McKinsey on the dynamics of Latin American debt

12 September 2018

As the good public perception in Argentina swings away from supposed economic saviour Mauricio Macri for engaging with a $50 billion IMF loan, McKinsey & Company has published a global debt ranking and the results show a different story. Countries with a higher level of total debt also rank highly on the GDP per-capita scale.

The McKinsey Global Institute has amalgamated the data from its recent series on global debt into a ranking and interactive map showing government, household and non-financial corporate debt by country. The ranking takes into account 51 countries from the advanced and developing world – including Chile, Brazil, Colombia, Peru, Mexico and Argentina. 

“Since the financial crisis of 2008, global debt has continued to rise. Total debt has increased by $72 trillion, or 74 percent, from $97 trillion in 2007 to $169 trillion in the first half of 2017. Government debt accounts for 43 percent of this increase, and non-financial corporate debt for 41 percent,” states the report. 

In terms of total debt as a percentage of nominal GDP per annum, Chile comes in first on the ranking with 169% of GDP being debt. As reported earlier this week, Chile is also seen as the best country in Latin America to do business in and as having the most stable economy of the region. 

Comparison of debt across countries

The majority of Chile’s debt comes from non-financial corporate debt, which may include debt owed by households, government agencies, NGOs, or any corporation that is outside of the financial sector. In an adjacent report released by McKinsey in mid-2018, the consulting firm warned; “Global corporate default rates are already above their long-term average, and the prospect of rising interest rates may put more corporate bond borrowers at higher risk.” 

Exactly 100% of Chile’s debt comes from non-financial corporate debt – the same level as Spain, Denmark and South Korea. Further down the list comes the majority of other Latin countries including Peru, Brazil and Colombia, which are all in the mid-to-low 40% range, while Argentina is the lowest on the ranking with a total 13% of non-financial debt.

The majority of Argentina’s total debt comes from government borrowing, and the nation is eclipsed by 48 other countries except Indonesia and Nigeria with a total debt of 73%. Argentina’s reluctance to interact with the IMF or international community has fuelled a regional financial exclusion and driven the Argentinian Peso into a black market exchange situation. 

Although the country has approached the IMF earlier this year for a financial bailout package, Argentina’s currency has dropped sharply against the dollar and the country is heading towards a recession.  

Total debt, 2017Q2

On the other hand, Brazil has the highest levels of government debt in the entire Latin America. Just under the global average, Brazil’s government debt equates to 84% of the total GDP representing a compound annual growth rate of 12.5%. Brazil’s government debt has been linked to the country’s poor economic performance of late and been extended by multiple corruption scandals. However, some economists put the fault not in the debt but in the lack of public investment and private sector investment in government bonds.

When looking towards North America – where Mexican investment could jump by up to 40% in some sectors if the new NAFTA is reached – Canada and the United States both have among the highest levels of debt in the world. The US has just under 300% of GDP in the country’s total debt and Canada is roughly sitting at 250%, both three times as high as that of Mexico; at an limited 78%.

Although the emerging countries in Latin America have a comparatively low level of debt compared to advanced economies, there is speculation of economic contagion spreading from the likes of Venezuela and Argentina to Brazil, Colombia and up to Mexico. One economic analysis of the panic in emerging markets has been due to investors flocking back to the US after years of searching abroad for opportunity.  

The McKinsey analysis does not give much explanation about the root cause of this growing debt or the effects of which it has on an economy – as debt is only one factor in a complex ecosystem – but the firm does conclude that “Corporate defaults are already above the 30-year average, and we should expect more defaults, particularly among speculative-grade issuers and some companies in developing countries.”

Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.