2024 Public Sector Perspectives

The successful development of domestic capital markets has been driven by numerous government initiatives including macroeconomic policies, regulatory frameworks, structural reforms, pensions regulations, the adoption of free-floating currencies, inflation targeting monetary regimes and the establishment of government securities exchanges. In addition, local bond market development has also been facilitated by the partial or complete privatization of pension regimes which require a market for the investment of assets under management. Latin America’s improving financial stability and growing domestic markets The region’s progress towards debt diversification has not only included shifts towards domestic debt but also in the composition of external debt. In 1988, more than 56 percent of general government external debt accrued by the region’s middle-and-low-income countries was owed to commercial banks. 2 However, presently, Latin America’s middle-and-low-income economies have continued to tap international capital markets and use multilateral and bilateral funding to diversify their debt profiles. LATAM low and middle income countries’ general government external debt outstanding (US$, Bn) Source: World Bank International Debt Statistics Note: Data Excludes High-Income LATAMSovereigns Latin America’s aggregate sovereign government debt has also risen substantially since the 1990s, driven by numerous countries gaining access to global capital markets as well as the expansion of domestic markets. The growth of local-market debt has been particularly noteworthy, central government debt issued locally increased from 57 percent of total central government debt in 2002 to 75 percent by 2022. LATAM total central government debt Source: Economic Commission for Latin America and the Caribbean (CEPAL) Note: Brazil added to the dataset in 1998; Peru added in 2002 While the region’s debt accumulation slowed during the Great Financial Crisis in 2008, the prolonged period of low interest rates that followed saw Latin American sovereigns shifting to domestic markets in greater volume than prior periods. The debt composition changed drastically across the major Latin American economies during the 2010s, with numerous sovereigns issuing sizable internal government debt securities and gaining access to longer maturities. For example, Colombia, Costa Rica, the Dominican Republic, Peru, and Uruguay have more than doubled their shares of internal debt relative to total over the past 20 to 30 years. LATAM central government internal versus external debt (% total) Source: Economic Commission for Latin America and the Caribbean (CEPAL) The region’s progress towards debt diversification has not only included shifts towards domestic debt but also in the composition of external debt. 2 World Bank International Debt Statistics Citi Perspectives for the Public Sector 77 76 The Currency Switch: How the Expansion of Local Debt Markets Has Provided Greater Financial Stability to Latin America