2024 Public Sector Perspectives

The Currency Switch: How the Expansion of Local Debt Markets Has Provided Greater Financial Stability to Latin America Lucia Cardenas Public Sector Group, Corporate Banking Reid Fennerty Global Sovereign Advisory and Solutions I n recent decades, Latin American sovereigns have achieved greater financial stability and reduced foreign exchange-rate exposure through the development of local capital markets. This expansion was primarily driven by the region’s prior experiences of the 1980s and 1990s when numerous sovereigns faced currency crises, severe economic disruptions, high inflation, loss of investor confidence and capital outflows. A particularly defining moment for the region was the 1994 Mexican “Tequila Crisis”, when the sudden devaluation of the peso and the resulting financial fallout severely impacted the Mexican economy and triggered a contagion effect throughout the region. In the aftermath of the crisis, governments began to shift debt management strategies towards using more local currency debt and developing domestic capital markets. Since the 1990s, Latin America’s expansion of local markets has given governments greater financing flexibility and has resulted in a progressive shift in the region’s debt composition. Notably, in the last 30 years, the proportion of foreign-currency debt among the region’s six largest economies (Mexico, Chile, Colombia, Peru, Brazil, and Argentina) has declined from an average of 56 percent of total debt in the 1990s to approximately 23 percent as of 2020. 1 Joaquin Jugo Head of Global Sovereign Solutions Ruben Ceballos Head of Caribbean and Central America Debt Capital Markets Cindy Morand Global Sovereign Advisory and Solutions 1 IDB 2023. “Dealing With Debt: Less Risk for More Growth in Latin America and the Caribbean”. Citi Perspectives for the Public Sector 75 74 Since the 1990s, Latin America’s expansion of local markets has given governments greater financing flexibility and has resulted in a progressive shift in the region’s debt composition. The Currency Switch: How the Expansion of Local Debt Markets Has Provided Greater Financial Stability to Latin America