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Fiscal Adjustment in Latin America This chapter presents general trends and stylised facts about fiscal adjustment in Latin America since the 1990s, with particular emphasis on Argentina, Brazil, Chile and Mexico. It highlights the considerable diversity in the size and scope of government among these countries, as well as in the level of public indebtedness, which continues to be a source of vulnerability in the higher-debt countries in the region. In most countries, the composition of fiscal adjustment has been tilted towards hiking revenue and compressing public investment, rather than retrenching current spending commitments. This imbalance is likely to affect the sustainability of adjustment over time. Moreover, the fiscal stance continues to have a bias towards pro-cyclicality in most cases, reflecting to a large extent high indebtedness and the ensuing vulnerability to shocks in "bad" times, as well as failure to contain the rise in expenditure in "good" times financed by cyclical revenue windfalls.
Perspectives for Fiscal Adjustment in Latin America This chapter discusses the market’s perception of fiscal adjustment in Latin America. It reviews the key methodological features used to determine a sovereign credit rating and assesses the fiscal performance of a number of Latin American credits. Several fiscal indicators are reported. A sovereign rating focuses only on a government’s ability and willingness to repay debt on time and in full. Sovereign rating methodology is argued to be both quantitative and qualitative, incorporating an assessment of policy credibility, transparency and predictability. Fiscal policy plays a crucial role in credit rating analysis, including the fiscal authorities’ ability and willingness to adjust policy to shocks or changing economic conditions.
Argentina's Fiscal Policy in the 1990s This chapter discusses fiscal adjustment in Argentina. It argues that the deterioration of the public debt dynamics prior to the 2001 crisis was due predominantly to the costs borne by the budget associated with the pension reform implemented in the early 1990s, the refinancing at market rates of the debt that had been restructured at concessionary rates under the Brady deal in 1992, and the recognition of previously unrecorded liabilities (fiscal "skeletons"). Instead of being perceived by the markets as instrumental in improving Argentina’s fiscal accounts over the long term, despite its associated short-term costs, pension reform is argued to have contributed to the deterioration of investors’ perception of debt sustainability in an environment of macroeconomic volatility and financial crises in other emerging market economies.
The Brazilian Fiscal Adjustment This chapter discusses fiscal adjustment in Brazil since macroeconomic stabilisation in the mid-1990s. It is argued that the authorities’ growing awareness of the need for fiscal discipline was as important as the pace of structural reforms for understanding the dynamics of public indebtedness. Fiscal adjustment intensified after the abandonment of the exchange rate peg in 1999 to avoid a default on the public debt with certainly ruinous consequences for the economy. The chapter discusses the composition of fiscal adjustment, based predominantly on tax revenue hikes, against the backdrop of Brazil’s still high public debt-to-GDP ratio, and concludes that the hard-won fiscal discipline will have to be entrenched in fiscal institutions and the quality of the fiscal adjustment improved to support higher and sustainable economic growth.
Structural Change in Chile This chapter discusses the driving forces behind Chile’s strong fiscal performance. It is argued that fiscal rectitude owes much to the progressive concentration of policymaking powers on the executive branch of government, including over sub-national finances. The ban on revenue earmarking is highlighted as a means of rendering fiscal management more flexible. Structural reform since the return to democracy in 1990 was facilitated by a high degree of political cohesiveness. The use of fiscal policy as a demand management instrument is due to the introduction of mechanisms to deal with the impact on the budget of fluctuations in copper prices and the business cycle, an achievement that is underpinned by Chile’s low level of public indebtedness.
Challenges of Mexican Fiscal Policy This chapter reviews the Mexican experience with fiscal adjustment. Different scenarios are presented for Mexico’s debt dynamics, arguing that the country has been relatively successful at containing expenditure pressures, while facing important challenges for the future. These include the need to ensure fiscal sustainability over the longer term, given the remaining unrecorded contingent liabilities associated with the public enterprises and the pension system, and to boost revenue performance, against a backdrop of continued reliance on oil revenue. The chapter also discusses the microeconomic aspects of fiscal adjustment, focusing on the need for improving the cost-effectiveness of government spending on infrastructure and social programmes.
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