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The following excerpt summarises Chapter 2 of Challenges to Fiscal Adjustment in Latin America: The Cases of Argentina, Brazil, Chile and Mexico by Lisa M. Schineller (Standard & Poor's), published on 22 February 2006.
Standard & Poor’s rates 16 sovereigns in Latin America, but only two countries, Chile and Mexico, have investment-grade ratings. Their stronger creditworthiness reflects their comparatively stronger fiscal positions in relation to the other Latin American countries, as well as other factors. The level of government debt does not determine a rating by itself. For example, Belgium has net general government debt of almost 90% of GDP and a “AA+” rating, while Ecuador’s net debt of almost 40% of GDP is much lower, but so is its “CCC+” rating. These very different ratings reflect different political and institutional strengths, these countries’ ability and willingness to adjust policy to shocks or changing economic conditions, and different policy track records, as well as fiscal flexibility, the structure of debt (the relative weight of domestic- as opposed to foreign currency-denominated securities, maturity structure, etc.), the depth of local capital markets, external vulnerabilities and the strength of the economy, among other determinants.
With the vast majority of Latin American sovereigns rated by Standard & Poor’s in the speculative-grade category, there is ample opportunity for significant improvement in fiscal policy and fiscal institutions in the region. In addition to running tighter budget balances and reducing debt levels, improved fiscal flexibility is important. Most nations could benefit from broader revenue bases to support widespread pressure for increasing efficient, well-targeted and productive government spending, such as on physical, social and human capital accumulation. In addition, less distorting tax regimes would contribute to making these economies more efficient. Reduced expenditure rigidities via politically difficult pension reform, payroll restraint and the elimination of widespread earmarking in many countries could support increased ability to adjust spending as needed under unforeseen stress scenarios.
The establishment of prudent fiscal rules and norms, as well as transparent decision-making processes through the enactment of well-designed fiscal responsibility legislation, should increase policy predictability, as could the creation of stabilisation funds for commodity-dependent sovereigns. However, the development of a strong policy track record is crucial to gaining confidence. Entrenching prudent fiscal behaviour and norms is key not only at the central government level, but also throughout the public sector, given current patterns of devolution of fiscal responsibilities to local governments. Finally, debt management practices aimed at lengthening tenor, issuing securities denominated in local currency and at fixed interest rates, while taking time and part of overall capital market deepening, are important to reduce the vulnerability of debt stocks and interest burdens.
General government debt and interest burden
Source: Standard and Poor’s.
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