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Related ���������ֳ� Content: Latin American Sovereigns Will Face Significant Post-Pandemic Fiscal Consolidation Challenges

���������ֳ�-New York/London-15 September 2020: Latin American sovereigns' efforts to reduce deficits and debt over the medium term may face particular challenges from expenditure rigidities and limited political willingness or capacity to increase taxes despite narrow revenue bases, ���������ֳ� says in a new report. A resumption of economic growth, somewhat higher commodity prices and the winding-down of fiscal support packages will see deficits narrow in 2021, but structural fiscal adjustment that would support debt reduction may be uneven across the region.

Structural reforms to widen revenue bases and reduce commodity dependence have been rare in the region in recent years. Instead, most countries relied on administrative measures with uneven gains pre-pandemic. Social and political pressures have hindered efforts to contain spending growth and will continue to pose challenges, although these efforts have proceeded in some countries (such as Brazil's pension reform). This helps explain both Latin American sovereigns' weak fiscal starting point entering the coronavirus shock (among the major Latin American economies only Mexico and Peru stabilized their debt ratios following the end of the commodity price super-cycle) and the post-pandemic consolidation challenges they face.

Governments have a range of policy options to stabilize and reduce debt burdens. As well as structurally boosting revenues and limiting spending, consolidation could benefit from supply-side economic reforms to boost GDP growth. Reinstating fiscal rules suspended during the pandemic would underpin fiscal credibility.

The most effective combination of revenue and spending measures may vary from sovereign to sovereign. For example, an already high tax burden in Argentina, Brazil and Uruguay means that they have less room to increase taxes without undermining competitiveness and hence economic recovery than Mexico and other Central American countries with very narrow revenue bases. Medium-term fiscal goals are starting to emerge in budget announcements from countries like Brazil, Colombia, Mexico, Peru and Uruguay.

The main driver of negative sovereign credit trends in the region has been the adverse growth and fiscal dynamics. Our sovereign-specific rating analysis to resolve the Negative Outlooks (nearly 60% of our Latin American sovereign portfolio) will incorporate the starting position of a sovereign and our judgements around the scale of the economic and fiscal damage from the crisis, the headroom around the current rating level and the relative performance versus the respective peer median across different credit metrics.

Policy choices and outcomes which help reverse the fiscal deterioration and rebuild fiscal space could better anchor current ratings and we will assess both short- and medium-term consolidation plans as they emerge. Relevant factors will include whether primary balance consolidation can be achieved and the mix of structural and one-off measures employed; whether fiscal rules are reinstated to help anchor consolidation efforts; and whether governments have sufficient political capital and willingness to achieve sustained consolidation. The latter may be influenced by upcoming elections in several Latin American countries in 2021 and 2022.

More details can be found in 'Latin American Sovereigns Will Face Significant Post-Pandemic Fiscal Consolidation Challenges,' available by clicking on the link above. Fiscal prospects for Latin American sovereigns were also among the topics discussed on our recent Americas Global Sovereign Conference. A replay is available at .

Contact:

Shelly Shetty
Managing Director, Sovereigns
+1 212 908-0324
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300 West 57th Street
New York, NY 10014

Christopher Dychala
Analyst, Sovereigns
+1 545 582-3558

Mark Brown
Senior Director, ���������ֳ� Wire
+44 20 3530 1588



Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
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