High debt levels will limit Latin America’s economic growth, Moody’s warns

Moody’s Investors Service warned Wednesday that Latin America’s most significant countries could see governments’ limited ability to stimulate economic growth because debt burdens are likely to remain high.

The rating agency said in a report that the growth of sovereign debts in the region coincides with rapidly rising interest rates worldwide, making refinancing them increasingly less affordable.

“The interest cost of debt, measured as the ratio of general government interest payments to revenues, will continue to comprise a larger proportion of government budgets than before the pandemic,” Moody’s said.

“Moreover, as Latin American sovereigns divert fiscal resources to debt and interest payments rather than infrastructure investments and other productivity-enhancing projects, this will weigh on economic growth prospects,” Moody added.

Moody noted that the region needs better logistics, utility expansion, and adaptation measures to address growing climate risks and energy security.

It said that the infrastructure investment pipeline across the region remains strong, particularly in Brazil, Colombia, and Chile, driven by government actions.

Meanwhile, the rating agency said that governments in Mexico and Peru are also pursuing infrastructure projects, but institutional and political uncertainties pose challenges to increased private investment.

“Corporate indebtedness will remain low despite inflation and political tensions,” the agency noted.

“Corporate indebtedness in Latin America has declined as companies generated abundant cash during the post-pandemic recovery and accessed historically low-interest rates,” it said.

The Economic Commission for Latin America and the Caribbean (ECLAC) estimates economic growth of 1.4 percent for the region in 2023, down from this year’s projection of 3.2 percent, due to a slowdown in growth and global trade, higher interest rates, and lower liquidity.