Last year, 2.7 million companies disappeared in Latin America, 44 million people–a number similar to the population of Argentina–were unemployed and extreme poverty reached levels similar to those of 1990. According to estimates by the Economic Commission for Latin America and the Caribbean (ECLAC), the region’s GDP per capita fell back to 2010 levels. Undoubtedly, the COVID-19 pandemic has caused a deep crisis in the Latin American economy. And after the end of the pandemic, the region will probably face a new debt crisis.
This situation, however, can be extrapolated to the global context. In the face of the health crisis, the different economies have been forced to act with determination. Several countries, mainly the developed ones, designed unprecedented fiscal and monetary programs. According to data from the International Monetary Fund (IMF), fiscal packages amount to 12 trillion dollars, while monetary initiatives total 7.5 trillion dollars.
Although these measures seek to reduce the negative economic consequences of the health crisis, we sometimes forget the other side of the coin: they exacerbate indebtedness.
The growth of debt
Before the pandemic, the level of global debt had reached an all-time high. In 2019 it stood at 320% of global GDP, in the first quarter of 2020 it had exceeded 331% and today it exceeds 360%. In the case of Latin America, the debt trajectory had accelerated due to fiscal expansion policies, mainly implemented by progressive governments in the region and the end of the commodity price boom in 2014.
According to IMF information, in South America the net government deficit in relation to GDP went from an average of 0.77% between 2000 and 2009 to 3.8% between 2010 and 2019. In Central America and the Caribbean, the net government deficit averaged 2.58% between 2010 and 2019. The persistence and in some cases the increase in the fiscal deficit in recent years has triggered a growth in debt in the region.
In South America, the average gross debt over GDP increased from 30.9% in 2011 to 72.3% by 2019. The South American countries that increased their debt the most between 2010 and 2019 were: Argentina with 47 points, Ecuador with 34 points and Brazil with 26 points. It is worth noting that, the countries with the highest debt weight in South America during 2019 were: Venezuela with 232.8%, Argentina with 90.4% and Brazil with 89.5%.
On the other hand, in Central America and the Caribbean, the average gross debt over GDP increased from 55.8% in 2008 to 65.8% in 2019. The nations that most increased their debt during the same period were: Costa Rica with 34 points, Aruba with 39 points and El Salvador with 23 points; while in 2019 the countries with the highest debt to GDP weight were: Barbados with 122.2%, Belize with 105.1%, Jamaica with 93.9% and Dominica with 85.7%. However, in the context of the current COVID-19 crisis, the acceleration of debt has been extraordinary. According to IMF estimates, between 2019 and 2021, the average debt in Central America and the Caribbean will increase from 65% of the debt/GDP ratio to 80.8%. In other words, an increase of 15 points in the debt/GDP ratio. In South America, the debt/GDP ratio would increase by an average of 12 points in that period.
The debt spiral
Under these conditions, there is a high probability that the region will enter into a debt spiral. The fiscal imbalances of Latin American economies, together with the recent increase in debt and the sharp slowdown in economic activity, will most likely lead to an increase in financing needs. This scenario may raise doubts about the solvency of governments to meet their financial commitments, generating an increase in sovereign risk and higher borrowing costs.
Recent losses in the value of certain currencies are also a potential problem. In the event of a sharp devaluation against the creditor’s currency, an economy borrowing in a currency over which it has no control cannot guarantee to debt holders that the money will always be available when the bonds mature. This phenomenon is known in economic jargon as original sin.
Although the economic crisis has not been avoided by any economy, certain decisions and characteristics have contributed to maximize the effects of the pandemic. The political instability of several nations, the problems in economic management prior to the health crisis, the inaction of several governments, the structural problems that have not been overcome in recent decades, the evident inequity in the distribution of COVID-19 vaccines, the decline in world trade and the fall in the price of raw materials augur a discouraging future for the region.
Consequently, in addition to the human losses, the deterioration of social conditions and the fall in productive activity, Latin America will also face a probable debt crisis in the medium term, similar to that experienced in the eighties and nineties.
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