Latin America debt at 52% of GDP limits fiscal space, ECLAC finds

Latin America projected to grow 2.2% for fifth consecutive year

ECLAC reported in August that central government gross debt in Latin America stands at about 52% of GDP and that stabilizing it at that level has not been enough to rebuild fiscal space, according to a UPI commentary published Thursday by economist César Addario Soljancic.

“That level does not, by itself, constitute a regional debt crisis,” Addario wrote. But the debt level helps explain why governments have so little fiscal room to invest, why central banks remain cautious about cutting interest rates, and why foreign capital has yet to transform the region’s productive capacity. The deeper problem, he argued, is not how much the region owes, but how much paying for the past restricts its ability to invest in the future.

The story begins with abundance, poorly managed. During the 1970s, the recycling of petrodollars and negative real interest rates made credit appear cheap and almost unlimited, according to Addario’s commentary. Governments borrowed heavily to finance infrastructure, subsidies and industrial projects.

The reckoning came in 1982, when Mexico announced it could no longer service its debt. What followed became Latin America’s “lost decade” — recession, hyperinflation, falling real wages and painful adjustment. By the late 1980s and early 1990s, debts were restructured, the region undertook privatization, trade liberalization and greater fiscal discipline, and debt ratios declined.

Then came the commodity supercycle. Between 2003 and 2013, high prices for copper, soybeans, oil and minerals filled government coffers, Addario wrote. Several countries reduced their debt burdens, accumulated reserves and expanded social programs.

Not quite, in his assessment. When commodity prices weakened after 2014, governments did not cut spending at the same pace, he wrote. Then the COVID-19 pandemic forced governments to borrow heavily again, pushing regional debt back above 50% of GDP. What has changed since is less the level than the cost of carrying it, Addario argued.

The figures vary widely across the region. Brazil and Argentina carry heavier debt burdens, while Chile and Peru have more room to maneuver, and Caribbean economies average close to 73% of GDP, according to Addario’s commentary. They share a servicing problem: debt may no longer be the acute emergency it was in the 1980s, but paying for it increasingly limits what governments can do, he wrote.

Interest payments across Latin America consume resources that might otherwise finance education, health care and infrastructure, according to Addario. In Brazil, nominal interest on public debt reached 8.8% of GDP in the 12 months to June, up from 7.4% a year earlier, according to the country’s central bank. Colombia’s 2026 budget commits 31% of government revenue to debt service.

“This is not an accounting problem,” Addario wrote. Money spent servicing yesterday’s obligations cannot build tomorrow’s roads, schools or energy systems. Without those investments, productivity and growth stay weak, and the debt burden becomes harder to reduce.

The result is a cycle that Latin America knows too well, one that monetary policy cannot easily solve, according to Addario. Most central banks have eased the restrictive policies used to fight post-pandemic inflation, yet borrowing conditions remain tight in several major economies. Central bankers are caught, he argued: cut rates too quickly and inflationary pressures return; keep them high too long and credit, investment and growth suffer.

Growth is the least painful way to lighten public debt, Addario wrote. A faster-growing economy carries the same burden more easily, without deep spending cuts or tax increases. Latin America’s difficulty is that growth has remained stubbornly mediocre. ECLAC projects regional expansion of 2.2% this year, a fifth consecutive year averaging close to 2.3%, a pace at which governments struggle to raise revenue, businesses hesitate to invest, and the debt-to-GDP ratio barely moves.

Access to international capital has improved since the 1980s debt crisis, but access is not the same as cheap money, according to Addario. Chile and Uruguay borrow on better terms because their fiscal credibility is stronger. Others pay substantially more, and refinancing grows costlier whenever global conditions deteriorate.

Foreign direct investment has been more encouraging, Addario wrote. Latin America continues to attract capital, led by Brazil and Mexico, and nearshoring is creating openings for Mexico and Central America. The region also holds resources the world increasingly needs, including critical minerals, energy and agricultural commodities. But the harder question is what that capital produces. Investment concentrated in a few countries or sectors will not break Latin America’s low-growth cycle; breaking it requires capital that flows into infrastructure, technology, skilled employment and competitiveness, he argued.

Addario recommended three policy steps. Governments need credible fiscal rules that gradually lower the burden of debt and interest payments while protecting public investment. Countries must compete for capital with more than tax incentives — infrastructure, legal certainty, human capital and predictable institutions matter more over time. Central banks must continue normalizing monetary policy carefully, so inflation does not become entrenched again.

These are not separate challenges but parts of the same equation, according to Addario. Fiscal discipline without investment can produce stagnation. Investment without fiscal credibility eventually becomes more expensive. Easier monetary policy without price stability simply recreates problems Latin America has already experienced. The aim is to create enough productive growth for the region to outrun the financial burden of its past.

“I have seen this movie before,” Addario wrote. “But the ending does not have to be the same.” Latin America now has opportunities that were largely absent during its earlier debt crises, he added: deeper capital markets, more diversified economies and a strategic position in a world searching for new supply chains and critical minerals.

The question, Addario wrote, is whether the region will use these openings to finance another cycle of consumption and debt, or to build the productive capacity that finally allows it to pay for the past without mortgaging the future.

Addario Soljancic is an economist specializing in public finance, with decades of experience advising governments and institutions across Latin America and the Caribbean. Over his career, he has led 69 capital-market issuances across 13 countries, totaling nearly $49 billion, according to UPI. The views expressed in the commentary are solely those of the author.