WASHINGTON (Reuters) - Latin American countries will have to tighten their belts as the rising cost of capital and lower commodity prices dampen growth and force countries to do more to drive economic activity, policymakers warned this week.
Both the World Bank and International Monetary Fund expect slower growth in the region this year than last year in the face of weaker Chinese growth slowing demand for commodities and tighter financial conditions as some central banks wind down stimulus.
The IMF expects Latin America's economy to expand 2.5 percent this year, which would make a fourth straight year of slowing growth.
"The region is clearly exiting from a period of high growth, above all in the southern cone," IMF Western Hemisphere chief Alejandro Werner said during the global lender's spring meetings.
International experts say Latin American countries, seasoned veterans of both home-grown and global financial crises, should generally withstand turbulence surrounding the gradual normalization of easy money policies in advanced economies such as the United States.
But how well will depend on the state of each country's economy and its appetite for reforms to boost productivity, increase competitiveness and support investment.
"We all have to acknowledge the growth will not be fostered by excess liquidity or cheap access to funding; growth has to be created from within and that's where structural reforms are always useful," Mexican Finance Minister Luis Videgaray said in an interview with Reuters.
Some countries have already taken steps. Mexico is in the midst of a package of structural reforms of areas including banking, taxation and energy, Colombia has announced fiscal reforms and Chile's new government plans an overhaul of education.
But others like Brazil and Argentina, with growth buoyed by China's demand for raw materials, have had less incentive to overhaul their economies. The IMF expects growth in Brazil, Latin America's biggest economy, to slow to 1.8 percent in 2014.
Brazilian Finance Minister Guido Mantega took issue with the forecast, saying the IMF was too pessimistic. Central bank governor Alexandre Tombini said Brazil was comfortable with its strategy of building up reserves and then using them for sterilized currency market intervention when needed.
"We have found our strategy to ride out these global financial cycles," he told a Brookings Institution event.
Brazil, Mexico and Argentina, as members of the Group of 20 bloc of emerging and developed nations, have signed up to a pledge to boost growth by 2 percent over the next five years through new structural reforms - Australian Treasurer Joe Hockey, who is chairing the G20 meetings this year, warned on Friday that reheated initiatives would not do.
Other Latin American countries have to follow suit, no matter how politically painful, the IMF and World Bank said.
"I believe there is widespread consensus across the region in the need for modernizing our infrastructure and adapting our educational systems to foster talent and innovation," said World Bank chief Latin America economist Augusto de la Torre, describing low productivity as the region's "Achilles Heel."
"This is a slow and complicated process, and results won't be seen overnight, but it is key to reach national agreements, above political sensibilities."
The World Bank said a test of countries' exposure to a tightening of international financial conditions and lower commodity prices showed those with a strong focus on targeting inflation were best-placed to counter such shocks with interest rates, including Colombia, Chile, Mexico and Peru.
Brazil had less room to absorb shocks with monetary policy, given that persistently high inflation had forced it to ratchet up interest rates, currently at 11 percent, the World Bank said.
IMF's Werner warned the effect of tighter monetary policy in advanced economies could be "acute" in countries with large current account deficits, high inflation and limited domestic policy space.
"Those countries that have a higher debt level, shorter-term debt and more volatile capital flows will have greater challenges than those that have lower financing needs, smaller current account deficits and better liability structures," he said.
Reporting by Krista Hughes; Editing by Andrea Ricci