(Bloomberg) -- Latin America is becoming a battleground of government spending extremes, drawing calls from smaller nations to tighten the belt before the consequences spill across borders.
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In Argentina, President Javier Milei’s chainsaw of spending cuts likely achieved the serial defaulter’s first fiscal surplus in more than a decade, resulting in a yearlong bond rally that outperformed most peers in emerging markets. Next door in Brazil, investors sold off bonds, stocks and the currency last month as doubts swelled about Luiz Inacio Lula da Silva’s willingness to narrow a ballooning fiscal hole.
Paraguay Finance Minister Carlos Fernandez stands between those two extremes, where his country depends on trade with Argentina and Brazil. In an interview, Fernandez outlined why sustainable fiscal policy matters in a region exposed to international crisis.
“I applaud it because it goes straight to the root of the problem, which is fiscal,” Fernandez said in reference to Milei’s austerity program. Brazil’s deficit “doesn’t leave it with much fiscal space in the event of an external shock that merits a macroeconomic policy response.”
Fernandez isn’t quite moving at Milei’s historic pace of austerity, but cutting payroll spending while increasing government revenue through better tax collection methods. That helped Paraguay narrow last year’s fiscal deficit to 2.6% of gross domestic product and seeks to cap future deficits at 1.5% by 2026, which would be a fraction of the 10% hole Brazil is struggling to dig out of.
Across Latin America, “if fiscal policy doesn’t get adjusted, monetary policy ends up tightening due to the fears central banks have about inflation,” said Fernandez.
Paraguay, a land-locked country of 6.1 million people, had one of the lowest tax-to-GDP ratios in the region at 14.7% in 2022, compared to 33% for Brazil, according to an Inter-American Development Bank report.
The 2025 budget authorizes the sale of as much as 9.72 trillion guarani ($1.2 billion) in global bonds to finance the deficit. The government will look to repeat last year’s issuance of both US dollar-denominated and global bonds in local currency during the first quarter to raise money and retire bonds maturing in 2026 and 2027, Fernandez said.
Sound public finances and a growing economy helped Paraguay win its first investment grade credit rating last year when Moody’s raised the country to Baa3 from Ba1 with a positive outlook. Winning investment grade from S&P Global Ratings and Fitch Ratings—which have flagged weak institutions and the rule of law as impediments to a higher rating—could be more challenging after the ruling Colorado Party passed a controversial bill that increases government oversight of non-governmental organizations. Fitch warned in a note the measure might weaken protections for freedom of association and expression.