April 22 (Bloomberg) -- The economy in Latin America and the Caribbean will contract 1.5 percent this year on a drop in commodities prices, and slumping demand for exports and tourism, the International Monetary Fund said.

The contraction will be more severe in Mexico because of its close ties to the U.S., and in Venezuela, the IMF said its World Economic Outlook report released today.

“The decline in commodities prices is pounding large economies in the region -- Argentina, Brazil, Chile, Mexico and Venezuela,” the report said. “The economic slump in advanced economies -- especially in the United States, the region’s largest trading partner -- is depressing external demand and lowering revenue from exports, tourism and remittances.”

Government and company balance sheets were “relatively strong” at the beginning of the crisis, and the region’s economies were less linked to the banking systems in “advanced countries,” so the decline in growth will be less than in emerging European countries, the IMF said.

Inflation in Latin America and the Caribbean will probably slow to 6.6 percent in 2009 from 7.9 percent in 2008, the IMF said. The region’s current account deficit will widen to 2.2 percent of gross domestic product in 2009, from about 0.75 percent in 2008.

Slowing inflation will give countries with “credible inflation-targeting frameworks,” such as Brazil, Chile, Colombia and Mexico, room to cut lending rates further this year to stimulate growth.

The IMF predicts the region’s economy will rebound in 2010, expanding 1.6 percent. In 2009, Mexico will see a 3.7 percent contraction in GDP, while Venezuela’s economy will shrink 2.2 percent, the report said.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net

Last Updated: April 22, 2009 09:00 EDT