Slow Latin America Growth Won’t Meet Social Demand, IDB Says

Economic growth in Latin America is slowing to a pace that is insufficient to meet social demands for better public services from its new middle class, the Inter-American Development Bank said.

The region will grow from 3 percent to 3.5 percent annually over the next years, compared to an average 4.9 percent in the five years prior to the 2008 financial crisis, the IDB said in a report distributed yesterday at its annual meeting in Costa do Sauipe, Brazil. The region has become more vulnerable to external shocks because governments increased spending and companies took on more foreign debt, the bank said.

“Latin America will grow below the performance of the global economy,” Jose Juan Ruiz, IDB chief economist, told reporters after presenting the report yesterday. “That is not enough to meet expectations and social challenges.”

In Brazil, the world’s second biggest emerging market, more than 1 million took to the streets last year to protest for better public schooling and health care and cheaper bus fares.

In Venezuela, demonstrators have clashed with police over the past two months as the fastest inflation in the world is fueled by shortages of everything from milk to toilet paper. Two people died this weekend in the South American country in incidents related to protests, the government said.

U.S. Tapering

Assuming the U.S. tapering of its monetary stimulus is implemented without surprises, economic growth in Latin America will be 3 percent in 2014, according to an IDB estimate. That is close to the fastest pace the region can grow without stoking inflation, the bank said.

The MSCI Emerging Markets Latin America Index, which tracks the major stock exchanges in the region, has lost 16 percent over the past year, while the MSCI AC Asia Pacific Index gained 2.8 percent.

The growth forecast could be undercut by an accelerated unwinding of monetary stimulus in the U.S. and a protracted slowdown in China, according to the report. Efforts to boost growth through increased spending led to a further deterioration of public finances in 2013, the bank said.

“There is less space now to respond if there is a negative shock,” IDB economist Andrew Powell, who coordinated the study, said in an interview by phone from Washington.

Slowest Pace

After expanding at twice the speed of the 1980s for the last decade, economies in Latin America last year increased 2.4 percent, according to data compiled by Bloomberg. That was the slowest pace since 2009, as policy makers struggled to find new engines of growth amid waning commodity prices and sputtering global demand.

To counter slower growth, governments have increased spending, the IDB said. Countries in the region on average saw their budget balance deteriorate by 3 percentage points of gross domestic product from before the 2008 crisis. This helped drive debt ratios to 42 percent of GDP from 36 percent in 2008.

Brazil’s credit rating was cut by Standard & Poor’s on March 24 to BBB-, the company’s lowest investment grade, from BBB. Sluggish economic growth and an expansionary fiscal policy are fueling an increase in the country’s debt levels, S&P said.

Only three of 21 countries improved their primary budget balances in 2013: Uruguay, Honduras and Nicaragua, the IDB said.

‘Much Harder’

“Economies, if they want to sustain high growth, they have to grow by investing more and this will be much harder,” the International Monetary Fund Western Hemisphere Director Alejandro Werner said over the weekend during an event on the sidelines of the IDB meeting. “We are seeing a slowdown in the rate of growth in Latin America, especially the Southern Cone, that will have a semi-permanent nature in the next few years.”

A credit boom over the past decade, which has been financed in part by increasing international borrowing, helped fuel growth in Latin America. As higher returns in advanced economies reduce demand for financial assets in the region, possible rapid currency depreciation may produce knock-on effects in domestic financial systems, the IDB said.

IDB data indicate that companies relied more on foreign bond markets after the 2008 crisis. Banks and corporations in Brazil, Chile, Colombia, Mexico and Peru and their subsidiaries abroad increased their foreign bond sales to $343 billion in the four years through the third quarter of 2013, up from $97.6 billion in the four years through the third quarter of 2008.

Increased bond sales in foreign currency increases vulnerability that could create liquidity squeezes in financial sectors and potential solvency issues for companies, the IDB said.

“Though the region’s economies are on a more sound footing than they were during the shocks of the mid-1990s, most countries are in a weaker position than they were in 2007, prior to the onset of the Great Recession,” the IDB said.

To contact the reporter on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Joshua Fellman, Randall Woods

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