2022 Perspectives for the Public Sector

Citi Perspectives for the Public Sector 31 A Balance Sheet Approach Can Help Tackle Latin America’s Debt Challenges A fter more than 18 months fighting the COVID-19 pandemic, many countries across Latin America have significant investment shortfalls. With high levels of sovereign debt, further borrowing will be costly, while raising taxes to fund investment could hamper economic recovery and is politically difficult. However, governments across the region can free up resources to boost long-term productivity, minimize political repercussions and maintain long-term flexibility by adopting an approach aimed to optimize their balance sheet, particularly in terms of its assets. As Latin American countries, and other emerging markets around the world, struggle to emerge from the shadow of COVID-19, they face a stark reality. Even before the pandemic, many countries had a sizeable investment shortfall in relation to healthcare, infrastructure, social services, security and other important areas of the economy. Across Latin America, the infrastructure investment gap alone was above 3% of GDP in 2015 and is expected to reach 4.4% in 2030. 1 If the public investment needed to eradicate extreme poverty is taken into account, the 2030 gap reaches 7% of GDP or $798 billion. The past 18 months have only increased pressure on the region’s finances, pushing the investments necessary to boost productivity further out of reach. At the same time governments now face greater constraints. Typically, governments borrow in domestic and/or international markets in order to fund their fiscal deficit. Thus, over the past 18 months many countries have increased their debt (in some cases supported by multilateral lenders) to fund their expenditure to address the pandemic. Other countries have reduced their fiscal buffers, which are used to stabilize budgetary income, effectively increasing debt. Consequently, for many countries the remaining fiscal space is limited. Alberto Torres Head of LATAM Public Sector, Citi 1 Francesca Castellani, Marcelo Olarreaga, Ugo Panizza and Yue Zhou, « Investment Gaps in Latin America and the Caribbean », International Development Policy | Revue internationale de politique de développement [Online], 11.1 | 2019, Online since 11 March 2019, connection on 27 May 2019. http://journals.openedition.org/poldev/2894 ; DOI : 10.4000/poldev.2894 Alfredo Martinez LATAM Public Sector, Citi Pablo Gonzalez del Real Public Sector Banking Mexico, Citi Rodolfo Gutierrez Public Sector Banking Mexico, Citi