Why Latin America Needs Lower Deficits and Stronger Fiscal Rules

IMF Blog, December 18, 2024

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Public debt in Latin America’s major economies is on pace to average 55 percent of gross domestic product this year, up from 34 percent in 2013.
The regional figure reflects the seven economies that account for about three quarters of economic output: Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay.
The increase in debt reverses improvements achieved in the earlier part of this century and leaves limited space to deal with shocks.

Public debt: average 55 percent of GDP (this year) versus 34 percent of GDP (2013).
Debt decline during commodity boom: fell from 50 percent to 34 percent of GDP in 2004-13.
Financing costs: average 3.8 percent of GDP in the region, compared with 1.7 percent in advanced economies and 2.5 percent in other emerging markets.
IMF forecast change: one year ago assumed an average structural primary deficit of 0.1 percent of potential GDP for 2025; this has now widened to 0.8 percent.
Recent fiscal plans: aim to revert an average deficit of 0.8 percent of GDP in 2024 to a surplus of around 0.6 percent by 2029.
Risk scenarios: turmoil in global financial markets could increase debt by about 8.5 percentage points of GDP by 2029 compared to current projections; 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.
Post-pandemic dynamics: public debt jumped during the pandemic but has declined since 2022 as economies recovered and crisis support was withdrawn.

End of commodity boom (post-2013): primary surpluses turned into deficits, currencies weakened, and growth slowed.
Low productivity and investment, and shifting demographics leading to lackluster growth prospects.
High financing costs driven largely by domestic factors, including low government effectiveness, an unfavorable history of stress and defaults, and lower foreign exchange reserves.
Fiscal policy has increased social spending but has not sufficiently boosted productivity or accelerated growth.

Global financial market turmoil: could affect growth, raise financing costs, and weaken exchange rates, increasing debt by about 8.5 percentage points of GDP by 2029.
Commodity price shock: could raise public debt by about 6 percentage points of GDP by 2029.
Natural disaster: could raise public debt by about 9 percentage points of GDP by 2029.
Continued delays and weak political support for fiscal consolidation plans increase the risk that announced measures will not materialize.

Many countries introduced fiscal rules and targets for spending and budget balances, but targets were frequently modified and relaxed over time, postponing necessary adjustment.
Some countries are introducing public debt targets (examples cited: Paraguay, Chile, and Colombia).
Shortcomings identified: complexity that reduces transparency and accountability; need for more resources for independent fiscal institutions and stronger accountability mechanisms.
Warning against reforms that could imperil public finances.

Lower deficits to rebuild policy space to deal with future shocks.
Pursue fiscal consolidation robust enough to truly reduce debt over the next five years, not just stabilize it.
Strengthen fiscal frameworks to improve transparency, accountability, and resilience, including:
- Providing more resources to independent fiscal institutions.
- Strengthening accountability mechanisms.
- Avoiding overly complex rules that undermine transparency.
Implement credible revenue and spending measures rather than relying on unspecified measures that lack political support.
Emphasize fiscal discipline to help tame inflation, thereby easing pressure on monetary policy.
Reduce borrowing costs through lower deficits and stronger fiscal frameworks.

IMF blog — Why Latin America Needs Lower Deficits and Stronger Fiscal Rules, December 18, 2024.

Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024
- Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024 (Markdown version)
- Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024 (PDF)