McKinsey on the dynamics of Latin American debt

12 September 2018 4 min. read

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.”