Fall in oil prices triggers fiscal responses

The past month has seen governments in several countries in Latin America announce measures to repair some of the fiscal damage caused by lower commodity prices. The most impressive package came from Mexico, where spending will be trimmed by almost 1.2% of GDP in 2016. This will weigh on economic growth this year but looks large enough to keep the budget deficit in check following a sharp fall in oil revenues. In contrast, the measures announced elsewhere were more underwhelming. Colombia’s government announced a fiscal squeeze equivalent to 0.8% of GDP this year but we think that further measures will be needed to both stabilise the public finances and put the balance of payments on a sustainable footing. Meanwhile, Brazil’s government announced spending cuts equivalent to 0.4% of GDP but in practice the squeeze looks likely to be much smaller. The precarious state of the public finances remains one of several vulnerabilities in the country – indeed it’s notable that despite the measures announced this month, Moody’s followed the lead of S&P and Fitch and downgraded Brazil’s foreign currency sovereign debt rating to junk.