MARRAKECH, Morocco (Reuters) – The International Monetary Fund said fiscal policy in Latin America and the Caribbean has been “prudent” but governments need to increase revenues as there are not many options amid elevated debt levels and high interest rates.
“In a new era of higher interest rates, and just because of the debt level being higher than in other emerging markets, the region needs to make further efforts to consolidate,” said Rodrigo Valdes, director of the Western Hemisphere Department (WHD) at the IMF.
“There are plans, now we need a lot of discipline.”
Earlier this week, the IMF raised its 2023 output growth estimate for Latin America and the Caribbean to 2.3% from July’s 1.9% as it saw faster expected growth in Brazil and Mexico.
In its regional outlook, published on Friday, the fund highlighted the need to lower debt burdens while meeting social demands.
“We have to recognize that fiscal policy was very prudent, with a lot of spending but a very quick withdrawal of the spending during COVID,” Valdes told Reuters.
“However we had already before COVID a relatively high debt level in the region and that continues to be the case.”
The perception that interest rates will remain high for a longer period in the developed world takes a double toll in emerging markets. Investors pull money out from the region given higher returns in less risky assets. It also increases the cost of borrowing and a larger chuck of country revenues has to be used to service the debt.
“Debt in the region is relatively long term so the pass-through from higher interest (rates) to higher costs is not immediate, but eventually it will come,” Valdes said.
“The world has become more complex. Climate, commodity shocks…. and therefore, it would be wise to rebuild (fiscal) policy space.”
(Reporting by Jorgelina do Rosario in Marrakech, Morocco, and Rodrigo Campos in New York; Editing by Chizu Nomiyama)