Sitting next to a Costa Rican flag and staring, President Carlos Alvarado did not hesitate to express his frustration with the global financial system. “Other actors have a responsibility to support the financing of our region,” he said, speaking at a virtual event organized by various multilateral institutions this month. “The pandemic has made it clear that we don’t all agree until we all agree,” he added.
Latin America is the most indebted emerging region in the world. According to data from the Economic Commission for Latin America and the Caribbean (ECLAC), the average gross debt of governments is 77.7% of regional gross domestic product (GDP), and the total cost of debt service – that is, interest payments – accounts for 59%. % of exports of goods and services.
Much of this debt comes from the market: it was issued through bonds in international markets, with the big banks and Wall Street investment funds among the main buyers. By “other actors”, Alvarado was probably referring to the governments of developed countries and not just to the private banks operating there.
Despite the extraordinary circumstances of the pandemic, and unlike funds lent by multilaterals or directly by other governments, market debt is a business. Its sole purpose is to generate returns for buyers and the interest rates paid by the debtor are subject to ratings established by independent credit agencies. These, also said Alvarado, have treated his country and others in Latin America unfairly, refusing to adapt their methodologies to the pandemic.
“The rating agencies didn’t treat us, they mistreated us, even though we did things responsibly,” Alvarado said at the December 2 event organized by CEPAL and the Cooperation Organization and Economic Development (OECD), the Development Bank of Latin America (CAF) and the European Commission, and where he shared the stage with his counterparts in Colombia and Ecuador. “Our tax margins in these times of pandemic are increasingly narrow,” he explained at the time. âDuring the pandemic, we had lower growth and higher spending, and more pressure as a result. We have had no respite from the rating agencies and I have always celebrated the bravery with which [Colombian President] Ivan [Duque] made it clear.
The sentiments of the Central American President are echoed throughout Latin America. In 2020, given the need to stimulate economies, debt levels have reached all-time highs and the time has come to pay them off. The United States Federal Reserve has sent signals that interest rates will start to rise in 2022, in order to contain inflation, and gradually return to a more orthodox monetary policy. This is what worries the presidents of Latin America so much. A Fed rate hike could see interest rates on their debt rise as well and could potentially cause their countries’ foreign currencies to leak out, affecting their exchange rates and making their foreign currency debt more difficult to pay.
In addition, their savings will slow down. Fitch Ratings expects the majority of Latin American countries to decelerate in 2022, after their economic reopening and recovery in 2021 following the Covid-19 shock in 2020. Likewise, external conditions should be less favorable given that given that the United States and China grow more slowly.
“The budget deficit remains quite high, close to 5% of GDP on average, reflecting the need for various countries to apply structural fiscal measures to stabilize the burden of ever-heavier debt,” analysts said. Fitch in a report. âThe social and political environment makes rapid fiscal consolidation difficult. “
During the pandemic, we had lower growth and higher spending, and more pressure as a result. We had no respite with the rating agencies
Carlos Alvarado, President of Costa Rica
Almost a third of sovereign ratings in Latin America are on a “negative outlook” and none of them have a “positive outlook,” according to Fitch. Panama, Peru, Suriname and Colombia have all been cut this year, causing interest rates to rise. The relationship between public debt and taxes, a rough indicator of a country’s financial capacity to pay public debt, has increased in recent years, from 223% in 2007 to 320% in 2019, according to SebastiÃ¡n Nieto, chief of the OECD for the region. . In 2020, global debt reached $ 226 trillion (â¬ 201 trillion), its largest annual increase since World War II. The difference is that after the global conflict, the majority of that debt was between governments, not between private banks and governments like now.
“We insist on the need to seek mechanisms such as special drawing rights, yes, but also other types of vehicles that help finance the debt that has been contracted to stop this crisis”, explained economist SebastiÃ¡n. Nieto via a telephone interview from Paris. “But in our opinion, a well-coordinated approach at the international level, putting all the multilateral actors on the table, is not enough, because, as we know, part of the creditors are private and as such, there is a need to bring in the various institutional investors and international financial institutions.
However, at this time, there is no leadership or effort that goes all the way to Wall Street. Latin American presidents agree that it is necessary to seek new means of financing at the Ibero-American summit this year, but no one is taking the lead.
Part of the strategy should be to spend better, says RenÃ© Orozco, macroeconomic policy analyst at the OECD. Brazilian government spending during the pandemic, for example, helped lift millions of people out of poverty and as such is a good investment. âHere the multiplier is greater than one,â Orozco explained. âAs such, we are not just talking about containing the crisis, but also about development. It is a challenge to think about how to make this crisis less painful, but also to take advantage of it to get out of these structural challenges.
As governments decide how to meet their obligations, both to citizens and to Wall Street, the region prepares for a major electoral cycle that will define the future of new generations. In this regard, Alvarado also had a message for developed countries: “If we corner development finance, I might feel the selfish idea that these resources are for my people, but we are going to see radicalized phenomena such as migration. , organized crime, inequality and political instability that will affect the economy, trade and overall production from the region to the rest of the world. We have to make this call in terms of funding.