By Delfina Cavanagh,
& Joydeep Mukherji
Standard & Poor's Global RatingsOVERVIEW
Low export prices for natural gas, combined with thus far only modest success in boosting prospects for gas production, are weighing on Bolivia's external position.
Potentially prolonged current account deficits, continued high levels of public-sector spending, and sustained rapid growth in domestic credit could erode the country's still-strong external position and weaken creditworthiness over the next two years.
We are revising our rating outlook on Bolivia to negative from stable, and we are affirming our 'BB' long-term foreign and local currency sovereign credit ratings.
The negative outlook reflects the at least one-in-three likelihood that persistent current account deficits could contribute to macroeconomic imbalances, weakening the country's sound external profile beyond our current expectations, over the next two years.RATING ACTION
On May 25, 2017, S&P Global Ratings revised its rating outlook on the Plurinational State of Bolivia to negative from stable. At the same time, we affirmed our 'BB' long-term foreign and local currency sovereign credit ratings and our 'B' short-term foreign and local currency ratings. The transfer and convertibility assessment is unchanged at 'BB'. RATIONALE
The negative outlook reflects the at least one-in-three likelihood that Bolivia's persistent current account deficits could contribute to macroeconomic imbalances, weakening the country's external profile beyond our current expectations, over the next two years. Low export prices for natural gas, along with only modest success in boosting prospects for gas production, are weighing on Bolivia's external position. Potentially prolonged current account deficits, as well as continued high public-sector spending and sustained rapid growth in domestic credit in recent years, could erode the country's still-strong external position.
For the third consecutive year, the combination of low export prices for natural gas and the government's policy of sustaining public-sector investment is likely to contribute to a current account deficit (CAD) approaching 5.3% of GDP in 2017, similar to the 5.5% deficit in 2016. Both the trade and current account deficits are likely to slightly narrow over the next two years, with the CAD likely approaching 4%-5% of GDP, based on a modest increase in gas export volumes and prices.
We project that narrow net external debt (total external debt less official foreign exchange reserves plus public- and financial-sector liquid external assets) will evolve toward a debtor position next year from -30% of current account receipts (CAR) in 2017 and -73% in 2015. Bolivia could become a net external debtor on this measure in the next two years, absent a substantial reduction in its CAD. We expect Bolivia's gross external financing needs (current account payments and public- and private-sector external debt due by remaining maturity) relative to CAR and usable foreign exchange reserves to rise toward 70% from 59% last year.
Bolivia's stable exchange rate vis-a-vis the U.S. dollar since 2011 has anchored inflation expectations and contributed to significantly lower dollarization in the country. However, steps toward greater exchange rate flexibility would contain external vulnerabilities if current account deficits persist and foreign exchange reserves continue to decline.
The ratings on Bolivia still reflect its strong external balance sheet, low debt burden, and favorable debt profile. They also reflect Bolivia's evolving public institutions, low per capita income (projected to exceed US$3,300 in 2017), and fiscal and export dependence on commodities. Hydrocarbons (mainly natural gas) and minerals account for the bulk of the country's exports, contributing to volatility in its terms of trade (the prices of exports compared with prices of imports). In addition, our ratings on Bolivia reflect its limited monetary flexibility.
Bolivia's GDP grew 4.3% in 2016 (or 2.7% in per capita terms), despite lower earnings from energy exports. We expect GDP growth to be around 3.8% in 2017 (or just above 2.2% in per capita terms), sustained by public-sector spending, and hover around 3%-3.5% in the following couple of years, given low commodity prices. However, growth could be higher if oil prices rise beyond our current expectations.
We expect the general government deficit to be around 3% of GDP in 2017 and remain relatively stable in the next three years. Public-sector revenues may rise modestly because of a higher contribution from the hydrocarbon sector, reflecting the lagged impact of a modest recovery in oil prices, which are linked to the export price for Bolivia's natural gas (see "S&P Global Ratings Raises Its Oil And Natural Gas Prices Assumptions For 2017," from Dec. 14, 2016). We also expect public spending to slightly increase in terms of GDP, reflecting the government's economic development strategy that relies on public investment. As a result, general government debt could increase by over 3.4% of GDP, on average annually, during 2017-2020.
We project net general government debt could approach 18% of GDP in 2017, up from 16.5% in 2016, and continue climbing toward 25% of GDP in 2020. Interest costs will likely rise to 2.6% of general government revenue in 2017 and exceed 3% in the next three years, reflecting increasing debt. We expect net public-sector debt to continue increasing in the next three years to around 44% in 2020.
The consolidated public-sector deficit is likely to be around 6.5% of GDP this year. The government is likely to fund about 70% of the overall public-sector deficit by drawing upon its ample fiscal reserves and other domestic sources (internal resources, local debt issuances, and new credit from the central bank) and the rest from borrowing abroad, including from official and commercial lenders.
Success in boosting the country's proven reserves of natural gas would, at least partially, compensate for a potentially prolonged fall in commodity prices, as well as facilitate the government's strategy for industrialization.
Gas output declined 4% in 2016, after falling 1% in 2015. The government projects that gas output will rise 2% in 2017. From 2019, gas output is projected to decline more substantially, absent new output from recent exploration investments. More than three-quarters is sold to Argentina and Brazil, while the rest is consumed domestically. Uncertainty about future gas production could affect upcoming negotiations to renew long-term sales contracts with Brazil (due in 2019) and Argentina (due in 2027).
Investment in the hydrocarbon sector amounted to $725 million in 2016, down from $1.15 billion in 2015. The government is projecting about $5.2 billion in investment in exploration and exploitation in the sector during 2017-2020.
Despite recent efforts to diversify the economy, it is still dependent on the hydrocarbon sector. Commodity exports account for more than 75% of total exports, while natural gas was around 30% of all exports in 2016, down from more than 50% in 2013. On average, about 47% of public-sector revenues (in the form of royalties and tax revenues) came from the hydrocarbon sector during 2010-2014, diminishing to 32% in 2016.
Bolivia's public institutions are still developing and susceptible to politicization, and economic policymaking is highly centralized. President Evo Morales will likely run for a fourth term in 2019. Despite losing a referendum in 2016 to change the constitution to allow Morales to run for a third consecutive mandate, it is likely that the president will seek approval to pursue another mandate. The governing Movimiento al Socialismo (MAS) political party holds a more than two-thirds majority in Congress and has a widespread presence throughout the country. There is no clear successor to Morales within his political movement, and no one within the MAS has similar political credentials, while the opposition remains divided, limiting its chances in the next presidential elections.
Unlike most of its counterparts, the Bolivian central bank lends to public-sector enterprises (mainly to YPFB, the oil and gas company) and manages funds that are available for investment in various projects. All such funds, as well as dollars kept in a bank deposit guarantee fund, are distinct from the central bank's foreign exchange reserves. Total central bank lending to public enterprises and trust funds reached just less than 12% of GDP in 2016.
Inflation is likely to be 4.5% in 2017, similar to 2016, and hover around 4.5% on average over the coming three to four years. Inflation will be anchored by Bolivia's stable exchange rate; however, we believe that it remains vulnerable to supply shocks.
The level of dollarization continues to fall from previously high levels.
Deposits denominated in local currency increased to around 85% of total deposits by the end of 2016 from 6% in 2002, and loans in local currency increased from 53% to 97% during the same period.
The reported capital adequacy ratio of the banks exceeds 12%, and deposits fully fund the loan book. The financial system is likely to remain a net external creditor in the coming three years. Total bank lending to the private sector grew around 17% in 2016 and may grow at a slower pace this year. Total domestic credit to the private and the nonfinancial public sector grew rapidly to 58% of GDP in 2016 from 39% in 2012, and we expect it to reach 66% of GDP in 2019. While nonperforming loans are around 1.5% of total loans and are fully covered by loan loss provisions, rapid credit growth raises the risk of potentially higher nonperforming loans in the event of lower-than-expected growth. The long-term health of the financial system depends in large part on the government's pragmatism in prudently encouraging lending to targeted sectors, avoiding excessive credit growth and risk-taking, and maintaining bank profitability.OUTLOOK
The negative outlook reflects the risk that Bolivia's external position could deteriorate beyond our current expectations as a result of persistently large current account deficits over the next two years. Growing economic imbalances, including potential risks to the financial system emanating from the rapid increase in domestic credit in recent years, could raise the country's vulnerability to an adverse external shock. A weaker external or monetary profile could result in a downgrade.
Conversely, timely adjustment in fiscal and monetary policies could contain further deterioration in Bolivia's external profile and its economic resilience. Similarly, better-than-expected export performance, especially through improved prospects for long-term hydrocarbon output and exports, could sustain favorable GDP growth, contain the CAD, and reduce macroeconomic imbalances. We could revise the outlook to stable as a result.RATINGS LIST
Ratings Affirmed; Outlook Action
Bolivia (Plurinational State of)
Sovereign Credit Rating BB/Negative/B BB/Stable/B
Bolivia (Plurinational State of)
Senior Unsecured BB
Transfer & Convertibility Assessment BB