How Latin America became the emerging market that issues the most debt (and what risks it implies)

Of the debt expected for this year in the region, Mexico will issue more than 25%, while almost 40% of the total will be borne by three Andean countries: Chile, Colombia and Peru.

For Brazil, on the other hand, projections indicate that its debt issuance will be lower.

The placement of public debt among foreign investors is one of the most common tools used by governments around the world to finance their spending.

But the other side of the coin is that if a government borrows too much , at some point it will have to cut public spending , raise taxes or the cost of public services.

In the worst case, you have to do everything at once.

And those were some of the main reasons behind the wave of social protests seen at the end of 2019 that traveled from Chile to Ecuador.

Fiscal sustainability and credibility

For many analysts, the question of public spending cuts is not whether governments will have to do it.

That is taken for granted.

The question is when they are going to do it and how deep they will be.

For Luis López Vivas, emerging markets economist at AXA Investment Managers, “it is clear that the region will have to reduce expenses in the coming years to ensure its fiscal sustainability and credibility” in international markets.

“In the past, Latin America could count on strong economic growth to improve its fiscal indicators. Today, however, in the absence of a commodity boom , the region faces a prolonged period of low growth.”

“Therefore, you will not be able to continue spending beyond your means,” says López Vivas.

Cuts and social explosion

The cuts could provoke another outbreak of social unrest in which inflation would play a key role .

“This, together with unemployment, rising poverty, exhaustion from the pandemic and highly polarized political processes, means that the region’s main economies face a latent risk of civil unrest in 2022,” he tells BBC Mundo. Jimena Blanco, head of analysis in the Americas region at Verisk Maplecroft.

For the firm, the key countries to watch in this regard include Argentina, Brazil, Chile, Peru, Colombia and Paraguay.

“We have seen many cases in which cuts in fuel subsidies (Ecuador 2019) and other benefits (metro fares in Chile 2019) or proposals to increase taxes (Colombia 2021) caused social unrest,” says Carlos de Sousa. , emerging markets strategist at investment firm Vontobel.

“So going into 2022, of course discontent will be a risk,” he says.

However, two countries are likely to escape this trend of cuts: Chile and Peru .

And it is that after the elections the new governments of both countries are expected to substantially increase public spending -especially in the social sphere- as they anticipated during their electoral campaigns.

Both countries have the financial capacity to do so, explains Edgardo Stenberg, vice president and emerging markets specialist at Loomis Sayles.

“The countries of the region have already begun to reduce public spending, at least as a percentage of their gross domestic product (GDP), after the significant increase in the previous two years to combat the pandemic and its economic effects,” he adds.

In the case of Mexico , he says, fiscal spending has always been moderate and the government of Andrés Manuel López Obrador (AMLO) follows the same fiscal policy.

His popularity levels are soaring, he adds, making social instability unlikely.

For its part, ” Colombia and Brazil will hold elections this year and voters will have the opportunity to demonstrate at the polls and they would not need social protests,” says Stenberg.

Ecuador could indeed find it more difficult to place its debt, mainly due to country risk.

Enjoying the moment

But the fact that Latin America was placed last year as the region of the emerging countries that issues the most debt in dollars is also due to market conditions.

The Latin American governments saw an opportunity: to finance themselves cheaper than in a few months.

The possibility that the United States Federal Reserve will raise interest rates in March has set off alarm bells.

With rising rates, borrowing becomes more expensive around the world.

In other words, the amount that the countries will have to repay from then on will be greater, especially if their debt is dollarized.

“The central banks of the major economies have tried to get ahead of that rate hike and we saw that they started to be much more aggressive with their own rate hikes,” says Alejandro Arévalo, head of emerging market debt at Jupiter AM.

The key behind this boom in emissions in these months is to attract investors.

“When the Federal Reserve raises interest rates, these markets are not going to be as attractive as before for international investors, who will no longer want to take the geopolitical currency risk of a country whose economy is unstable or slowing down,” he says. Arevalo.

Therefore, by issuing debt now, the region’s main economies are taking advantage of a favorable environment that may disappear when the United States tightens its monetary policy.

world context

The other factor that catapulted Latin America to first place in the ranking of issuers among emerging markets has to do with the behavior of other markets.

The bloc that has historically held that position for years, the Middle East , has sharply reduced its debt levels.

“Relatively speaking, what propelled Latin America to become the largest emitter as a region is that fiscal deficits in the Middle East are shrinking at a much faster rate than elsewhere thanks to high oil prices,” he explains. Sousa.

“The Gulf countries issued a lot of foreign debt in 2020 because oil prices were low. Now that oil prices are high , the fiscal balance of the big oil producers has improved faster than anywhere else in the world,” Add.

That is why emerging countries in the Middle East and Africa region issued less debt.

On the other hand, several Latin American countries “will benefit from rising commodity prices and tighter fiscal policy,” says Guillaume Tresca, Senior Emerging Markets Strategist at Generali Investments.

A notable exception is Mexico , which has surprisingly applied a strict fiscal policy since the start of the health crisis, experts agree.

For all this, the view of economists is that this year the indebtedness of Latin America should be less than in 2021.

“Global inflation growth should slow down at some point and when it comes to specific countries: Colombia’s credit rating has already been downgraded, Mexico now has some room to cut rates, and Chile and Peru ‘s assets are already appreciating .” political risks,” says Romain Bordenave, senior analyst for emerging sovereign debt portfolios at Edmond de Rothschild Asset Management.

“The year 2021 leaves us with many opportunities in this region,” he adds.