Latin America’s looming debt crisis?

Dr Christopher Sabatini

Greetings, hello. Welcome, everyone, thank you for joining us today. The topic today is on the pandemic and particularly focusing on the debt and the problems of economic growth. Now, obviously, Latin America debt crises have all too often become synonymous with Latin America, perhaps unfairly, but of course, even going back to 1898 and the Argentina Baring Crisis, this has been a perennial problem for many countries in the region. And, in the case of Latin America today, we see rising levels of debt, and the response, obviously, for the need for governments to be able to create stimulus to help cushion the blow of the economic contraction and the contagion and the pandemic, generally. And, of course, we also see with that the economic contraction, that in – according to the IMF, in the last year, the – on average, the region contracted by 7.4%, and of course, in this year, the IMF, and we can have Alejandro to talk about this, I would argue it’s perhaps too optimistic the idea that the region may bounce back to 4.1% growth. But even with that level of growth, it will take some years before the economic scarring and the previously low years of economic growth, the region can return to where it was, say, in the early 2000s.

In terms of debt, according to CEPAL, and the numbers I have, in 2020 the debt in Latin America increased, on average, by 15%. Now, Argentina, which had defaulted in its debt, though not entirely for reasons linked to the pandemic, had seen its debt grow to 102% of GDP. Brazil, it’s 94.4% of GDP, El Salvador 88.9% of GDP, and Colombia 58.8% of GDP. While Mexico is at a more stainable – sustainable level of 53.8%, you’re looking at very low rates of economic growth in Mexico and the risk that the pandemic, because of the lack of effective measures to contain infection rates, as well as struggles with the vaccine and the lack of economic stimulus, concerns about the ability of Mexico to sustain its level of debt. At the same time, of course, you’re seeing the concerns and the spectre, if you will, of the quantitative easing loosening, or being tapered in developed markets and a few developing markets, that will obviously increase interest rates and reduce liquidity, again, raising the risk of debt in the region.

We have here today four great experts to talk about this situation, and we’ll speak in this order. Alejandro Werner is the Director of the Western Hemisphere Department of the International Monetary Fund, the IMF. Second to speak will be Andrés Velasco, Former Finance Minister of Chile, from 2006 to 2010, and now the Dean of the School of Public Policy at LSE and Associate Fellow at Chatham House. Third to speak will be Jonathan Heath. Jonathan is the Deputy Governor of the Banco de México, Mexico’s Central Bank. And last is Lisa Schineller, the Managing Director and Lead Analyst of the Sovereign & International Public Finance Ratings at S&P Global.

So, without further ado, what I’ll do is turn the microphone over to Alejandro Werner, to give us an overview of the debt levels, economic growth projections and potential concerns, as well as positive signs in the future. Alejandro.

Alejandro Werner

Thanks, Chris, thanks for the invitation. It’s great to be with so many friends in this panel. Let me be quick. First, I mean, we’re expecting the world economy to grow at around 5.5% in 2021. That forecast had a US growth of around 5.1, with an assumption of, let’s say, no additional fiscal packages being approved in 2021. So, if you had a fiscal package of around $1.9 trillion being approved in the next two months, that could add around, let’s say, 1.3/1.4 percentage points of additional growth towards the US. So, we would be looking at a growth rate in the US closer to 6½% for 2021, with and important spill-over effects, to Latin America especially, to Mexico, Central America and Colombia.

In addition, I would say commodity prices have been doing much better than anticipated, and in that sense, that’s also a plus for Latin America. So, I would disagree a little bit with your comment that these forecasts are pessimistic. I think there’s a relatively balanced view where we can have better outcomes, in terms of economic growth than the ones we have assumed in our baseline. I also do think that there’s a lot of carry over. I mean, even if we have a flat 2021, growth in Latin America will be anywhere between two and three, so, we’re not talking about excessive or really aggressive growth by thinking of a 4. something% growth in Latin America. So, if we think of an important reopening of the service sector by the second half, on the back of vaccination campaigns and on the back of the world economy reopening, travelling, starting to pick up, etc., I think we can have a positive surprise. So, I would characterise the growth outlook for Latin America in a more balanced way than the one you characterise it at the beginning.

Obviously, I agree 100% with all the risks that you highlighted. We are coming out of the pandemic with GDP per capitas that are significantly below where we started. The pandemic is significantly biased towards affecting the poorest segments of the population, the most vulnerable groups of the population, so the social problems that Latin America has had, are going to deepen after the crisis and also, the political climate in Latin America is being deteriorated in the crisis. It’s hard to find, I mean, there are cases, but in general, one will argue that the pandemic contributed to political polarisation and did not contributed actually to generate some consensus on how to fix both the problems of the pandemic and the traditional problems of the regions. So, to come out of the pandemic strong, with a stronger policy agenda, that, with a very heavy political calendar. You have elections, I mean, you will have the second round of elections in Ecuador, you have elections in Peru, Presidential elections in Chile and then legislative elections in Argentina and Mexico, and then in 2021, you also have an important – a heavy electoral calendar.

So, it’s hard to envision, in this environment, that you will have the kind of important political agreements that will launch an important economic and social agenda for the next ten years, and there I think all the elements that you argued, with higher debts, political and social problems, the region can be stumbling into more debt crisis. We had two debt restructures this year. As you described, the Argentina one had already happened before the pandemic. Argentina was already in, let’s say, de facto before the pandemic, and I think it actually launched its restructuring before the pandemic started. Ecuador was a borderline case and with the decline in the prices of oil in March/April, it was obvious that Ecuador had to go into a restructuring phase.

For the other countries, I think it’s an issue where you have a much higher levels of debt, as you highlighted, but historically, low cost of servicing that debt. So, if countries are able – and look, even if, with the US fiscal package interest rates in the US go up and interest rates, either will have some outward pressures, etc., we will still be living in a world of historically low interest rates, given the excess of savings over investment, ‘cause investments are not going to pick up extremely rapidly. Either – so, maybe we will not have 2020 rates of growth, but they’re going to be low. So, those countries that will be able to show that they’re good at anchoring their debt levels in the post-pandemic world and those commitments are credible, I think will do well. Those countries that will not be able to do that, obviously, all the problems that you were – you mentioned in your introduction, I think will be reflected eventually on that – on their issues, down the road, in the next five years.

So, with that, I mean, I will close my initial remarks and highlighting the positive in the short-term, that it’s maybe some upward bias in our short-term focus, but on the other hand, totally agree with you of the big challenges that the region will face post-pandemic and the difficult initial conditions to deal with those challenges.

Dr Christopher Sabatini

Thank you, Alejandro, and I’m more than happy to be disagreed with on a topic of whether the projections for economic growth may be too high. Hopefully, meet that and exceed it. Andrés Velasco, your comments and thoughts on the situation.

Andrés Velasco

Thank you. Thank you, Chris, and hello, everyone. Very happy to be on this panel with some dear friends. Let me begin by highlighting something that Alejandro mentioned in passing, but which I think needs to be said. Last year’s economic performance in the region was less bad than we once anticipated, but it was pretty dismal anyway. If you look across regions of the world, Europe and Latin America posted the largest two sets of contractions. In Europe, that is easily explained, because the virus really wreaked havoc. In Latin America it did too, although deaths per capita are somewhat less dramatic than they are in Europe, and nonetheless, the contraction ended up being pretty big. So, you know, if there’s any champagne to be consumed, it is not quite yet.

Secondly, an obvious arithmetic point. I know everybody knows about this, but sometimes, obvious things need to be emphasised. If you shrink at six or seven and if you grow at three, or four, or five, you’re still not growing. You’re not even recovering, at least. So, you know, Alejandro will have much finer numbers than I have in mine, but the bottom line is, in December 2021, GDP will not be what it was in December 2019, as far as I can see, in any country of the region. So, if you add to that what Chris was saying at the outset, there are reasons for presume scarring effects of one kind or another. Latin America’s been very, very slow, for instance, in sending children back to school and, you know, that may not show up in this year’s GDP, but it will show up in some year’s GDP. Then, the prospects for recovery are not great.

Third, I think Alex has a very fair point. You know, as Central Bankers like to say, “The risk is at – on the upside,” simply because of the Chinese recovery, which has been stronger than people thought, and of the prospects for a bigger package than was once anticipated in the US. Whether this is a good policy or a bad policy in the US, it’s a separate subject. You know, we could invite Larry Summers and Olivier Blanchard to fight it out, with Krugman having something to say, but from the point of view of Latin America, of course, this means that the overall world scenario is a little bit more user-friendly than we once thought.

Now, I think the good news from last year is that governments and central banks found a way of making monetary and fiscal space where very little monetary and fiscal space was thought to exist. I think, you know, we Latin Americans tend to be pretty pessimistic and get down on our institutions quite readily, often with some justification. But I think it is fair to say that in most countries central banks have a lot more credibility than they used to, including Jonathan, Central Bank, the Banco de México, but it’s certainly not the only one. And, you know, even in the fiscal space, where things in Latin America are typically pretty dicey, markets have been quite tolerant, probably more tolerant than we might’ve anticipated, of fiscal expansions, even in countries like Brazil, where the initial debt levels were high. So, you know, countries were bold, not every country was bold, but a number of countries were bold, and the markets seem to have taken it well.

Now, the question, going forward, of course, is how long will this persist? How much additional room is there, and should we be worried? You know, Chris’s title for this session tended toward the pessimistic. I am tempted to side with Jorge Luis Borges, who, you know, who, when asked once, you know, “What do you think of Latin America doing this, that or the other?” Borges, as I’m sure you know, replied, “I’ve never met a Latin American. I’ve met Mexicans and Panamanians and Peruvians, never came across a Latin American,” which is a way of saying, simply, that this may be one area where generalisations are dangerous. Peru and Chile have debt levels, public debt levels of about one third of GDP, Brazil has public debt levels of nearly 100% of GDP. So, clearly, not everybody here is in the same bag.

Secondly, Alex made a point that is absolutely key, namely whether this debt is manageable or not depends on the world interest rate environment. The reason why many traditionally cautious Economists are saying, “Well, there’s more room for fiscal activism than there used to be, is that interest rates in the world are zero. You know, not every interest rate is zero, but many interest rates are zero, or even negative, and therefore, the carrying cost of this debt is much less.

The one scenario that does cause me to lose some sleep, of course, is one in which, because of changing macro circumstances in the US, there is a bit of a sudden stop coming from the Federal Reserve. I mean, Alex is right, even if the Federal Reserves does raise interest rates, we would still be in a low interest rate environment, that’s the good news. The bad news is that we have seen temper tantrums, particularly when it comes to spreads affecting emerging markets, even in response of pretty small actions on the part of the Fed. So, is there a scenario out there in which the Fed does something, which is not too large, but markets take it badly and spreads affecting our part of the world jump up and then, we are in more trouble? Yes, that scenario is certainly out there. It’s not a high probability event, but it is a more than zero probability event, and in that world, a subset of countries, including the countries with a lot of debt, like Brazil, would certainly come under a lot of stress.

Last but not least, and I will end here, this is a supercharged year politically and I think it is fair to say that politics in the region are always stormy, has been stormier than ever. Even my country, typically, kind of, boring and non-eventful, has seen its fair share of unexpected events. And in this very volatile political environment, even with high commodity prices, it is hard to envision a return to a high investment, high growth scenario, and I think that should be one main constraint that we keep in mind, as we look at what might or might not happen in the future. Let me stop there.

Dr Christopher Sabatini

Thank you, Andrés. Certainly, we understand the diversity of the region. It just makes for a difficult title to list all 34 countries in it. Why don’t we turn – Jonathan, please, your remarks and thoughts on Mexico, which obviously is – you know, as I like to say, AMLO has been almost Thatcherite in his fiscal policy, a curious change result from a seemingly leftist Presidency. Please.

Jonathan Heath

Well, I mean, AMLO is, in terms of what the world is doing, is, kind of, a big question mark. He was supposed to be a leftist President, but a lot of his policies are not really reflecting this left or white – left or right paradigm. It’s – in some sense, he’s been extremely conservative. But the one thing I think that is very important to understand is, kind of, the starting point, and AMLO was voted in with a really high percentage, because everybody was just completely fed up with previous Presidents, especially the last one of Peña Nieto. I mean, it was, like, one of the worst Presidencies ever, in terms of corruption, in terms of so many problems, in terms of so many mistakes and everything, that everybody wanted a change. So, along comes this radical Pre – this President with radical changes and then, all of a sudden, everybody’s like, “What?” You know, “We wanted changes for the, you know, for the good and, you know, what’s going on here?” So, it’s been a very, I would say, very difficult Presidency so far, but I mean, I think we’d better hang on, because depending – sorry, because depending on the midterm election results, things could get even harder in the next three years.

But I mean, first of all, I would say, in terms of growth, it’s, kind of, been surprising, because the – all our surveys of Analysts, everything, up until maybe just a month ago, were forecasting about 3.5% growth for Mexico, but if you grow 0% in every one of these quarters of this year, you’ll end up growing 3.5%. So, it was, like, a very pessimistic scenario that I think everybody is now starting to, kind of, understand that there is, kind of, a low point there, which 3.5, I think is just non-feasible.

We now have probably about three narrow scenarios of growth that are – the consensus forecast is now, like, about 3.9. If that happens, it’s a very low growth scenario and we’ll probably see, going back to previous peaks by maybe the first quarter of 2024. So, it’s, basically, you could say, the lost [mother tongue], as opposed to the lost decade of the 80s, but it’s, kind of, a similar scenario. Then we have our – the banks, central scenario is growing 4.8, which is, I would say, kind of, a moderate growth. It doesn’t call for any high growth rates at all. Probably more zero growth, at the first quarter, and then slowly picking up, and hopefully, maybe seeing something in the second half of the year.

If that happens, we will probably recover previous peak levels in mind-2023. And then we have our upper limit scenario of 6.7%, which could materialise if we do see success in the vaccine campaign, which, right now, is, kind of, up for grabs, we really don’t know. But it could materialise and 6.7%, after a drop of 8.5, still isn’t, like, a very robust recovery either. So, it’s a very optimistic scenario, but if you really look at it, 6.7 sounds fabulous, but it really isn’t that much. I mean, it still means that we would be returning to previous peak levels, probably towards the end of 2022.

Mexico, I think, is definitely one of the countries, probably almost alone in the world, that is betting for a – to not have a fiscal countercyclical policy and is betting on keeping debt to GDP levels, as long as they can. We did see an increase in debt to GDP levels the – last year, but it was more because of a drop in nominal GDP and an increase in the exchange rates, not so much because of an increase in debt per se. So, I think AMLO is betting on having no debt hangover, once this recovery is finishing and while all other countries are going to probably be facing a second crisis, in terms of the debt problem, he is betting that Mexico won’t. And I think that’s coming from the experience of the 80s, when we had this, well, whole decade of no growth, and resuming with this huge debt problem and we just couldn’t get over it, and then finally, and until we had a huge, massive release in terms of that, we were able to start growing again. And he, I think, has, kind of, that in mind that debt is not the way to go and that’s, basically, kind of, the main part of what he sees, looking forward.

The two key, I think, events, this year, which are going to probably make the difference, there’s a lot of things are going to make a difference, but I mean the two big things, is going to be the success of the vaccine campaign, how fast it can start getting implemented. We’ve had a very, very, very, very low start. We have – the governments has contracts, I think, with almost all of those reproducing vaccines and I mean – and they’re betting that somewhere in the future it’ll kick in. But then there’s logistic problems, distribution problems, the government is centralising everything. It’s going to be a hard, hard bumpy road, but maybe things will start turning around in the second half of the year and I think that’s, kind of, what the government is betting on.

And then the second key event, as some of you have pointed out, definitely are going to be the midterm elections. AMLO remains with very high popularity levels, they haven’t really budged very much and it’s, basically, because there’s a lot of people who really believe that now what the government is doing is geared towards the poorer people, the lower segment of the population and it’s only the, you know, the rich who are complaining and, you know, and that’s really great that they’re finally being – going to be looked after and they’re going to vote for him. They’re going to continue to vote for him. He had his famous Mañanera conference every single morning, at seven in the morning. He talks for one or two hours, or sometimes more, and everybody’s – you know, listens to him. He seems to be on the campaign trail, still, and I mean, and this tells us that the midterm election outcome is – if it doesn’t favour AMLO as well as it did three years ago, he’ll probably only lose marginally. But if he does lose marginally, it may be enough to be able to stop very more radical reforms from coming along in the second half of his administration. So, I think that may be definitely a key event. If he maintains his seats in congress, going forward, we’re in for a very bumpy ride in the last three years of his administration, very bumpy. And I mean, I think right now, the Central Bank can survive because AMLO’s been very adamant that it needs – you know, we – that they have to respect it, etc. But along the way, we’ve been already taking a few hits there, and I think that in the last three years of his administration, that could step up and we’re going to be definitely defending ourselves all along the road.

So, I mean, yes, we have a very, I think, complicated recovery going forward. Everybody’s talking that Mexico’s growth forecast is probably one of the lowest of them all, but this President is betting that, yes, but it means that we’re not going to have that debt hangover that other countries are going to have, so maybe in two or three years, we’re in a better position, that’s what he’s betting on. Let’s see what happens.

Dr Christopher Sabatini

Thank you very much, Jonathan, that was great. Now, batting clean-up, we have Lisa Schineller, and what I’ve read, Lisa, is that in – between January and October of last year, 13 countries in Latin America had their ratings downgraded. What are your thoughts, both in terms of what happened last year and this year, given what Jonathan just said, and Andrés, about the – this round of elections this year? Lisa.

Lisa Schineller

Yeah, thanks so much, Chris, and it’s really a pleasure to be on the panel, such a distinguished panel, and have this conversation. I think, starting off, if we’re looking LatAm, again, and I want to highlight I’m coming from the rating agency, we have a specific approach, right, we’re looking at payment of debt on time and in full, but within that, there’s not a magic debt to GDP number. It’s not that if debt goes up, we downgrade you. It depends on an approach, which looked at the institutional setting, the econ – the strengths and the weaknesses of the economy, external vulnerability, monetary policy credibility and track record, as well as the contour of the fiscal stance, okay? And we’ve had a number of actions, but it’s also the case that if you look at our ratings, there are more ratings that, on balance, didn’t move than moved. We still are tilted, there’s more stable outlooks, although it’s a close call, relative to negative outlooks in the region. That said, I think the region – and if we look globally, right, we didn’t – our goal is to not to overreact with the rating action, but try and look through what are the resiliency and policies signalling post-pandemic and will resiliency be there after the fact, or is there really no space, or, you know, or policy choices exacerbating already underlying weaknesses?

So, I think that’s the key approach we took, but if you look at LatAm, relative to our rating universe of 135, the 28 we have in LatAm, you’ve had more rating action there and I think that reflects the underlying vulnerabilities that there are. One of them is growth, and we talked about, you know, near-term growth dynamics, and I think there’s pro – we’re in the middle of our forecasting and there’s prob – there’s certainly upside, particularly what Alex highlighted on the US outlook, etc., filtering through to the region, but half, half. 14 of our 28 ratings in LatAm and the Caribbean, have what we call below average growth. We are – relative to the level of per capita income, you know, we see growth underperforming relative to peers with a similar level of economic income. You compare LatAm rating universe with Asia, there’s more – a majority of speculative grade versus investment grade, because of a weak growth story, weak investment. Andrés touched on education and all those things, the poverty inequality that [inaudible – 30:01], so, you have – besides higher debt levels, you know, so there’s a history there.

I’m so I just, you know, would want to highlight that, but there’s also heterogeneity, right, so, I think that’s the key point. If you look at Chile, at single A+ and Peru at triple B+, there’s a lot more scope for the fiscal space, in part, because you start with such a lower debt level, but there’s also a lot more policy credibility in there and a sense that there may be – historically, right, and we do have an important election in Peru, right, but how that will play out, moving forward. You go down the rating spectrum, Mexico we did downgrade because of a stress on the growth dynamic that was started pre-COVID. It doesn’t have to do to – that downgrading have to do with the fiscal, but there are fiscal risks that we highlight, but it’s still a triple B credit, right, and I think that’s an important point to highlight. You know, Colombia, a bit weaker because of a combined, relative to a Mexico, debt, and external profile, and I think that’s another point to highlight. You bring in various strengths and weaknesses here, as you go down the rating spectrum, and you highlight Brazil, who has even – it was in solid, you know, spec grade, with its higher debt burden and its very countercyclical – strong fiscal impulse, and there the question is, how do you withdraw that fiscal impulse and how – at what rate can that be financed in the local market and the rollover is there? It’s not an external story. So, I think that’s an important vulnerability there.

If you look at the defaults, so, now we’re going to get to questions of a – well, you put your question of a debt crisis. If you look at the six defaults, we had last year on commercial debt that we rate, four of those six are LatAm. Argentina, which, as you heard, was already on the road, Ecuador, Belize and Suriname, and I would argue that those three, already very low ratings, with inherent track records of poor payment culture and vulnerabilities, etc., COVID exacerbated that, right? But this highlights a track record of weakness, certainly in the region, and we still have, you know, a, you know, predominant of – you know, and we have more negative outlooks than positive outlooks, and I think when we’re talking about the very weak – the risks around debt – the debt story, is much more at the lower end. And I think one of the points that we talked about before, I would highlight, what might be good, from public policy point of view, may not immediately be the – what’s appropriate – you know, may differ from the rating. And I think that’s also an important point I want to highlight here, that, you know, stress is made because of political context.

You may need to make choices that may lead to a different rating outcome and then, you know, a policy choice can differ, I think that’s an important point to highlight. But if we’re looking at the low end of the spectrum, you know, Argentina, I think the difference between what we hear from conversations with investors, the near-term versus the short-term, Argentina’s in the triple C – is triple C+, challenges in discussing a programme with the fund. It’s in arrears with the Paris Club. Solving those near-term, or less near-term, you know, kind of challenges, is – to get, maybe, to the single B category, is very different than tackling the long-term challenges of growth, investment, a complex tax burden, a high tax burden, the grow – you know, clearly, the debt, and a lack of policy consistency for decades, right, and a poor debt culture. That’s going to take a lot more, and that circles back to, kind of, where’s the political standing? And you have the political cycles, to really turn around the structural fundamentals, that’s going to be harder, okay?

I think Belize, which we – went into default last year, it had defaulted multiple times in years before, never doing a haircut, but always extending maturities, we lowered them again last week, because there’s a real question about ability and willingness to pay debt that’s coming forward this year. And I think this highlights the risks around the low end of the spectrum, particularly for small tourism dependent economies, with very high debt levels, who need to reach out and work very much with the multilaterals and they are, in many instances. But I think it’s that very low end of the spectrum, and we’re not talking about the very high end of the spectrum, that we see more risks, clearly.

Dr Christopher Sabatini

Thank you very much, Lisa. Now, for all of you, please put your questions you have in the question box and I’ll call on you. We already have three questions from Fiona Clouder, Peter West and Vivian Oswald. Please be ready, I’m going to ask you to ask your questions in person. But before we do, I want to turn to Victor Bulmer-Thomas, who, by the way, you mentioned Belize, Victor. His interest in Latin America came from the time he spent in Belize as a college student, I believe. So, Victor, give us some historical perspective, as an Economic Historian, on what we see now, in general. Victor, please.

Victor Bulmer-Thomas

Well, thank you, Chris. I mean, when we talk about a Latin American debt crisis, we’re talking about a situation where there is widespread default or threat of default. And the first of those crises was 200 years ago, in the 1820s, shortly after most Latin American countries gained their independence. It was at a time when the bulk of the debt was in the form of bonds, with the creditors being external and, essentially, the funds were used in unproductive ways, primarily for military expenditure and purposes like that, and inevitably, that, of course, led to the risk of default, which is what happened.

The next is in the 1870s and note that that’s 50 years later, and this was after a period, a rapid build-up in debt with Latin America, mainly put to productive use, but then, undermined by the price deflation of the 1870s in the industrialised countries of that time. Then, you go forward to the 1930s, when, in the wake of the Great Depression and the collapse of commodity prices, you have, again, a very widespread default. And then, the fourth of these is in the 1980s, very much associated with the over-lending by banks to Latin America and a widespread threat of default, rather than default, which triggered, then, a huge effort by the creditor countries, the creditor institutions, to try and keep Latin American countries from defaulting, even though some of them, of course, did.

Now, the interesting thing about these four crises is that they are roughly every 50 years, not precisely, but roughly, and that has pe – led people to speculate whether there might not be some sort of Kondratiev wave operating here. A Kondratiev wave was named after the Russian Economist, who first noticed it in studying wheat prices from the Middle Ages to the present, and nobody’s ever been able to explain, causally, what brings about a Kondratiev wave, but it’s definitely worthy of comment that these Latin American debt crises have occurred roughly every 50 years. And I can remember, when I was working with a group of Economic Historians on the 1980s debt crisis, a group that included people like the late Carlos Díaz-Alejandro, and the very much living José Antonio Ocampo from Colombia, we did speculate about when the next crisis would occur, and of course, we’d pencilled in the 2030s and in ten years’ time, on the grounds that that will be 50. So, the question is well, is this an early debt crisis, an early generalised widespread debt crisis?

Unfortunately, the answer so far is no, and the reason for that are straightforward and have been mentioned by some of the panellists. First of all, there is no widespread default or threat of default. Lisa mentioned four countries. I would take issue with her whether she should classify Belize as having defaulted. I strongly oppose that idea, but even if it – if you did include them, it’s still a very small number of countries and only one major country, in terms of size of the debt, and that is Argentina, and that, of course, is pre-COVID, rather than post-COVID. So, that’s not the problem.

The second is that there are still willing lenders. Normally, in a debt crisis, the whole point is, you don’t have willing lenders and, certainly, that has been the case of the four generalised crises that I’ve described. In fact, not only would I say there are willing lenders, some of these lenders that are extremely keen to lend. I mean, it’s almost unheard of that the IMF is actually encouraging countries to take on more debt and, in its own case, is close to issuing the SDR, some of which, presumably many of which, would go to Latin American countries. So, that’s another reason why we’re not yet, at least, in one of these Latin American debt crises that we’ve observed in the past.

I think the third is a point that probably hasn’t been made enough of by the panellists and that is the difference between domestic and external debt. The four crises that we were talking – that I’ve talked about earlier on are primarily to do with external debt, held by the public sector, and if you get into trouble with that, obviously, that can lead to a generalised debt crisis. If the problem is domestic debt, of course, it can lead to huge problems, but it doesn’t lead to the same kinds of problems as when you have an external debt. At the end of the day, you can print the money, if it comes to it, with domestic debt. May not be a very good idea, has inflationary implications, but it’s very different from an external debt. And when we look at the ratios of public external debt to GDP in Latin America, they’re quite low, and even for those countries, which have a very high public debt to GDP ratio, i.e., including the domestic debt, along with the external debt, even for those countries, the external debt ratio is quite low. So, that’s, I think, again, a reason why I don’t anticipate this being a generalised debt crisis.

Now, having said that, within these four generalised debt crises, there have always been individual cases of debt problems, debt crises. I mean, the most famous is the one you mentioned at the beginning, Chris, which is the Baring Crisis, of 1890, by the way, not 1898, and that affected Argentina, in particular, but also Uruguay, and that was very specific to those two countries and had to do with the excessive lending by the House of Baring, to those particular countries, but it didn’t really affect the rest of Latin America. And we can say the same about a number of individual countries.

Mexico has had its own debt crises, quite separate from the rest of Latin America, in the past, and looking ahead for the next two or three years, it seems to me quite likely that one or two, maybe more, sadly, countries will have debt crisis of the external debt variety. But that doesn’t mean it’ll be generalised or, necessarily, widespread and it shouldn’t affect the whole of Latin America. I think the key problem is the one that Andrés and Alejandro mention, which is the possibility that interest rates might go up and that that might trigger a, kind of, negative external shock that would affect all of the borrowing countries in Latin America. But unless something really dramatic, and it would have to be a very dramatic increase in interest rates, unless something like that happens, I do not expect this to be the next generalised Latin American debt crisis. Thanks.

Dr Christopher Sabatini

Thank you very much, Victor, that was great. And, you know, you mentioned the – what debt is invested in actually shapes, too, and the nature of that debt crisis, and of course, in the 1820s, military investment, in the Baring Crisis, it was speculation. Whereas now, obviously, the debt that has gone up has been intended to spur productivity, rather spur economic growth and cushion the fallout. So, any debt that has been raised, while some of it has been perhaps mismanaged or ill spent, is much needed. So, this isn’t just speculative debt that’s been taken out.

Let me go to the first question by Fiona Clouder. Fiona, please, you can – if you turn your camera on, you can – and unmute yourself, you can ask the question.

Fiona Clouder

Hello.

Dr Christopher Sabatini

Hello, yes.

Fiona Clouder

Hi, I don’t think it’s possible to turn my camera on, so – but hopefully, you can see who I am.

Dr Christopher Sabatini

Yes.

Fiona Clouder

So, thank you very much to all the speakers for this fascinating overview of the region and its challenges. Could you also comment on the role you see a green recovery playing in the future across the region, and crucially, apart from just identifying it, how can we get governments and the private sector to really focus on that as part of their plans for jobs and growth? Thank you.

Dr Christopher Sabatini

Green recovery, who wants to take this first? Ah, Jonathan, please.

Jonathan Heath

I can’t speak for the rest of LatAm, but I can tell you that Mexico is definitely not going there. We have a President that, if anything, he hates green and he’s going – running in the opposite direction. They just passed a new electricity law, in favour of more contaminating electricity generation. He sees that we did really well back, I think, in the 50s, so that’s, basically, where he’s thinking that we should return, let’s go back, and definitely, there’s absolutely no progress, I think, that we can even hope for in Mexico, going in that direction, in these next – at least in the next three years.

Dr Christopher Sabatini

Alejandro, your thoughts on a green recovery, and then I’m going to go to you, Lisa, because I want you to talk about – a little bit about green bonds, which have been doing quite well in Brazil and other countries.

Alejandro Werner

And my thoughts, first, are that we don’t have to worry about an independent central bank, no, because, I mean, with Jonathan there, we have seen that independence and the strength of a completely independent thinking coming from the central bank. Look, I do think that following on Jonathan’s comments, it is true that you don’t have a strong green agenda, neither in Mexico, nor in Brazil, and I mean, again, without having the two largest economies in the region pushing for these green recovery-led – investment-led growth, it’s hard to talk about a regional strong push. But I think you do have, I mean, interesting ideas coming through the pipeline in other countries now, in Colombia, in Chile, obviously Costa Rica and the Caribbean, with a very strong agenda of adaptation. And, hopefully, I mean, being able to implement it on the back of significant financial support from the advanced economies, no. So, I think we will see interesting things, but regionally, it’s hard to think that you – we have a very strong push, and that’s what countries should be doing, that it’s based on strong fis – medium-term fiscal anchors that will allow countries to enter into long-term financing, to fund a mitigation and a patient agenda for the region in the next decade.

Now, I think it’s too early, the region is still going through how to manage the current pandemic and I think we haven’t seen a strong consensus on how to launch these green responses.

Dr Christopher Sabatini

Lisa, did you have a comment on this, given the ratings and what you’ve seen, in terms of debts and bonds on the…?

Lisa Schineller

Yeah, I mean, I think I would thoroughly agree with the comments that have been made, and I was going to highlight one of the countries that I’m working with, Costa Rica, is clearly – you know, has a very strong green agenda, it’s been quite successful. And I think here, and notwithstanding the points on Mexico, in terms of a green agenda, Mexico was the first sovereign to issue a Sustainable Development Bond last year, which I thought is interesting and including, within its formal budgetary framework, kind of, an SDG approach, which I think, you know, could be – you know, reflects a legacy of a strength, in terms of the civil service in ASEAN, the kind of, laying these pieces on the ground ahead of time, even though that may not be the priority, in terms of a green piece at the moment by the administration.

We, at – we’re trying to – we’re looking at ESG and ratings and I think important to highlight, elements are already in there and I think we want to crystallise that more formally, over the course of the year, on sovereign, as we have elsewhere in the practice, but things like the governance piece, that is key point in the rating. Social indicators, very important if you’re going to think about the pace of economic activity, the balanced – the balance of economic – is economic activity balanced or not? Will you have a feedback loop, in a positive or a negative way, to reinforce the governance side, coming from social indicators, right, or you know, strong or weak? So, those are the, kind of, ways that we think about them in the rating, but I give it – the rating, when we’re talking about sovereign payment of debt, I think Costa Rica’s an example, this – notwithstanding having an extremely strong and successful green agenda, favourable social indicators, its rating is in the single B category, because it hasn’t been able to put in place, over time, its policies to, you know, curtail a strong rise in debt, over the last decade, right? And problems, in terms of passage of policy, in terms of getting – issuing a bond on the global markets, right, kind of a thing. So, there’s a difference between the ESG characteristics, in some instances, and where the outcome on a sovereign rating’s going to be, right? So, I think that’s got a – so, that’s what – some of the nuances that we’ll – we’re going to try and balance further, in terms of communications with the market.

Dr Christopher Sabatini

Andrés, did you want to weigh in on this, given the very nice things that have been said about your bus system in Chile? Ah, you’re muted.

Andrés Velasco

I share Fiona’s concern. I’m coming from the same place. I keep hoping for a green recovery. My only thought is that in order to have a green recovery, first you need a recovery, for all the reasons that we mentioned that is not completely clear. Secondly, the green recovery, based on infrastructure, requires fiscal space and as we said, the fiscal space story is not clear-cut. Not much of that, in some countries, and in countries where you do have fiscal space, like Mexico, maybe you don’t have the interest or the political will, as Jonathan just put a – and, you know, put it very, very clearly.

But I would – you know, that may be the general trend, that may be the overall, somewhat pessimistic, conclusion, but within that, I think you have single countries, or groups of countries, with more hopeful outlooks. I will mention that in Chile there – you know, clearly, the transformation of the way the country produces energy is nothing short of outstanding. You know, we went from being a very diesel heavy and coal heavy country just a decade ago, to being one of the top producers of solar power in the world. You know, hydrogen, in its different varieties, has a great future. You know, more generally, Latin America’s a pretty sunny place, so to the extent that the technology for sun – for solar gets improving, I think we’re going to be seeing more investment there. So, will we see an – a big co-ordinated push? I don’t think so. Can we see some individual happy country stories? Yes, very much so.

Dr Christopher Sabatini

Great. So, we have only five minutes left. I’m going to have the remainder questions we have, have them asked in a lightning round of questions, and hopefully, lightning round of answers. So, we’re going to go Peter West, Vanessa Oswald, then Karin Strohecker, and I’m trying to see. I guess that’s it, yes, that’s it. So – and then, let me just say, before we end, I want to thank our sponsors, the Latin America Initiative. We would not be able to have this event, or even be able to have a Latin American Initiative, were it not for them, BTG Pactual, HSBC, Fresnillo, Charin Energy and Equinor. So, let’s start, Peter, are you – is your mic on, can you speak?

Peter West

I can speak, can you hear me?

Dr Christopher Sabatini

We can hear you.

Peter West

Okay, thank you. There’s one major debtor in the region, which has been in default for many years now, that nobody’s mentioned, for understandable reasons, and it’s called Venezuela. The – and that’s my question’s about Venezuela. The – I do know a regime has being taking some limited moves, I don’t know how to put it, towards ‘economic liberalisation’, more out of desperation than conviction. But maybe Alejandro or Lisa could comment on the significance of these moves, and are we going to see the economy finally bottom out? Thank you.

Dr Christopher Sabatini

Well, I think where the bottom is, is the question when it comes to Venezuela. It seems to just keep lower – getting lower and lower. Let’s continue with this, Vanessa, please, your comment.

Vivian Oswald

Yes, hi. I would like…

Dr Christopher Sabatini

Oh, Vivian.

Vivian Oswald

…to talk – yes, I would like you to make some comments on Brazil. The Brazilian Government acted too late and in a very contradictory way, whilst facing the sanitary crisis. There is no unified speech there to fight COVID. We have a political scenario, which is complicated. The President is focusing on the presidential elections on 2022. The second wave is hitting hard the country, with record COVID figures and everything that you probably are reading everywhere. So, the economy will feel it hard. The economic crisis will probably deepen. Don’t you think that the way the country’s dealing with the pandemic will affect the Brazilian fiscal situation in the medium-term and its growth rates in the end, and don’t you think, also, that this sanitary situation in Brazil could affect the other countries in the region, as well?

Dr Christopher Sabatini

I just want to add to Vivian’s question, which is to what extent are you building in, Alejandro and Lisa in particular, the risk that Bolsonaro is really going to start to prime the pumps of fiscal stimulus and break the bank, in the lead-up to the elections, in an effort to, sort of, consolidate his power, given, especially, the success of the previous stimulus packages?

And then, the last question is by Karin Strohecker, Karen, please?

Mark Jones

Hi, it’s not actually Karen, it’s her colleague, Mark Jones, but I think the system has sucked her name in somehow.

Dr Christopher Sabatini

Oh, but at least you’re not looking like a cat.

Mark Jones

That’s a bonus. It’s just a quick question for Alejandro. There’s some concern, perhaps, that Argentina’s approach to its current talks with the IMF, seems to be some foot dragging and, potentially, even, you could come up with a theory that they could even default on IMF debt by the end of the year. I mean, it seems a, you know, obviously, a kind of, an implausible idea, but what would the fund’s plan be to deal with that possibility, if its largest borrower doesn’t pay back at some point?

Dr Christopher Sabatini

Great, thank you. Let’s go in reverse order to the speakers. Lisa, we’ll start with you.

Lisa Schineller

Thanks. So, on the Brazil side, I think, you know, in terms of the lack of a unified response, I think we want – we’ve seen that elsewhere in the region, including in the US, and its – at least, you know, you’ve got – when you’ve got Mexico federal systems, complicated approaches and signalling from the Executive, so that’s – you – but, you know, I think that’s part of the complexities of having a very strong federal system and different views on the sanitary policy, right? But I think – so, we haven’t focused on that as much, from the rating perspective. We do see that the fiscal impulse has been very supportive for, you know, limiting the decline in GDP, as well as then, putting forth a recovery, right, this year.

That said, you know, the – your question of what this means, over the medium-term, is very relevant. The fiscal and the growth story, the combination of them, those are the key weaknesses in Brazil’s rating, period. They – they’re, kind of, as low as they can go, in a sense. They’re offset by other factors, including going back on – to the – one of the other discussion we had, the fact that it doesn’t have this, kind of, external vulnerability that it had, you know, a decade ago, and that is a key strength. But moving forward, an inability to – a prolonged inability to offset the, kind of, the stimulus impulse, if it spills over, okay, because it’s – and again, it’s not an external vulnerability, if it spills over and contaminates the financing dynamics in the local market, which are the, you know, dominant share – dominant piece there, in terms of their financing, that is where we, potentially, could see, you know, the negative – and a more negative scenario. And does that then spill into, kind of, the monetary policy strengths that have – that it – Brazil has acquired, over the last decade, as well? So, those medium-term dynamics are certainly a question over time and given the weak starting point.

Chris, to your point on the tone of policy, I think you see there has been, you know, I would say, some balancing there. There certainly is always a – this is a – and it’s a political question for across the region, the temptation to keep in stimulus too long, thinking about the electoral cycle, and we talked about the – this – the strong electoral cycle we already have for this year, etc., and how that will impact and how it’s impacting policymaking in Argentina, etc., in the near-term. There seems to be, though, some, you know, balancing there, right? So, if we really felt that there was, you know, there’s some learning there, at a lower rating level, by the way, but we’re not assuming, at this point in time, that there’s, you know, an all-out. It’s a matter of, do you add some more stimulus, can you offset it a little bit or not? Do you – you know, excluding something from the cap, when the cap might come back in, that kind of thing, kind of, the structure of fiscals there. But we don’t see, at this point, a major deterioration, right, but it’s a question of the slow improvement.

Dr Christopher Sabatini

Thank you very much. Andrés, your thoughts?

Andrés Velasco

Let me focus on Brazil, which is the one subject I may claim to know a little bit about. The thing to notice about Brazil is that the short rate, domestically, in Brazil, is very low, so one might be tempted to conclude, well, Brazil is like, you know, the US and the UK also have debts to GDP of nearly 100%, what’s the difference? The big difference is that the yield curve in Brazil is very steep and as a result, if you borrow short, the debt is cheap, if you try to borrow longer, the debt is quite expensive. And, of course, we know, from hundreds of years of history, not simply in Latin America, that when you borrow short, you leave yourself exposed to a panic, a crisis, a run, or all of the above.

So, the real danger in Brazil is the shortening of maturities and the volatility and vulnerability that that elicits. That’s the bad news. The good news is that most of the debt is in domestic currency. That doesn’t mean, necessarily, that most of the debt is domestic, in the sense of the holders being domestic, it’s a pretty mixed batch. You know, Brazil is so big that a lot of the people who buy debt denominator and realise in Brazil, are not necessarily Brazilians. So, you know, your guess is as good as mine as to what the political economy of that is. You know, if Brazil were to change the terms – the fact or the jury, you know, who gets hurt, that’s a different question. But there could be a subset of debtholders who are not necessarily domestic residents, who are flighty and who could, you know, be looking for the door at some point.

So, I think Brazil is very much, you know, [mother tongue]. It’s very hard to know exactly where this will end up. And the last point that you mentioned, Chris, is the big one, no-one seems sure about whether Bolsonaro, having tasted the elixir of, you know, fast and deep and big expenditure, will become hooked on the stuff, right? You know, extraordinary expenditures, during an extraordinary pandemic, nothing wrong with that. Extraordinary expenditures, year in and year out, very bad idea. Problem is, when you try the stuff, you, you know, you tend to like it and Bolsonaro seems to be liking it.

And to my friend Peter West, Peter, you know, on Venezuela, what can I say? I do not think that what we have seen is any indication of a deep change in the orientation of the government. As you pointed out, it’s mostly desperation stuff. I’m afraid that any real change in Venezuela will have to wait until the political change, you know, comes, and I wish I could say otherwise, but that political change, which is most necessary, does not seem to be around the corner.

Dr Christopher Sabatini

Thank you, Andrés. Jonathan, I want to go to you and just – I want to echo what Alejandro said about the independence of the central bank. You know, as much as we may – your comments, your profile, is clearly an indication of what is an enduring sign of stability, despite all the other problems in Mexico, so thank you. Jonathan, your thoughts on the comments and questions that have been raised. Mute. Yeah, there we go, let’s see.

Jonathan Heath

The last three questions have been more focused on Venezuela, Brazil and Argentina, and I just, I don’t really have too much to say, except just I completely agree with Andrés. I mean, Venezuela’s basically, been taken off everybody’s list of even paying attention to and analysing, and sometimes we find it amusing to look and see what their inflation forecast is going to be, and sometimes, I think it was, like, a couple of years ago, they were forecasting a million% inflation and whatever, and then it’s had a negative GDP rate now, I don’t know, for like, almost every year for the last ten or whatever. I mean, it’s just – and there’s no hope at all, I mean, for Venezuela, like Andrés says, until they turn around politically, and that just is not even around the corner, it’s not even, I mean, in the same neighbourhood. And that’s a long, long way away and I think the country’s going to continue to deteriorate, even, you know, much further than it is, even though it almost seems impossible to see that.

And just, look, in the last – I think just reflecting over what’s happened, kind of, in the last 20 to 25 years, when Andrés and I, and a few others, were together, explaining all these Latin American countries, and I remember Mexico was, kind of, a little down the list, in terms of what countries people would look up to, and it was – on the top of the list was Venezuela and then they – then, I think, Argentina, and now it’s, kind of, all completely, you know, the other way around. It’s been an amazing 20/25 years, so many things going on and it’s, kind of, I don’t know, difficult looking forward and to see what we can think where we’re going to be in the next 20/25 years. Anyway, closing remarks, thank you.

Dr Christopher Sabatini

Thank you. I really appreciate Peter’s persistence in raising Venezuela, ‘cause it, sort of, makes him the skunk at the garden party every time, but I appreciate Peter. Alejandro, final remarks, final thoughts.

Alejandro Werner

Thanks, Chris, I hope in 25 years we will have Venezuela and Argentina being spoken about like a Chile or Peru today, but Mexico, Colombia, etc., will continue to be there and will not be in the position that other countries in Latin America area. I think those small changes towards liberalisation of imports and currency use, etc., in Venezuela, are irrelevant. And I mean, the huge institutional decomposition of the country make it ungovernable and the decline in oil production has generated a 70% contraction of the economy in the last seven years. So, the problems will continue, yeah, eventually it will reach a bottom, because you reach self-sufficiency and then, some agriculture keeps on going and there’s some minimum oil that keeps being pumped. And I think this liberalisation has allowed, I mean, the richest people in Venezuela to be able to fund and bring goods to operate a minimal level of normal activity, but from the economic point for view, it’s – I think it’s a distraction.

I totally agree with what has been said in Brazil. I think the tensions between – I think in Brazil, need – given the continuation of the pandemic and, let’s say, the economic effect in the first/second quarter of this year, it will need some sort of support to the population, in a much smaller scale than in the previous year, and at the end of the day, what will make the fiscal situation manageable or not is if the politics in Brazil shows that they’re willing to do what it takes in 2022 and 2023. I don’t think a percentage point, or two percentage points of GDP, in 2021, will break the situation, but if they do it, they’ll better send a very strong signal on how they’re going to manage in the future, and as both Lisa and Andrés said, it’s a mixed bag. Because also, I mean, they just passed the independence of the central bank, they’re talking about tax reform. I think this – and so, that’s the attention with Paulo Guedes and the President, the political incentives to do more, and on the other hand, the realisation that the financial situation is very fragile, you know. So, let’s see how that ends up shaping, but I think we will continue to see that equilibrium, and I think they will continue to pay significant attention to the financial side and respect their very shaky budget constraints on Argentina. I will not comment on ongoing negotiations. The negotiations are ongoing, we’re working well with the Argentinians and they have their calendars, they have their strategies, but the work is ongoing to, eventually, to sign a successful programme that will allow, I mean, Argentina to manage their very challenging balance of payment needs, in the next few years.

Thank you, Chris.

Dr Christopher Sabatini

Thank you, everyone. I won’t bother trying to summarise what was a very rich discussion, and except to say that, clearly, it’s mixed. I think we’re seeing different pressures in different – but it’s clearly not as dire as the title of the – this indicated, we’re quite – in fact, quite the opposite. But each country’s going to be different. That’s my dog, by the way, that you just hear the sound of. Each country’s going to be different and there are competing pressures, but I think the big thing is, hoping that the vaccination programmes and these measures achieve a moment that allow these countries to start to grow.

So, thank you all very much for joining us: Jonathan, Lisa, Alejandro, Andrés, Victor, and I look forward to continue to be in touch with all of you. Bye, bye, everyone, thank you.