IMF says Latin America at risk from deeper Chinese slowdown

MEXICO CITY (Reuters) - Latin America's regional recession could worsen if China's economy slows more than expected and hits commodity exporters, the International Monetary Fund said on Wednesday.

Latin America has been hurt by slowing global growth, lower commodity prices and tighter global financial conditions. Economic activity in the region is projected to contract by 0.5 percent in 2016, the fund said in an annual report.

A deeper Chinese slowdown could drive the contraction in Latin America to around 1 percent this year, the report said.

The downturn is being driven by Brazil's worst recession in over a century. The IMF projects Brazil's economy will contract 3.8 percent this year after an equally deep slump last year.

The Washington-based fund noted that political uncertainty in Brazil, where President Dilma Rousseff is likely to be suspended from office in mid-May pending a Senate trial for allegedly breaking budget rule, could delay a recovery in investment.

Meanwhile, the outlook for growth in Mexico, Latin America's No. 2 economy, and Central America remains "relatively robust" due to their links to the United States.

However, persistent weakness in U.S. industrial production is a risk to the IMF's estimate for a 2.4 percent expansion in Mexico this year, the report said.

Higher debt in Latin America has curbed governments' ability to boost growth with public spending while infrastructure investments have trailed developments in Asian countries that the region competes with in export markets, the report said.

Nevertheless, the impact on inflation from big currency depreciations seen across the region has been less than in the past due to more flexible exchange rate regimes and stronger macroeconomic frameworks, the fund added.

Amid concerns that higher U.S. interest rates and global financial volatility could spur outflows from the region, the IMF said there may be a need for new financing mechanisms, such as IMF credit lines that would cut reliance on costly reserves.

Currently both Mexico and Colombia have credit lines with the IMF that were extended due to the countries' track record of responsible fiscal policies.

(Reporting by Michael O'Boyle; Editing by Frances Kerry)

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