## Why Latin America Needs Lower Deficits and Stronger Fiscal Rules _IMF Blog, December 18, 2024_ ## Source details **Canonical URL:** [Why Latin America Needs Lower Deficits and Stronger Fiscal Rules](https://www.imf.org/en/blogs/articles/2024/12/18/why-latin-america-needs-lower-deficits-and-stronger-fiscal-rules) ## Other formats - [Markdown version](/en/blogs/articles/2024/12/18/why-latin-america-needs-lower-deficits-and-stronger-fiscal-rules/index.md) - [Structured JSON version](/en/blogs/articles/2024/12/18/why-latin-america-needs-lower-deficits-and-stronger-fiscal-rules/index.json) - [Bundle manifest](/en/blogs/articles/2024/12/18/why-latin-america-needs-lower-deficits-and-stronger-fiscal-rules/bundle-manifest.json) ## Bibliographic details - Authors: Juan Passadore, Juan Pedro Trevino, Rodrigo Valdes - Published: December 18, 2024 --- ### Overview - 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. ### Key findings and statistics - 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public debt jumped during the pandemic but has declined since 2022 as economies recovered and crisis support was withdrawn. ### Drivers of the debt increase - 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. ### Risks and downside scenarios - 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. ### Assessment of fiscal frameworks - 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. ### Policy recommendations and priorities - 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.* --- ## Content in this bundle - **Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024** - [Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024 (Markdown version)](/-/media/files/publications/reo/whd/2024/october/english/backgroundpaper2.pdf.md){rel="alternate" type="text/markdown"} - [Western Hemisphere Regional Economic Outlook; Background Paper 2; October 2024 (PDF)](/-/media/files/publications/reo/whd/2024/october/english/backgroundpaper2.pdf){rel="external" type="application/pdf"} --- ## References - [Fiscal Monitor](https://www.imf.org/en/Blogs/Articles/2024/10/15/global-public-debt-is-probably-worse-than-it-looks) _Source: https://www.imf.org/en/blogs/articles/2024/12/18/why-latin-america-needs-lower-deficits-and-stronger-fiscal-rules_