Another Latin America debt crisis?

Economic troubles across the globe have raised the risks in financial markets, with some seeing Latin American debt explode in the coming months. While there are parallels between the current market conditions and that of the 1980s, when Latin America and some other emerging markets saw a debt crisis, RBC BlueBay Asset Management says that repetition is unlikely.

“The systemic risk to the global financial system is much lower and the borrowing governments have reduced their dependence on foreign financing by running tighter fiscal policies and developing deeper domestic markets,” writes Graham Stock, EM Senior Sovereign Strategist, at BlueBay.

In a report published in late September, BlueBay draws parallels between the reasons why a Latin America debt crisis took place. In the 1970s, rising oil prices forced Latin American countries to increase borrowing from US commercial banks and other creditors which caused debt levels to rise by 11x in a decade. The second catalyst for a debt crisis was the sharp policy tightening by the US Federal Reserve.

While similar conditions are prevalent in 2022, banks have not recycled petro-dollars into commercial lending schemes. Separately, Latin American economies are much more resilient now with over $835 bn in international reserves. Current account deficits are much smaller than 40 years ago and central banks have delivered better policy measures to control inflation.

Talking about the broader emerging markets, BlueBay says that an EM debt crisis is unlikely as Asian countries have learned from the challenges faced in the 1980s. “Generally speaking, however, fears of a widespread EM debt crisis look misplaced,” says Stock.

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