Latin America and the coming global debt crisis
Despite not being the epicenter of the crisis, Latin American countries face payment crises, political backlash, and international tension as debt pressures mount worldwide.
WSJ - Global Poor Lose Services as Developing Countries Face Higher Debt Payments
NYT - Defaults Loom as Poor Countries Face an Economic Storm
The two articles above reveal growing debt concerns across emerging and frontier markets. From Latin America’s perspective, countries entered 2020 with poor fiscal situations, had to spend more to counter the pandemic and the lockdown recession, then had to spend to counter inflation, and now face a slowdown in growth and potential recession in some cases. I wrote about this in my timeline article in July.
The major takeaways and aspects to consider as we head into 2023 are below.
The problems in Latin America won’t hit immediately and will continue to build for many months.
The debt payment problem will build across 2023, peaking with a payment crisis in some countries in the final quarter of next year or the first half of 2024.
In terms of problems hitting earlier, Argentina is the biggest concern as the political campaign and election could accelerate the economic crisis.
In the meantime, countries making higher debt payments have less money for public goods. And that will increase political anger.
Even as inflation slows in most countries in the region, wages have not kept up with price increases. The general public in most countries in the hemisphere feels the economy is doing far worse post-pandemic, and blames the government for economic conditions.
Some countries may see the political class attempting to direct that anger towards debt holders including the IMF. But that direction of blame - while it receives a lot of media attention - rarely moves public opinion in a way that will help presidents gain leverage in their negotiations with legislatures or international lenders.
This public anger means the anti-incumbent environment will remain for several years to come.
Latin America is not the epicenter of this crisis.
The debt and default risks are higher in sub-Saharan Africa and South Asia. Sri Lanka has already defaulted and the crisis in Ghana appears far worse than anywhere in the Western Hemisphere.
Not a single Latin American country is mentioned in the NYT article linked above, though it does reference the region's debt crisis of the 1980's.
Problems in other regions of the world during the next 12 months could set the stage for a crisis in Latin America in the following year.
China's role in this debt crisis will be determinant.
Countries across Latin America owe money to China that is separate from what they owe bond holders or multinational lenders. This makes China key in all debt negotiations and can create controversy over which debt payments Latin American governments prioritize.
China has already refinanced its debt with Ecuador and that deal could become a model for how China deals with other countries in the region.
China has plenty of its own problems including anti-lockdown protests and a crash in its local property market. It also has similar debt payment issues around the world.
China could bail out small countries, although it probably won't. Most countries facing these debt crises have a relatively small amount of debt. China could buy all of El Salvador's or Belize's debt and have it be a drop in the bucket that would give them significant leverage over those countries moving forward. It’s unlikely they will take that action given all their internal problems, but it’s an interesting scenario to consider.
Like other lenders, China's debt in Argentina and Venezuela is not a drop in the bucket and can be a rather major concern for them. China has stopped throwing good money after bad in Venezuela and is not likely to provide new financing to Maduro in the coming year, but recently agreed to a currency swap with Argentina. The debts owed by these two countries are going to be the subject of years of negotiations and controversy, even after one or both governments have a transition.
Cascading debt crises are the outlier risk we should fear.
While it’s unlikely, the potential that default in one country in Latin America pushes multiple other countries into greater crisis does exist. When that first default happens, the question will be whether it’s a single failure or the first domino.
None of the debt owed by these countries exists in a vacuum. For example, Costa Rica can have its act together in terms of getting its government spending under control, but if other Central American countries look at risk of default, the cost of financing will increase for the Chaves government.
Brazil, Chile, and Colombia are very unlikely to default, but all face serious fiscal challenges that will become even more difficult as the regional environment worsens.
The most likely scenario is that Latin America has a default or two (Argentina being most likely) and other countries take a hit but get external help to make it through. However, the risk of a regional crisis can’t be ignored.