LatAm leaders urged to find new growth engines
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Emerging Markets

LatAm leaders urged to find new growth engines

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The president of the World Bank, Jim Yong Kim, is urging Latin American leaders to use this week’s IADB meetings to hammer out a plan to get the region growing again after the commodity price crash

Latin American economies that have been hit by the plunge in commodity prices to historic low levels must find new drivers of economic growth, the head of the World Bank warned on the eve of the IADB meetings.

However, Jim Yong Kim, the bank’s president, acknowledged that the current state of the world economy could make that a difficult task.

He said that policymakers should look to the steps that China had taken to shift its economic model away from investments and exports towards consumption and services in the face of the downturn in demand for commodities and heavy manufacturing.

“The lower commodity prices are really forcing every Latin American economy to think about diversifying its economy,” Kim told Emerging Markets. “While that rolls of our tongues very easily, it is actually quite hard to find new drivers of economic growth.”

The price of oil has plunged from almost $130 a barrel to below $30 since the summer of 2014 and has fallen 26% in the last year. Prices of metals such as copper, gold, iron and zinc that are key to many countries’ growth models have declined 17% over the last 12 months.

In its annual global economic prospects report earlier this year the World Bank cuts its forecasts for GDP growth in Latin America and the Caribbean for 2016 by 2.3 percentage points to 2.5% thanks to a 3.6 percentage downgrade of Brazil.

Kim said that he was “specially concerned” about the slowdown in emerging markets, where growth rates had fallen by almost one percentage point since 2013 — from more than 5% to about 4%. He highlighted the economic contraction in Brazil as a leading factor behind that.

“One of the things I’d like the Latin American countries to think about is that they should think together as a region about potential new drivers of economic growth,” he said.

“What those new drivers of economic growth are is the number one question for Latin American ministers of finance and we work very closely with the IADB and we will take that issue up with them going forward.”

He said the most successful countries were the ones that were being most aggressive in looking for new drivers.

In a report earlier this week Moody’s, the credit rating agency, said that a scenario of lower-for-longer commodities prices meant that many countries in Latin America and the Caribbean would experience a structural shift in their future growth trends.

It said that most commodity exporters in Latin America would see their trend growth rate over the five years to 2020 fall by about one percentage point relative to their growth performance in 2000-15.

Commodity-producing nations are impacted by the oil and metals price shock in a number of ways: not only do lower prices reduce the value of their exports, they also squeeze commodity-related tax revenues and reduce foreign direct investment.

Moody’s anticipates several governments will be forced to cut spending at the expense of economic growth.

“A key driver of the region’s sovereign creditworthiness will be structural reforms to increase productivity and diversify economic activity, as well as fiscal reforms that address expenditure rigidities and enhance revenue bases,” said Renzo Merin, a New York sovereign risk analyst.

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