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By Valerie Hernandez, International Banker
On February 6, Fitch Ratings downgraded Bolivia’s Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘B-‘. This was perhaps not surprising given that the South American country’s international reserves have declined in recent years, reaching critical levels in 2024 and representing a profound risk to the nation’s macroeconomic stability. With a distinctly unfavourable balance-of-payments position and a questionable capacity for servicing its considerable outstanding debt, Bolivia faces serious threats to its long-term economic prospects that may even mean its long-defended currency peg to the US dollar will have to be sacrificed.
Indeed, the past year has seen a dramatically escalating dollar-liquidity problem gravely impact the Bolivian economy, with long lines of customers queued up outside commercial banks to buy the US currency frequently observed across the country. A report published in January by the Central Bank of Bolivia found that the country’s net foreign currency reserves at the end of 2023 stood at just $1.7 billion, the lowest level in 19 years and just 11 percent of its peak of $15 billion in 2014.
Of those $1.7 billion reserves, $1.57 billion were represented by gold reserves and just $166 million as foreign exchange (FX), according to Fitch. Because of Bolivia’s fixed exchange rate, the central bank has been forced to defend its peg of just under seven bolivianos per US dollar by selling foreign currency. But with reserves now so meagre, concerns are growing that its peg to the US dollar will have to be abandoned, which would trigger a substantial devaluation. And with ordinary Bolivians hugely reliant on imported necessities, such as food and fuel, such an abrupt depreciation would surely send inflation skyrocketing.
The banking system supported the demand for dollars throughout much of 2023 by charging around 10 percent in commissions on dollar transfers overseas. But the depletion of reserves has been so severe that FX rationing has been introduced, prompting lenders to place tighter restrictions on FX withdrawals, forcing bank commissions even higher and creating frequent delays in FX authorisations for imports, which, in turn, has led to persistent fuel shortages across the country. The reserves shortfall has also led to a parallel exchange-rate market emerging, which is now trading well above the official pegged rate.
The situation has been further exacerbated by the long-term problem of waning natural-gas reserves across Bolivia, which has precipitated a steady decline in natural-gas production and exports over the last decade. Indeed, the central bank’s report also attributed the country’s dwindling exchange-reserves position partly to lower revenues from hydrocarbon exports. As such, crude-oil imports have dramatically risen, while gas exports to neighbouring Argentina are expected to be halted before the end of the year.
These shifting trends have dealt a heavy blow to Bolivia’s balance of payments, with exports falling by just over $2.8 billion in 2023 (excluding re-exports or personal effects) and a trade deficit standing at almost $700 million after three years of surplus. “Fitch forecasts the current account deficit will widen to 1.9 percent of GDP in 2024, from 1.5 percent in 2023,” the credit rating firm stated in its early-February assessment. “Gas exports continue to decline on dwindling production, while imports of heavily subsidized fuel remain elevated. Large errors and emissions in balance-of-payments data likely indicate a weaker external position given widespread contraband activity.”
Meanwhile, the dearth of dollars—and the rising cost of obtaining the US currency—threaten to derail several key industrial sectors. According to Gary Rodríguez, the general manager of the Bolivian Institute of Foreign Trade (IBCE), Bolivia’s precarious FX situation could seriously hinder the agricultural, forestry, industrial, pharmaceutical, commercial and export sectors, with reduced activity, operational shutdowns, price hikes and persistent inflation the likeliest consequences. “About 85 percent of what is imported are inputs, capital goods, transportation equipment and fuels, which are impossible to stop buying,” Rodríguez acknowledged in an interview with UNITEL in mid-February.
“Already, dollar scarcity is weighing on importers, who struggle to find hard currency to buy goods from abroad. Those problems could get worse, as the government limits access to foreign currency,” according to Monica de Bolle, senior fellow at the Peterson Institute for International Economics (PIIE), in a piece for the Wilson Center, a United States-based think tank. “Signs of a looming balance of payments crisis are everywhere. The scarcity of dollars, for example, has led to a scarcity of medications, medical supplies, and equipment for farming and mining. Bolivians are expressing growing frustration. Worryingly, the real crisis has not yet begun.”
Although obligations to service external commercial debt will remain low throughout 2024 and 2025, such that the government can prioritise its scarce FX liquidity position, Fitch also acknowledged that risks to debt-service capacity continue to rise. Bolivia owes $110 million in coupon payments this year and next on its 2028 and 2030 bonds, whereas the 2028 Eurobond will mature in three annual instalments of $333 million beginning in 2026. This could also pose a much greater challenge to its repayment capacity, the credit rating agency added, particularly in the absence of corrective policy measures.
With such stresses continuing to be transmitted through the economy, the adverse impacts on Bolivia’s economic growth over the medium term are expected to be pronounced. “Fitch estimates growth slowed to 2.1 percent in 2023 from 3.6 percent in 2022 and forecasts growth of 1.8 percent in 2024 and 2025 as balance of payments pressures continue to weigh on the economy, public investment remains low, and private investment is constrained by a weak regulatory environment,” the rating firm added in its early-February downgrade assessment. “Intensification of FX rationing or other manifestations of balance-of-payments stress is a clear downside risk to these projections.”
Can the Bolivian authorities do anything to trigger a much-needed reversal of fortune? On February 20, La Paz took official action by laying out 10 key measures to boost investments and exports to ease the pain of dollar scarcity. The administration of President Luis Arce confirmed that after discussions with several businesses, it would move to eliminate much of the bureaucracy surrounding export activity, boost investment in grain production, simplify the process of importing diesel and allow bigger trucks on the roads.
And despite the collapse of Bolivia’s fourth-biggest lender, Banco Fassil, which commanded around 10 percent of the sector’s total assets, Fitch claimed it did not see any material contagion risk from its worsening economic prospects to the rest of the banking sector. Indeed, banking supervisor ASFI (La Autoridad de Supervisión del Sistema Financiero) found that credit growth outside of Banco Fassil was a solid 10 percent last year, with deposits growing by 8 percent and nonperforming loans recorded at 3.1 percent in January, only a slight uptick from the 2.9 percent posted in December 2023.
La Paz, meanwhile, has firmly rebuked Fitch’s downgrade, with the Ministry of Economy and Public Finance arguing that the rating firm has not considered its positive economic results and social-welfare programmes. “It lacks an analysis of the true dimension of the national economy’s positive results and the efforts taken to confront the adverse international environment,” the ministry explained in a statement, adding that its economic model prioritises families’ well-being and the economy generally, as reflected in contained inflation, price stability, falling unemployment, lower poverty and reduced inequality, even as other countries fail to protect their most vulnerable. The ministry also said that Bolivia continues to guarantee the payment of its outstanding debts.
Elsewhere, the Arce government has argued that efforts to diversify its natural-resources industry and thus lower its dependence on hydrocarbon imports will provide a significant boon for the Bolivian economy. Evidence of such diversification can already be found in the recent commencement of operations at the country’s first-ever biodiesel plant, with a second plant scheduled for completion in November. Located in eastern Santa Cruz, the operational plant has a maximum capacity of 1,500 barrels per day, using seeds, palm oil and recycled cooking oil as feedstock, according to the state hydrocarbon company YPFB (Yacimientos Petrolíferos Fiscales Bolivianos). Arce also signed a $1-billion agreement with Chinese lithium firms and Bolivian state company Yacimientos de Litio Bolivianos (YLB) to explore lithium deposits in the country, while $350 million in financing recently secured from China will go towards constructing Bolivia’s maiden zinc-refining plant.
“Yes, it’s true that we import diesel because we are a gas producer, rather than an oil producer,” the minister of Economy and Public Finance, Marcelo Montenegro, said in an interview with LatAm INVESTOR magazine, pushing back against the notion that Bolivia’s economy will struggle to cope with the decline in natural-gas exports. “However, we are going to substitute diesel imports with ethanol and methanol plants. We will also mix these biofuels with conventional fuels to reduce our oil import costs.” The minister also noted that while the last six years have admittedly seen a drop in gas exploration, the Arce government has uncovered more gas through YPFB, with more search initiatives for reserves across the country underway.
President Arce has also demonstrated his desire to use the Chinese yuan more in international trade, which could prove pivotal in preventing Bolivia from abandoning its currency peg. “Multilateral, primarily regional, and bilateral loans, potentially collateralized with gold, should enable the government to maintain the peg to the dollar and continue its expansionary fiscal policy in 2024,” according to an analysis from Coface, a credit-insurance and risk-management firm.
