Lackluster growth prospects—reflecting low productivity and investment, and shifting demographics—and persistently high financing costs pose important challenges, given the high levels of debt. The study finds that high financing costs largely reflect domestic factors, including low government effectiveness, an unfavorable history of stress and defaults, and lower foreign exchange reserves. The combination of low growth and high interest rates means higher debt burdens in coming years for Latin America.
During the pandemic, public debt jumped globally for good reason—emergency spending helped protect the most vulnerable and avoid an even worse collapse in economic activity. While still higher than before the lockdowns, debt has declined since 2022 as economies recovered and crisis support was withdrawn.
To stabilize debt, the seven largest countries in the region have announced ambitious fiscal consolidation plans, aiming to revert an average deficit of 0.8 percent of GDP in 2024 to a surplus of around 0.6 percent by 2029. However, these plans have suffered delays, and lack political support. In many countries, they rely on raising additional revenue and spending cuts that have yet to be identified.
Stabilizing debt is an important first step, but not enough. Truly reducing debt over the next five years is necessary for countries to rebuild their capacity to address future shocks, as it happened during the pandemic.
Debt Rise
As documented in the study, turmoil in global financial markets could affect economic growth, raise debt financing costs, and weaken exchange rates. If this happened, debt could increase by about 8.5 percentage points of GDP by 2029, compared to current projections. Similarly, the study documents that a commodity price shock or a natural disaster could increase public debt by about 6 to 9 percentage points of GDP, respectively, over that horizon.
The deterioration of public finances and the increase in debt after the end of the commodity price boom in 2013 suggests that existing fiscal frameworks were not strong enough. Effective fiscal frameworks can guide policy choices and offer the resilience and flexibility to deal with unpredictable events. Some countries are strengthening them through the recent introduction of public debt targets, such as Paraguay, Chile, and Colombia.
However, in trying to address the problem, some have become overly complex at the expense of transparency and accountability. There are several areas for improvement, including providing more resources to independent fiscal institutions and strengthening accountability mechanisms. And it is critical to avoid reforms that imperil public finances.
With lackluster growth prospects, high financing costs, and an uncertain world, now is the moment to reduce deficits and enhance fiscal frameworks, both of which help with reducing borrowing costs. It is urgent for countries to rebuild the space used in the last five years. Fiscal discipline will also help tame inflation, as our October report notes, which would ease the pressure on monetary policy.
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Publish date : 2024-12-18 01:07:00
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