Brazil, Mexico, and Colombia are among the economies facing the greatest challenges in stabilizing their public debt levels, according to a report by Oxford Economics, which concludes that a growing number of countries have fallen into “fiscal holes” from which it will be difficult to emerge without prolonged and politically costly adjustments.
Oxford Economics Measures Debt Stabilization Needs
The firm analyzed 46 developed and emerging economies using the Debt-Stabilizing Primary Balance (DSPB) indicator, a metric that calculates the primary fiscal balance required to prevent the debt-to-GDP ratio from continuing to rise over the medium term. The indicator incorporates variables such as economic growth, real interest rates, debt levels, debt composition, and exchange-rate movements.
The study concludes that more than 25% of the economies analyzed need to maintain primary surpluses indefinitely to stabilize their debt, while about 10% require permanent surpluses exceeding 1% of GDP.
Gabriel Sterne, Head of Global Emerging Markets Research at Oxford Economics, and Felipe Camargo, the firm’s Global Chief Economist, argue that “Brazil is the greatest concern” because “its required primary surplus is close to the 3% threshold above which history suggests political support for corrective efforts becomes extremely fragile.”
Brazil Leads the List of Fiscal Vulnerability
Oxford Economics’ calculations show that Brazil currently records a DSPB close to 3% of GDP, the highest level among the major economies included in the sample. The firm considers this range to be approaching a critical zone, as governments historically face increasing political difficulties in sustaining the required adjustments over long periods.
Behind Brazil is a group of economies that also need to maintain persistent primary surpluses to stabilize debt levels. These include Italy, Japan, South Africa, Mexico, and Colombia.
Sterne and Camargo note that “Italy, Japan, South Africa, Mexico, and Colombia are in the category of prolonged fiscal strain, with DSPBs above 1%.” The report adds that “Turkey, Spain, the United Kingdom, Belgium, France, Peru, and Canada also need to maintain primary surpluses indefinitely.”
Fiscal Conditions Have Deteriorated Since 2020
The evolution since 2020 reflects a significant deterioration. Oxford Economics’ data show that Brazil, Colombia, and Mexico now require larger fiscal adjustments than before the pandemic, although the deterioration has been particularly pronounced in several developed economies.
The report highlights that the median fiscal position worldwide is not yet alarming. However, beneath this apparent stability lies a growing group of countries whose debt dynamics require permanent corrections to prevent debt from continuing to rise.
Market Discipline Has Not Been Enough
One of the study’s central findings is that high financing costs have failed to force the necessary fiscal adjustments in several emerging economies.
Brazil, Colombia, Mexico, and South Africa have spent years accumulating fiscal vulnerabilities. During that period, financial markets imposed high interest rates that increased sovereign borrowing costs, but this pressure has not translated into policies capable of returning debt to a stable trajectory.
The economists state that “high yields have contained fiscal excesses, but market discipline has not yet imposed enough pain to force policies consistent with debt stability.”
According to Oxford Economics, this helps explain why several emerging markets have remained trapped in these fiscal holes for much of the past decade and, in some cases, have deepened their deterioration in recent years.
Developed Economies Face a Different Problem
The contrast with developed economies stems from a different trajectory. For years, many advanced governments were able to finance large deficits thanks to exceptionally low real interest rates. After the pandemic, rising global yields increased debt-servicing costs and rapidly worsened fiscal sustainability indicators.
The firm believes that the post-Covid deterioration has been more severe in developed economies than in emerging markets, both on average and among the most vulnerable countries in each group.
A Long Adjustment with Few Historical Precedents
The research also reviewed historical experiences of sustained fiscal consolidation and concluded that successful cases are rare.
According to a database compiled by Oxford Economics and the IMF, only a small number of governments have managed to maintain high primary surpluses for extended periods. Ireland sustained an average primary surplus of 3.7% of GDP for two decades, Belgium maintained an average of 4.1% for 19 years, while Mexico sustained an average surplus of 4% of GDP for 19 years.
Brazil appears among the historical examples identified by the firm, with an average primary surplus of 3.5% of GDP between 2004 and 2008. However, historical experience shows that sustaining such fiscal efforts typically requires long periods of budgetary discipline.
Oxford Economics also rejects the idea that governments can easily solve debt problems through inflation. Between 2020 and 2023, inflation eroded debt equivalent to 3.7% of GDP in emerging markets and 7.3% of GDP in advanced economies, but the process came with significant economic costs, including slower growth, higher financing burdens, and wealth losses associated with declining bond prices.
Limited Quick Solutions
The report concludes that quick solutions are limited. After analyzing fifteen years of data and historical episodes dating back to the 1980s, the firm argues that once the DSPB enters positive territory, sustained fiscal improvements generally require either severe crises or exceptionally favorable circumstances.
The future trajectory of Brazil, Mexico, and Colombia will depend on their ability to generate consistent primary surpluses in an environment of still-elevated financing costs and growing pressure on public finances.
Source: bloomberglinea
