Rising interest rates in the United States have intensified the need for Latin American countries to take action to tackle their high debt levels, the World Bank’s senior official in the region has warned.
“The time to step up the pace of fiscal adjustment has come,” said Jorge Familiar, the World Bank’s vice-president for Latin America.
The Bank’s latest regional report noted that the poor fiscal situation had barely improved over the last year, with 29 out of 32 countries projected to have a negative overall fiscal balance in 2018. “External public debt has surpassed 60% of GDP for the region as a whole, with six countries having debt ratios above 80%,” it said.
“Net capital inflows to the region have fallen dramatically since early 2018, bringing once again to the fore the risks faced by Latin America and the Caribbean.” The report said some large economies, such as Brazil and Argentina, had to address pressing fiscal concerns as the international environment was turning bleaker.
Familiar said the region had “progressed a lot in terms of good macroeconomic management. If you look at what happened in the past six years, there has been a growth slowdown, but the region has held up very well,” he said. “Markets have given time to the region to adjust gradually. But now, it is a fact that the time to step up the adjustment has come.”
Although some progress has been made, Familiar noted that “expectation and speed of normalisation of monetary policy in developed economies is increasing”. Countries in the region need to adjust “while foundations for growth are built and the most vulnerable are protected,” he said.
“There are a lot of emerging markets with good fundamentals,” said Julio Velarde, the Peruvian central bank governor, in an interview with GlobalMarkets. He said countries of the Pacific Alliance, including Peru, had registered a consistently better macroeconomic performance than their counterparts from the Atlantic coast, thanks to their prudent macroeconomic policies over the past 15 years.
“Paraguay would also be a good case study,” said José Cantero, the country’s central bank governor. “We are aligned with countries such as Chile, Peru and Colombia. We are following their experiences. It is an inspiration for us: we are very close to getting investment grade from credit rating agencies.”
Paraguay has just reported a 6.2% year on year GDP growth in the second quarter, including a 17% push in investment, while its public deficit is capped at 1.5% of GDP due to a stringent fiscal responsibility law.
“We need to stick to macroprudential policies to contain scenarios that could be harmful for the future. Argentina has contained the currency crisis and that is a good sign for the region,” he said.
Peru’s Velarde said he was not really concerned about the impact of the trade war between the US and China on his country. “The potential could be huge, but it has so far proved very limited in effect. Maybe there will be some sort of agreement that will limit the damage,” he said.