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IMF cuts Latin America GDP forecast as Brazil, Mexico falter

Published: Wednesday, July 29 2015 5:49 a.m. MDT

IMF Managing Director Christine Lagarde, right, meets with Sao Paulo Governor Geraldo Alckmin at Bandeirantes Palace in Sao Paulo, Brazil, Friday Dec. 2, 2011.  (Andre Penner, Associated Press) IMF Managing Director Christine Lagarde, right, meets with Sao Paulo Governor Geraldo Alckmin at Bandeirantes Palace in Sao Paulo, Brazil, Friday Dec. 2, 2011. (Andre Penner, Associated Press)

RIO DE JANEIRO — The International Monetary Fund reduced its growth forecast for Latin America and the Caribbean as weaker commodity prices threaten to further sap strength from the region's two biggest economies.

The Washington-based lender cut its 2013 gross domestic product expansion forecast for the region to 2.7 percent from 3 percent in July, which would be its worst performance since the aftermath of Lehman Brothers Holdings Inc.'s bankruptcy in 2008. Mexico's growth will ease this year from last while Brazil's GDP in 2014 will climb slower than previously forecast, the IMF said in a report Tuesday.

The change in outlook comes as the IMF forecasts the U.S. and Chinese economies will moderate this year, which would reduce demand for raw materials and manufactured exports from Latin America. Policy makers must balance their economies by protecting social and public investment programs while ensuring fiscal expenditures don't fan inflation, the IMF said.

"Downside risks dominate the outlook," according to the lender's World Economic Report. "Strengthening competitiveness, raising productivity, and increasing saving and investment rates remain critical medium-term challenges."

The IMF cut its 2013 Mexican growth forecast to 1.2 percent from 2.9 percent in the previous report after lower government spending, a decline in construction and sluggish U.S. demand caused GDP growth to slow in the first half of this year. That's below the central bank's outlook for 2 percent to 3 percent growth for 2013. Growth will accelerate to 3 percent next year, the IMF forecast.

The fund kept unchanged its 2.5 percent growth forecast for Brazil this year while reducing its 2014 estimate to 2.5 percent from 3.2 percent. Inflation pressures persist in Latin America's largest economy and threatens to damp consumption, making interest rate increases "appropriate," according to the report.

Brazil's central bank has boosted the benchmark Selic rate 175 basis points, or 1.75 percentage points, this year after inflation twice exceeded its 2.5 percent to 6.5 percent target range. Policy makers will increase the Selic another 50 basis points to 9.5 percent in their meeting today and tomorrow, according to the median estimate of 46 analysts polled by Bloomberg.

Policymakers in the region also need to protect financial stability as the prospect of tighter monetary conditions in the U.S. may lure capital to more developed markets, the IMF said.

"Prudential oversight of the financial system needs to be stepped up, with the goal of identifying and addressing potential vulnerabilities," according to the report.

_ With assistance from Nacha Cattan and Eric Martin in Mexico City.

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