raw materials,” he said.

In Colombia, nearly 600,000 families rely on coffee farming as their only source of income, and prices for the fine arabica coffee beans they produce have plunged to a four-year low and are down 32% in the past 12 months. This drop has led to two major protests this year by coffee farmers who demanded to be compensated with higher government subsidies.

Colombia’s government relented and promised more subsidies.

But the IMF’s Mr. Werner warned that Latin American governments need to keep an eye on public spending as they seek solutions to the slowdown.

Latin America’s “fiscal situation is worse than before the [2008 financial] crisis,” Mr. Werner said, noting that current account deficits are widening.