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Emerging Markets

Capital inflows set to collapse in regional recession – IIF

The Institute of International Finance (IIF) expects Latin America to register negative growth this year, private capital inflows to decline by more than 50%, and international reserves to contract.

An IIF report to be issued tomorrow forecasts that regional GDP will contract by 0.7% “with substantial risks to the downside as external conditions continue to deteriorate”. Global GDP will suffer a 1.7% drop, the IIF believes.

“Growth is going to be hit very hard,” said Frederick Jaspersen, the IIF Latin America economist.

The impact of global recession on commodity exporters is a factor in the worst performance in decades. The IIF forecasts: a 2.5% decline in GDP in Mexico, which is expected to suffer the most severe recession among the region’s seven largest economies; a 1.2% decline in Argentina; a 0.5% decline in Brazil; Peru (with 3% growth), Colombia (1.6%) and Venezuela (0.3%) to remain in positive territory.

The IIF’s economists are not as bearish as many in the private sector. Morgan Stanley is forecasting – 4.3% growth for the region in 2009. Gray Newman, chief Latin America economist, wrote in a recent report: “Fiscal stimulus is likely to require an important increase in debt financing, precisely at a moment when investor appetite for emerging market obligations appears to be waning.”

The IIF says that regional terms of trade are expected to deteriorate by 10.8% this year, as non-oil commodity prices are projected to drop by an average 16.7% compared to last year. Moreover, net private capital flows are set to fall to $34 billion – less than half of last year’s and less than one fifth of flows in 2007.

Nevertheless, IIF managing director Charles Dallara told Emerging Markets: “Latin America should be resilient this year because its fundamentals are stronger”.

His views were echoed by IMF Western hemisphere director Nicolas Eyzaguirre, who told Emerging Markets: “The region is not going to be a laggard. [It] is better prepared than at any time before.”

The IIF has not issued forecasts for 2010, due to the great degree of “uncertainty”, but Dallara said he expected the region’s economy to recover next year. “But is it important that the IMF and the IDB be given adequate resources to support the region.”

The IIF forecasts a 12.6% drop in the region’s international reserves, as countries start to draw on them to weather the downturn. Venezuela, Argentina and Ecuador are especially exposed, the report says, as they “have overspent their export price windfalls and are pursuing unsustainable macroeconomic policies”.

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