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IMF Warns of Hot Money as Latin America Growth Forecast Climbs

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April 17 (Bloomberg) -- The International Monetary Fund today raised its economic growth forecast for Latin America and the Caribbean on an improved global outlook, warning against an inflow of capital that as recently as 2010 caused currencies in the region to surge.

The Washington-based lender increased its forecast for the region’s real gross domestic product growth for 2012 to 3.7 percent from 3.6 percent in January, also boosting its global estimate to 3.5 percent from 3.3 percent. The IMF kept its forecast for Brazil unchanged at 3 percent as estimates for Mexico climbed to 3.6 percent from 3.5 percent. Peru will lead growth in the region by expanding 5.5 percent this year while Paraguay will slow most and contract 1.5 percent, according to the fund.

The region runs the risk of overheating as the spillover from Europe’s sovereign-debt crisis has had a limited impact on Latin America, the fund said in the report, the World Economic Outlook. The IMF warned against relaxing economic policies as consumer prices rise more than three times faster in South America than in advanced economies this year.

“Policies must be alert to domestic overheating and must build on a strong foundation of prudential measures developed during the most recent periods of robust capital flows,” according to the report. “The region has had difficulty absorbing hot money in the past and this remains an ongoing source of vulnerability.”

Inflation, Policy Balance

Consumer prices will rise an average of 7.4 percent in South America this year, led by 32 percent and 9.9 percent gains in Venezuela and Argentina respectively, the fund said. Prices in Brazil, which is Latin America’s largest economy, rise 5.2 percent this year, down from 6.6 percent rise in 2011.

Mexico, the region’s second-biggest economy, will see average prices rise 3.9 percent this year from 3.4 percent in 2011, the fund said. The country, which has kept its key interest rate unchanged at a record low 4.5 percent for 25 straight meetings, can keep monetary policy at “accommodative” levels if price pressures and estimates hold.

Latin American policy makers should take steps to sustain liquidity without relaxing monetary policy if global financial instability resumes, Nicolas Eyzaguirre, director of the fund’s Western Hemisphere department, said in an April 12 interview. Today’s report echoed that advice, signaling out countries with higher-than-average inflation rates.

“These concerns are particularly acute in Venezuela, where policy has not tightened noticeably and inflation continues at high levels,” according to today’s report. “Similarly, in Argentina, although it is not affected by international credit flows in the same way, high credit growth and high inflation are worrisome.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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