The total debt of Latin America and the Caribbean increased to 5.8 trillion dollarsequivalent to 117% of regional GDP, from less than three trillion in 2008, revealed the Inter-American Development Bank (IDB), which considers this trend worrisome.
In the study "Dealing with debt, less risk for more growth in Latin America and the Caribbean", The IDB adds that public debt in particular went from representing 58% in 2019 to 72% in 2020 "due to covid related tax packages, lower income and the recession".
"Debt is not bad per se"can be used to create jobs or build infrastructure, for example, but "if used recklessly has its problems, can be a burden" for economies, companies and also for people, the president of the IDB, Ilan Goldfajn, stated during the presentation.
High debt levels drive investors to demand higher returns, thus forcing governments to allocate resources to pay higher interest rates, instead of having that money to invest in infrastructure and public services. The situation reduces the ability to respond to future economic shocks, as well as increasing the risk of a crisis occurring.
Because Governments should aim to reduce the percentage of public debt in relation to Gross Domestic Product (GDP), from an average of 70% to a range of 46%-55%, a level that the IDB considers "prudent". Countries "dependent on volatile commodity income" they should lower it even more, says the study.
"Sustainable debt has benefits that clearly outweigh the costs"declared this Thursday during the launch of the report Eric Parrado, chief economist of the IDB, convinced that the debt can become an engine.
Oscar Valencia, one of the authors of the report, stated that the latest statistics show that "countries are acting" with a tendency to lower the debt in the medium term, but it is insufficient.
The report proposes to strengthen fiscal institutions, to prevent overspending in good times and create a cushion to deal with bad times.
Fiscal rules, which set limits on public spending, are useful, but the countries of the region "met only 57% of the objectives" that were drawn in this matter.
"The best way to reduce debt is through higher growth combined with efficient public spending and adequate public revenue."concludes the report.
"A regional forum"
It also recommends reducing labor informality and actively managing debt repayment schedules.
"More than half of the countries in the region face a debt service of more than 2.5% of GDP, and a quarter of them more than 5%, an amount similar to spending on education"exemplifies the financial institution.
Latin America and the Caribbean should take advantage of multilateral development banks and other lenders that provide lower rates and longer terms than private markets.
The report advises "create a regional forum to improve the coordination of debt restructuring processes" and complement international initiatives focused primarily on low-income countries.
Private debt also increased before and during the pandemic.
A quarter of the countries have internal credit that reaches at least 100% of GDP, but for another quarter the figure is less than 50% of GDP.
access to credit "remains low, especially for households, small and medium-sized enterprises (SMEs), and women-led businesses"indicates the IDB.
estimates "point to one $1.8 trillion gap between demand and supply of funds available to SMEs"for example.
According to the IDB, the level of household indebtedness in the region "remains relatively low by international standards, averaging 22% of GDP, well below other emerging economies (35%) and developed countries (77%)".