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Fitch Says Bolivia Reserves Are No Longer Enough for FX Peg

Matthew Bristow
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Fitch Says Bolivia Reserves Are No Longer Enough for FX Peg

(Bloomberg) -- Bolivia has depleted its “war chest” of international reserves to the point that it no longer has enough dollars to defend the nation’s fixed exchange rate, according to Fitch Ratings.

Fitch in November downgraded the Andean country to B+, four notches below investment grade, citing the central bank’s dwindling reserve pile and political turmoil following the ouster of President Evo Morales.

The bank has intervened to keep the currency stable near 7 per dollar over the past decade. Since prices fell for Bolivia’s natural gas exports five years ago, it has been supporting its currency by burning through reserves at a pace that Fitch says isn’t sustainable -- since 2014, they have fallen by half to below $8 billion.

“Bolivia’s fiscal, monetary and credit policies have all been highly stimulative, and the bottom line of all of that has been a very rapid draw-down on international reserves for the last few years,” Fitch analyst Todd Martinez said in a phone interview from New York. “So we already think the levels of reserves are no longer fully adequate to mitigate risk given that economic profile, and there’s a lot of uncertainty around what the plan is to stabilize those reserve levels going forward.”

Bolivia enjoyed one of Latin America’s strongest growth rates during Morales’ 2006-2019 presidency, initially buoyed by growing revenues from natural gas exports. When gas prices fell in 2015, the government increased public spending to support the economy, turning fiscal and current account surpluses into deep deficits.

“To sustain a fixed exchange rate in the context of high commodity dependence you need a very large stock of reserves, and we no longer think that Bolivia has the war chest that it needs,” Martinez added.

Tough Adjustment

Bolivians vote for the next president in May, with a likely run-off in June. A recent poll shows that Morales’ socialist MAS party is likely to face a conservative, pro-U.S. candidate in the second round.

Whoever wins will have to implement a tough adjustment as Bolivia’s gas sector is hit by a “triple whammy” of lower prices, production declines due to underinvestment and falling demand from Brazil, Martinez said.

The central bank, the finance ministry and the presidency didn’t immediately reply to requests for comment.

Fitch expects Bolivia’s economy to expand only 1% this year, which would be its slowest pace since 1999. The ratings firm’s forecast is much gloomier than those of the International Monetary Fund, which predicts 3.8% growth, and the Bolivian central bank, which is forecasting an expansion of 3.5%.

Even so, the country appears to have avoided the “worst-case scenario” of a severe contraction, Martinez said. At the height of the turmoil, when there were road blockages and damage to infrastructure and gas production, it appeared that the economy could suffer “real damage,” he said.

The nation’s dollar bonds due 2028 have rallied 5 cents since Morales left office, sending the yield down to 4.94%.

Interim President Jeanine Anez took power in November after Morales fled the country when security forces sided with anti-government protesters demanding his resignation. Morales faced weeks of demonstrations after the Oct. 20 election, which the Organization of American States said was plagued with irregularities.

Since Anez is running for president, she’s unlikely to take unpopular measures to rein in the deficit before the election.

Martinez said investors may not have a clear picture on the economic adjustment strategy until after the vote. The “extreme amount of uncertainty” in the pre-election period is hurting the economy, he added.

Moody’s Investors Service put Bolivia’s rating on review for downgrade in December, saying that heightened political risk has “materially increased policy uncertainty”.

(Updates quote in fourth paragraph, adds that finance ministry didn’t comment in 8th paragraph.)

To contact the reporter on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte

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