The return of another “old enemy” to several Latin American countries, among them Uruguay – Business – 11/16/2021

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With an “old enemy” already installed (inflation). Latin America begins to grapple with another: the fiscal deficit. The pandemic of COVID-19 generated a practically synchronized economic recession around the world in 2020 and this year, as countries begin to show a recovery, plans are being launched to make fiscal adjustments after the spending stimuli that governments had to carry out.

“The emerging markets are planning substantial fiscal consolidation in the next two years, having implemented a very expansionary fiscal policy in the COVID-19 crisis. Various adjustment plans involve large cost reductions. Some aim to cut spending below pre-COVID levels, a goal that will be politically challenging, “warned a report by the Institute of International Finance (IIF according to its acronym in English, a global business association of financial institutions) which agreed The country.

The report calculated fiscal impulses in emerging markets, a measure of how the posture of the economy is changing. fiscal policy.

“The fiscal momentum in emerging markets is oscillating from very positive last year to negative for an extended period. This is not supportive of growth and is a fiscal cliff for emerging markets, ”the IIF report said.

“In a few countries, the brake on growth could be more pronounced than the fiscal adjustment derived from the global financial crisis. The fiscal restraint obviously reduces the risk of indebtedness, but it will have a growth cost ”, he warned.

What did the study find? “On average, we expect fiscal consolidation to subtract 0.5 percentage points from growth next year. In contrast, we estimate that fiscal support added 1.2 percentage points to growth last year. The recovery from COVID-19, and in some cases the high prices of raw materials, will partially cushion the impact of the fiscal adjustment on growth, ”the report explained.

“However, fiscal tightening is one reason emerging market growth may soon return to moderate pre-COVID levels. We believe that some countries will want to avoid this kind of painful adjustment and relax fiscal targets soon, ”he added.

According to the IIF analysis, “almost all countries point to large deficit reductions (between 0.5% of Gross Domestic Product -GDP- and almost 6% of GDP for the period 2021-2023). In the case of Chile, the magnitudes are extreme (almost 6% of GDP) and it is probable that they will be revised downwards when a new government takes office next year ”.

In the case of Uruguay, government programming included in the Accountability recently approved, it foresees a reduction in the fiscal deficit of 0.9 percentage point of GDP this year, 1.8 points of GDP in 2022 and 0.2 points of GDP in 2023.

Headquarters of the Ministry of Economy.  Photo: Estefanía Leal - El País Archive
Headquarters of the Ministry of Economy. Photo: Estefanía Leal – El País Archive

In 2020 the fiscal deficit was 5.8% of GDP and for this year the Ministry of Economy and Finance (MEF) estimates that it will be 4.9% of GDP. In the 12 months ending in September, the red of the public accounts (without the “fifty-year-old” effect, see separately), reached 5% of the Product.

The IIF document noted that “lower spending is complicated from many angles. At a time when social unrest is high in many countries, it will be politically difficult. So we know it’s probably bad for growth. How much depends on the nature of the cuts ”.

“Eliminating wasteful spending may be ‘free,’ but reducing subsidies to the poor can significantly affect consumption,” he added.

To estimate, what could be the effects of cost cutting on the economy growing Over the next two years, the IIF study used “fiscal impulse, a measure of the change in fiscal stance that offsets the impact of the business cycle on fiscal variables (for example, a recession widens fiscal deficits even if the government does not take no fiscal action). Since the planned adjustment is focused on spending, we build our fiscal impulses ignoring the always tricky side of revenue. ”

“We also abstract from the fact that automatic stabilizers affect a small part of spending (unemployment benefits, for example). Basically, we are looking at the change in primary spending as a percentage of START potential as an approximation of the fiscal impulse. Our metric oversimplifies things, but often comes close to more sophisticated methodologies, such as the International Monetary Fund’s Fiscal Monitor, while avoiding difficult-to-determine income elasticities, “the report added.

Based on this, “the fiscal momentum in emerging markets is swinging sharply. Fiscal policy provided broad support last year, but it will be a drag on growth for an extended period. We haven’t seen these kinds of changes in emerging markets in a while. The global crisis (2008-2009) is a comparable episode. In 2010-2012, several emerging markets tightened fiscal policy even more than planned in 2022-2023. However, some, including South Africa, are planning much more now, ”the document noted.

“The impact of a strict fiscal policy on growth depends on the so-called fiscal multiplier. Existing estimates range from zero to very high levels, so we settle for an illustrative and somewhat conservative 0.5. This means that cutting public spending by US $ 1 reduces GDP by US $ 0.50. Under these parameters, fiscal policy will be a significant drag on growth in the next two years, ”said the IIF.

“The above trends are particularly pronounced in some parts of Latin America. Brazil’s fiscal expansion was huge, and this year’s cuts were already severe. The adjustment that the fiscal rule calls for next year pales in comparison, but it is proving to be a major challenge. Brazil never squeezed (spending) significantly in an election year and the circumstances do not lead to a very different result this time, ”he concluded.

The 50-year-old effect on the deficit in Uruguay

The “fifty-year-old” effect is extraordinary income received by the treasury and is affected by the future payment of the retirement of the “fifty-year-old” who left the AFAP. These are people who were less than 40 years old in 1996 when the mixed pension system began and were forced to join an AFAP due to their salary level. When you leave and return to the previous regime (only by the Social Security Bank without retirement caps), your savings in the AFAPs go to a trust. Although there is currently an extraordinary income to the state coffers (0.5% of GDP in 12 months to September), the cost of paying their pensions will far exceed what they entered.

The MEF plan in Uruguay and what the IMF suggested

Headquarters of the International Monetary Fund (IMF) in Washington.  Photo: Reuters.

In the Accountability, the government included its explanation of the fiscal situation. There he pointed out that “the financial programming that accompanies the budget project contemplates a deterioration of the fiscal accounts for the year 2021 (with respect to the one foreseen in the Budget law approved in 2020) which is mainly explained by the health crisis of COVID-19 ”.

Meanwhile, “for the year 2022 onwards, a fiscal trajectory is presented that supposes a decrease in the deficit based on the improvement of the efficiency of the public spending and the generation of savings in the different organisms of the Central Administration and those included in article 220 of the Constitution ”, he added.

In October, a mission of technicians from the International Monetary Fund (IMF) visited Uruguay to review the economy (corresponds to all member countries, at least once a year). There, the IMF technicians suggested that “in the short term, efforts should be directed to rebuilding the fiscal space, while maintaining targeted aid to the most affected sectors” and that “the reorientation towards policies to favor job creation is welcome. ”.

In turn, they advised that in the “medium term, an additional fiscal effort would be desirable to put public debt on a firm downward trajectory.” Although they acknowledge that “short-term fiscal risks are limited”, the projected path of the debt assumes “stable macroeconomic conditions” which “leaves a limited margin to respond to future shocks”.


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