Public debt in Latin America returns to center of fiscal debate
Demonstrators organized by the Free Brazil Movement protest against Banco Master on Thursday in front of the bank’s headquarters in Sao Paulo, Brazil, after recent fraud allegations published in the press. The bank was recently liquidated and the area fenced off. Photo by Isaac Fontana/EPA
SANTIAGO, Chile, Jan. 23 (UPI) — Rising public debt has again become a central concern for Latin American economies, amid low growth, higher financing costs and an uneven fiscal recovery after the pandemic.
The trend reflects broader regional pressures that mirror a more restrictive global financial environment.
Chile illustrates this dynamic. Public debt reached 43.3% of gross domestic product in September, the highest level in more than four decades, according to the latest report from the Budget Office at the Finance Ministry.
The agency said the increase was driven mainly by new debt issuance, exchange rate movements and a reduced impact from inflation.
Budget Director Javiera Martinez said the current administration inherited “a very complex fiscal situation marked by post-pandemic macroeconomic imbalances: high inflation and a historic structural deficit of minus 10.6% of GDP.”
She added that after spending was reoriented and budget adjustments were implemented, “the growth trend was reversed, making this administration the one with the smallest increase in debt since President Michelle Bachelet‘s first term from 2006 to 2010.”
From a regional perspective, analysts say the challenge extends beyond Chile.
Economist Carlos Smith, a researcher and lecturer at the University of Development’s Center for Business and Society Research, said Chile’s figures “do not represent an imminent default risk” but should be viewed cautiously in a low-growth environment.
“The country is growing at around 2% to 2.5%. That is potentially low growth and it creates risks for the economy because interest payments absorb about 9% of fiscal revenues,” Smith said. It’s a pattern he noted is common across several Latin American economies.
Even so, Smith said Chile still holds comparative advantages in the region.
“It is concerning because of the speed of growth and budget rigidity, but compared with other countries, debt remains low. Chile has access to financial markets at reasonable rates and a credit rating that remains in a solid position,” he said.
Chile also operates under a fiscal rule that sets a public debt threshold near 45% of GDP to ensure long-term sustainability. Smith warned that failing to rein in debt growth could carry additional concerns.
“There could be other risks, such as losing the credibility of the fiscal rule, which would limit access to the rates we currently enjoy and that are quite privileged within the region,” he said.
In comparative terms, the International Monetary Fund projects Latin America will have closed 2025 with public debt equal to 73.1% of GDP, reflecting years of fiscal deficits, higher social spending and reduced capacity to absorb external shocks.
The IMF has also warned that global debt is on track to exceed 100% of GDP by 2029, the highest level since 1948.
Within the region, debt levels are highest in Brazil at 91.4%, followed by Argentina at 78.8%, Uruguay at 66.6%, Colombia at 60.0% and Mexico at 58.9%. Chile at 42.7% and Peru at 32.1% remain among the least indebted.
“Chile is among the strongest in a difficult neighborhood. It remains solid by comparison, but that advantage gap has narrowed,” Smith said. “It carries a lighter fiscal burden than Brazil, Mexico, Colombia or Argentina, which provides greater resilience to shocks such as a rate hike by the Fed.”
Smith said Brazil’s high debt stems from the fact that “virtually all state revenue goes to paying pensions and interest,” leaving “very little room for public investment.”
By contrast, Peru maintains low debt levels, but faces structural constraints.
“Low debt alone is not enough if there are no political institutions that allow investment to be projected,” he said.
Other countries face different challenges.
Venezuela, for example, posts debt levels above 150%, alongside hyperinflation, international sanctions and a prolonged economic collapse.
Argentina, with debt above 100% of GDP, faces the task of stabilizing its economy “without triggering a complex social crisis,” Smith said.
Low-debt economies, such as Paraguay, also show vulnerabilities.
“It has low debt, thanks to hydropower and agriculture, but it is very vulnerable to climate conditions,” Smith said, adding that the regional challenge is to invest in infrastructure without undermining fiscal sustainability.
JPMorgan has also flagged risks in Colombia, noting that higher public spending in 2025 aimed at boosting consumption widened the current account deficit. The bank said growth is being driven by resource injections rather than productivity gains.
“The region’s weak performance is rooted in a combination of political instability, fiscal fragility, inequality and insecurity,” said Nur Cristiani, JPMorgan’s head of investment strategy for Latin America.
“Political volatility has led to frequent policy reversals, undermining long-term investment. Fiscal deficits and procyclical spending have left countries vulnerable to external shocks.”
“Ultimately, Chile sits in a group with relatively low debt in the region but faces the challenge of boosting productivity and consolidating its fiscal position,” Smith said, warning that the country risks converging toward the regional average if it fails to protect both institutional strength and fiscal discipline.