Fiscal Policy in Latin America: Prudence Today Means Prosperity Tomorrow

IMF Blog, December 11, 2013

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Public finances in most Latin American countries strengthened significantly before the global financial crisis.
Government debt ratios declined by 16½ percentage points on average between 2002 and 2012, reflecting rapid GDP growth, falling interest costs, and solid primary surpluses in the first half of the period.
The average maturity of debt outstanding has increased, reducing rollover and interest rate risks.
Debt issuance in financially integrated economies has shifted decisively toward local-currency bonds, lowering exchange rate risk.
Several countries—including Brazil, Chile, Colombia, Mexico, and Peru—have introduced or strengthened their fiscal responsibility frameworks since 2000.

Favorable external conditions supported fiscal improvements:
- Commodity exporters benefited from a sustained surge in global commodity prices.
- From 2002 to 2008, fiscal revenue in the region grew from below 26 percent to above 30 percent of GDP.
- The marked fall in global interest rates reduced average government interest bills by almost 2 percentage points of GDP over the course of the decade.
Expansionary fiscal policies since 2009:
- Since 2009, countries have generally increased public deficits, drawing down on their fiscal coffers.
- Primary expenditure climbed from 24½ percent to 30 percent of GDP on average across Latin America over 2002–12.
- Increases in the ratio of primary spending to GDP were particularly large in Argentina, Ecuador, and Venezuela, where the ratio surged by 12-23 percentage points.
- As a result, fiscal balances are now significantly weaker than prior to the global financial crisis in most countries.

Cyclical context:
- Economic activity is slowing but output levels are still close to potential.
- Tight labor markets, infrastructure bottlenecks, and widening current account deficits point to limited spare capacity.
- It is hard to argue that more fiscal easing is needed; launching a new stimulus now would undermine credibility of countercyclical policy.
- Monetary policy is better suited to respond to a normal cyclical slowdown.
Structural considerations:
- IMF research suggests potential growth rates in the region are coming down (see Chapter 3 of the May 2013 REO).
- Growth of physical capital is expected to moderate, reflecting expected normalization of external financing conditions and stabilization of commodity prices.
- Employment growth is likely to be limited going forward—labor participation rates are already elevated, and unemployment has fallen to record lows.
- Unless total factor productivity growth picks up, output growth is likely to stay below the rates observed over the past decade.
- Attempts to maintain unrealistically high growth targets through fiscal stimulus would weaken public finances.

Preserve and strengthen fiscal balances to:
- Better buffer the impact of future headwinds, such as rising real interest rates and a possible decline in global commodity prices.
- Address current imbalances, including widening external current account deficits and persistently high inflation in some countries.
- Lay the basis for meeting the future challenge of population aging.
Undertake expenditure reviews:
- After a long period of continuous increases in public spending, now may be a good time to launch a thorough expenditure review to increase efficiency and reduce wasteful or untargeted expenditure.
Avoid new fiscal stimulus given limited spare capacity and the need to restore countercyclical credibility.

Alejandro Werner, December 11, 2013.

A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã
- A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã (Markdown version)
- A política fiscal da América Latina: Prudência hoje significa prosperidade amanhã (PDF)