By Krista Hughes
WASHINGTON, Oct 11 (Reuters) - Latin American countries should not fear currency depreciation as their economies adjust to an environment of lower global liquidity and slower growth in many emerging markets, policymakers said.
Many developing countries have been punished by investors amid expectations that the U.S. Federal Reserve will soon start to ease back on the easy money it has been pumping into the global financial system since the crisis, money which helped fuel bumper capital flows into lesser-known markets.
But at meetings in Washington, the World Bank and the International Monetary Fund urged member countries to embrace the buffer offered by flexible exchange rates and not try too hard to resist a trend to weaker currencies.
Latin America, which suffered from currency crises as recently as the 1990s, was better able to withstand exchange rate fluctuations than in the past, thanks to healthy international reserves, less dollar-denominated debt and independent central banks with a strong focus on inflation, officials said.
'It's a very big change compared to 15 years ago,' Hasan Tuluy, World Bank Regional Vice President for Latin America, said in an interview with Reuters.
'Contrary to before, depreciation is more likely to have a positive competitiveness effect and a positive fiscal effect.'
Since the start of the year, the Peruvian sol is down almost 8 percent and the Brazilian real and Colombian peso have fallen more than 6 percent. Chile's peso has dropped 3.8 percent and Mexico's is down 1.8 percent, according to Thomson Reuters data.
The fall was particularly acute after May, when Fed Chairman Ben Bernanke floated the idea of slowing stimulus later in the year, although currencies gained a reprieve in September when the Fed decided the U.S. economy needed more time to recover.
Colombian Finance Minister Mauricio Cardenas said a rapid increase in borrowing costs in the United States could be a threat to his country's recovery but currency flexibility could act as a buffer.
'The first line of defense for our economies is flexible exchange rates,' he told Reuters.
The World Bank said countries with bigger current account deficits experienced stronger currency depreciation between May and September, suggesting countries more dependent on foreign capital could face greater depreciation pressure if capital flows do swing away from Latin America.
But it said the disruptive influence of currency mismatches, where repayments on once-common foreign-currency debt soar if the local currency weakens, had eased.
Bank accounts in foreign currencies were becoming less common and dollar-denominated loans held by households and firms had fallen to 33 percent by 2008-2009 from 45 percent at the start of the decade, the World Bank said in a report.
Countries had also systematically reduced sovereign debt denominated in dollars to less than 25 percent of gross domestic product (GDP) and inflation targeting by central banks had weakened the knock-on effect of currency depreciation on prices, reducing the threat to inflation.
The IMF said central banks should try to restrict intervention to just smoothing out volatility, not to keep currencies artificially weak, and the recent depreciation had helped bring currencies more in line with fundamentals.
'That's good for the economy as a whole,' IMF western hemisphere division chief Alejandro Werner said.
'We haven't seen that kind of anxiety that maybe we used to see in these economies seven years ago, 10 years ago, 15 years ago, when a move in the exchange rate was a signal that something was going wrong. Now people really understand that an exchange rate can move both ways, and sometimes it overshoots and comes back to a normal level.'
The IMF cut its forecast for Latin American growth to 2.7 percent this year, which would be the weakest in four years. It also cut its 2014 forecast to 3.1 percent - both about 0.75 percentage points below the level of growth expected in April.
Individual 2013 forecasts for major economies ranged from 5.4 percent in Peru to 1.0 percent in Venezuela, where Werner warned that the situation was becoming 'more and more complicated, and that eventually a significant adjustment will be needed'.
Venezuelan importers complain they are starved of greenbacks, while the annual inflation rate hit almost 50 percent last month.
According to the IMF forecasts, Brazil is seen growing 2.5 percent this year, Mexico 1.2 percent and Argentina 3.5 percent.
Both the IMF and the World Bank warned, however, that currency depreciation was no substitute for the structural reforms needed to boost productivity and competitiveness.
'The big challenge is the productivity agenda, you need to be able to get a better return on your effort, each peso or each dollar of investment needs to yield a better return, and for that you need to go back to the basics,' Tuluy said.
(Additional reporting by Alonso Soto; Editing by Chizu Nomiyama) Keywords: IMF/LATAM
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