Latin America's (LatAm) economy will shrink by 1.5 per cent in 2009, ending six years of strong growth as the world economic crisis slashes financing and demand for exports - though dealing a softer blow here than in many regions, the International Monetary Fund (IMF) said Wednesday.

The global credit crunch has drained access to capital across Latin America and the Caribbean, increasing borrowing costs at local banks, as well as for companies and governments looking to raise cash with bonds, the IMF said in its annual World Economic Outlook report.

Stimulus spending

Without access to credit, consumption and industrial output have tanked even as government stimulus spending swells.

The global downturn has also reduced demand for oil, metal and farm exports, stalling economic activity across the commodity-reliant region.

Growth is expected to slow most sharply in Mexico, which sends about 80 per cent of its exports to the United States (US); in Venezuela, which relies on oil for some 93 per cent of its exports but has seen crude prices plunge; and in small Caribbean countries that depend heavily on tourism and money sent home from migrants in the US, the IMF said.

Yet, compared to recession-wracked economies in the US and Japan, and to emerging markets in Europe and nearby former Soviet states, Latin America is faring relatively well, the Washington-based lender said.

Scarred by their own banking and debt crises in the 1980s and 1990s, many of the region's countries entered the current downturn with tougher financial regulations, fewer ties to advanced economies' banks, and 'relatively strong' public-sector balance sheets, including significant currency reserves, balanced budgets and low levels of foreign debt, according to the IMF.

Those resources have, for example, allowed Brazil to offer tax breaks and emergency credit lines to exporters to ease liquidity and support growth.

The downturn is, meanwhile, expected to reduce inflation to 6.5 per cent in Latin America this year, from eight per cent in 2008, freeing central banks in Brazil, Mexico, Chile, Peru and Colombia to continue cutting interest rates to boost growth.

"Most countries are weathering the storm well, relative to earlier experiences with global turbulence, thanks to improvements in policy frameworks and balance positions," the IMF said, predicting that the region will post a 'modest recovery' of 1.6 per cent growth in 2010.

Still, a continued unwinding in the US could put that rebound at risk, depressing capital flows at the very moment that governments may most need to raise cash to finance stimulus spending.

Downturn

While policies in Brazil, Chile, Colombia, Mexico and Peru have kept borrowing costs from climbing sharply, Argentina, Ecuador and Venezuela have seen debt spreads soar.

Latin American equities have also been battered by the downturn, which sent local currencies plunging as foreign investors dumped assets to cover losses at home or to take refuge in the US dollar. Brazil's real and Mexico's peso have each lost about 20 per cent of their value against the dollar since world stocks plunged in September, boosting losses for some of the region's biggest companies, which had placed steep derivatives bets against the dollar when their currencies were strong.

AP