External Conditions and Debt Sustainability in Latin America

IMF Working Papers, January 30, 2013

Source details

Highly favorable external conditions have helped Latin America strengthen its economic fundamentals over the last decade.
The paper asks whether the region has built enough buffers to guard against a weakening of the external environment.
The paper develops a simple framework that integrates econometric estimates of the effect of global factors on key domestic variables that determine public and external debt dynamics with the IMF‘s standard debt sustainability framework.
Results suggest:
- Some countries in the region are well placed to withstand moderate or even large shocks.
- Many countries would benefit from having stronger buffers to be in a position to deploy countercyclical policies, especially under tail events.
- External sustainability does not appear to be a source of concern for most countries.

Framework components:
- Econometric estimates of the effect of global factors on key domestic variables that determine public and external debt dynamics.
- Integration with the IMF‘s standard debt sustainability framework.

Buffer adequacy:
- Some countries: able to withstand moderate or large shocks.
- Many countries: need stronger buffers to enable countercyclical policy deployment under tail events.
External sustainability:
- Generally not a source of concern for most countries in Latin America, per the paper’s analysis.

Strengthen fiscal and external buffers to increase resilience to adverse external shocks.
Position countries to be able to deploy countercyclical policies when facing tail events.