Fiscal risks in the spotlight

The growing likelihood that Brazil’s government will circumvent its spending cap adds to broader signs that austerity is becoming politically difficult to implement across the region. For instance, Ecuadorian President Lasso recently U-turned on a plan to reduce fuel subsidies after facing the threat of protests. That echoes the decision by Colombia’s government to dilute tax hikes after mass demonstrations there earlier this year. With a busy electoral calendar approaching (e.g. in Chile, Colombia and Brazil), it seems unlikely that policymakers will push through the (harsh) austerity needed to reduce public debt risks. This feeds into our view that financial markets will come under further pressure across much of Latin America.