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In a report that analyses the total public debt in Latin America and the Caribbean, IDB recommends these countries to focus on sovereign debt structure in order to avoid future economic crises. From a methodological point of view, this report underlines the importance of analysing the total public debt in order not to exclusively focus on external debt, and thus reach the wrong conclusion that public debt has been decreasing in Latin America, when in fact there has only been a change in its composition.

The Inter-American Development Bank (IDB) launched its annual report: “Living with Debt: How to Limit the Risks of Sovereign Finance”, in which it is pointed out that “more than the level, it is the structure, namely the quality, of the debt issued by Latin American and Caribbean countries, and the inherent volatility of their economies, that makes the region prone to crises”. In view of this, the IDB recommended countries in the region to continue “to shift their debt structures away from foreign-currency-denominated debt and into debt denominated in domestic currency”.

The report was launched in June and focuses on the total public debt, both external and internal, in Latin America and the Caribbean. The difference between both types of debt has been considerably reduced in recent years, given the origin of bondholders and the cancellation of debts owed to international financial institutions by Argentina, Brazil, Uruguay and Ecuador.

From a methodological point of view, this report underlines the importance of analysing the total public debt in order not to exclusively focus on external debt, and thus reach the wrong conclusion that public debt has been decreasing in Latin America, when in fact there has only been a change in its composition.

Early in the 1990s, the region was characterised for the existence of very high debt levels, which exceeded 100 per cent of GDP. The debt rapidly decreased in the period 1993-1997 and reached its lowest level at 64 per cent of GDP. The last years of the 1990s and first years of this century were characterised by a wave of financial and debt crises (East Asia in 1997, Russia in 1998, Brazil in 1999 and Argentina in 2001), which gave rise to a new debt increase – from 64 per cent to 80 per cent of GDP – within the period 1998-2003. Following the crisis, a reduction of about 12 percentual points was registered during 2004 and 2005. Therefore, the current average public debt level in the region is similar to the one registered ten years ago.

According to the IDB report, in order to limit the risks of sovereign finance, apart from adopting and implementing prudent fiscal policies, it is also necessary to focus on the improvement of debt management and the development of local bond markets. The two key sources of vulnerability identified are: debt denomination (foreign currency debt) and debt maturity (short-term debt).

Analysts of different leanings now agree on the fact that fiscal policy and debt management should be aimed at strengthening debt sustainability. However, the techniques of debt sustainability analysis have undergone quite radical reformulations in recent years, placing emphasis on repayment capacity or economic development, depending on the perspective adopted.

“In general, all countries are considerably reducing their debts given the fact that external conditions are very good and they are smartly taking advantage of them”, pointed out the Italian economist Ugo Panizza, one of the coordinators of the IDB report, in presenting his conclusions at the Central Reserve Bank of Peru. In addition to this, he said, they do not spend collected revenues excessively and make efforts to fulfill the commitments they have undertaken.

Panizza highlighted that Argentina and Colombia show the highest debt levels in the region, while Chile, Peru and Mexico are among the lowest. He said that Venezuela is undergoing a “positive period” in terms of debt, mainly taken on by the private sector, which is being reduced owing to profits arising from the exploitation of oil while Bolivia has a “substantial debt” with official institutions. The economist underlined that the ideal thing would be for countries to follow the “Vatican policy” in direct allusion to abstinence or, in any case, “to borrow less and for good reasons”.

Peruvian Economy Minister, Luis Carranza, admitted that abstaining from taking on debt is impossible in countries like his own, given the need to invest in development in order to lift more than half of the population out of poverty. He also pointed out that the government is following “prudent fiscal and monetary policies”, when highlighting that the goal is to increase the average life of debt from eight to ten years by end-2007. “In terms of foreign currency, in December 2004, ten per cent of the external debt was denominated in soles (Peruvian currency). Our goal is to end up with a 30 per cent of debt denominated in soles by December 2007”. All points brought up by the Peruvian Economy Minister can be considered as representative of most countries in the region.

This article was published in Agenda Global, a weekly supplement issued every Thursday with the newspaper La Diaria (Montevideo, Uruguay).

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