The IDB warns that debt is drowning Latin American economies

The countries of Latin America and the Caribbean justifiably borrowed to face the pandemic, but now that debt is choking their economies and it is urgent to reduce it to boost growth and reduce the risk of a crisis, warned the Inter-American Development Bank on Thursday.

The debt has risen to some 5.8 trillion dollars, equivalent to 117% of the Gross Domestic Product (GDP) of the region, almost three trillion more than in 2008. During the pandemic, public debt soared from 58% of GDP in 2019 to 72% in 2020. That additional funding was used to offset the impact of COVID-19 at a time when the economy was paralyzed, helped households buy food and pay for health care, and businesses pay the wages of their employees.

“Due to the risks of excessive indebtedness, the current situation in Latin America and the Caribbean is worrying,” said the financial organization in its report “Dealing with debt, less risk for more growth in Latin America and the Caribbean.” “The concern is whether this increase in debt will cause sustainability problems, a new debt crisis and another lost decade for the region,” the report says.

The IDB stated that it is important to gradually reduce it over the next 10 years to “prudent” levels of between 46% and 55% of GDP -similar to those before the pandemic- so that the economies return to the path of the growth path. This level would limit interest costs, provide space for investment, and allow for more financing in the event of new negative shocks, as well as mitigating a debt crisis.

The report was revealed at a time when the countries present a grim outlook in an international context dominated by the slowdown in the most developed economies, the continuation of the war in Ukraine, the tightening of access to financing due to high interest rates and persistent inflation.

Forecasts indicate that the growth of the Latin American economy will slow to at least 1.3% in 2023, less than half of the 3.6% of 2022, according to the World Bank.

In 2020, due to the impact of COVID-19, the regional economy fell to levels not seen in more than a century with a contraction of 6.2%.

If you look at the regional long-term dollar debt repayment schedule, the largest countries like Brazil and Mexico have close to 57% of total repayments, while all the countries of Central America and the Caribbean reach only 8%. , according to IDB calculations. Amortizations decline from about $460 billion in 2023 to $61 billion in 2033. While the region has issued long-term debt maturing in 2040 and later, the amortization curve is steeply skewed toward the next few years.

“Good debt management is essential to increase good-quality investments, provide better services to citizens, reduce financing costs, and generate greater growth and employment,” Eric Parrado, chief economist at the IDB, said in an interview with AP. “The biggest concern is related to the fact that this debt cannot be managed over time and represents a burden for governments,” he said.

The report examined the increase in debt in the region and offered recommendations to governments. He clarified that although the debt peaked during the pandemic, it had already begun to increase before. With the pandemic, spending rose and tax revenues fell, further increasing public debt.

Parrado explained that one of the IDB’s main recommendations is that governments draw up a fiscal policy and debt plan that shows that they have the situation under control and thus sends a message of responsibility and prudence to international markets, risk rating agencies and investors.

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