IADB cautions Latin America; growth seen up 3.6 pct

Sun Mar 18, 2012 8:59am EDT

* Mix of commodities exports crucial if prices fall

* Foreign banks could shed Latam assets in downturn

MONTEVIDEO, March 18 (Reuters) - The economy of Latin America and the Caribbean should grow 3.6 percent this year, down from recent rates above 5 percent as slower expansion in China, a soft recovery in the United States and debt woes in Europe weigh on the global economy.

The Inter-American Development Bank, in its latest annual outlook released on Sunday, said the region's fortunes would depend in large part on prices for commodities and demand from its biggest buyer - China.

Credit pressures in Europe could also prompt foreign banks to shed assets in the region, while local currencies could experience excessive appreciation if yield-seeking investors pour short-term cash into local markets, the IADB said.

"The biggest risks to Latin America are not internal ... it's more about what happens outside Latin America," IADB President Luis Alberto Moreno said.

Metals prices would face a more severe hit from a sharper-than-expected downturn in global growth than would grains prices because demand for food is more resilient, the report said.

"If China's growth falters, prices for metals such as copper, particularly important for Chile and Peru, may fall by more than a commodity aggregate, while grains prices, important for Argentina and Brazil, would fall by less," the report said.

Chinese Premier Wen Jiabao cut China's 2012 growth target to an eight-year low of 7.5 percent and vowed to wean the economy off dependence on government-backed infrastructure and exports while boosting consumer demand.

IADB economic modeling suggested that commodity prices would fall on average by 30 percent if Chinese growth rates dropped by 3 percentage points. While grain prices would fall less than 30 percent under such a scenario, copper prices may plummet by some 48 percent from 2011 levels, the report said.

The International Monetary Fund estimates that net commodity exports account for 10 pct of economic output in South American countries, and has urged countries to be prepared for a possible bust in prices. Copper prices have risen more than 12 percent so far this year to more than $8,500 a tonne.

Peru, a major gold producer, is somewhat insulated from drops in copper prices because gold prices, already near records, often rise during periods of economic uncertainty.

ASSET SALES?

Another concern is excessive currency appreciation that undermines the competitiveness of exports and drives up inflation by causing depreciation when hot-money flows leave.

"The recent period of capital inflows presents potentially dangerous characteristics," the IADB said.

The report also said a deterioration in the euro zone economy would likely spark further fire sales of banks in Latin America, many of which are owned by Spanish banks, although that was not its baseline scenario.

If there were a severe recession this year and next, it could prompt further European sovereign credit rating downgrades, a drying up of liquidity, more pressure on banks, and asset sales.

"If such assets consist of entire banks with management in situ and investment funds are unlimited, then such sales may have a limited impact on the region," the IADB said.

"However, if institutions are dismantled and relationships between borrowers and lenders are severed - the very essence of banking - or if only limited funds are available to purchase those assets, then such sales could have significant negative effects."

Several multinational banks have sold or split off their operations in Latin American countries. Spain's Santander is selling its Colombian unit and a stake in its Chilean operations. Dutch ING is selling most of its Latin American operations, and HSBC has agreed to sell its Mexican and Argentine insurance businesses. (Reporting by Krista Hughes and Terry Wade; Additional reporting by Antonio de la Jara; Editing by Peter Cooney)

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