Latin America Economic Growth to Slow in 2011 on Inflation, IIF Says

Economic growth in Latin America will fall to 4.5 percent this year from 6.1 percent in 2010 as inflation and rising interest rates curb expansion, the Institute of International Finance said.

Latin America’s growth will be about 4.6 percent in 2012, the Washington-based banking group said in its regional overview, released today during the Inter-American Development Bank annual meeting in Calgary.

Countries in the region including Brazil raised interest rates this month to slow inflation and dampen demand. Uruguay raised its benchmark rate 100 basis points, more than expected, to 7.5 percent on March 23, while Brazil raised its rate 50 basis points to 11.75 percent on March 2. A basis point is 0.01 of a percentage point.

“A monetary tightening cycle has already begun in several of these and we expect other countries to move in the direction during the course of the year,” Frederick Jaspersen, director for Latin America, said in a statement. “This, together with gradual withdrawal of fiscal stimulus, will dampen growth.”

The region is being flooded by external investments, with net inflows of about $237 billion this year, Jaspersen said.

These inflows will continue to strengthen the currencies in the region and capital control measures such as the ones introduced by Brazil will be of little effect, said the IIF, whose members include 430 financial institutions around the world.

“Tightening in fiscal policy would allow interest rates to be lower, thus taking the upward pressure off the real in a more sustained fashion,” the report said.

Regional Banks

Latin American and Canadian banks have strong fundamentals, are “well managed and regulated” and should not be subjected to “suffocating” new rules, said the IIF report.

“Standardized prescriptive rules designed to fix broken systems are simply not appropriate for Latin American banks -- and I can include Canadian ones here too,” said Richard Waugh, chief executive officer of Toronto-based Bank of Nova Scotia (BNS) and vice chairman of the IIF. “Our systems were not, and are not, broken.”

Brazil, the region’s largest economy, will grow 4.8 percent this year, while Mexico will expand 4.5 percent and Chile 6.5 percent, the report said.

To contact the reporter on this story: Fabiola Moura in New York at fdemoura@bloomberg.net Gene Laverty in Calgary at glaverty@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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