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Bolivia: Staff Report for the 2016 Article IV Consultation

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
December 2016
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Context and Recent Developments

1. After a decade of substantial economic and social progress, underpinned by sound macroeconomic management, Bolivia is being challenged by low commodity prices. Growth averaged around 5 percent per year over the last decade (2006–15), while the poverty ratio declined by a third to less than 40 percent. The authorities built up sizable international reserves and fiscal buffers while considerably de-dollarizing the financial system. But the global outlook has changed, and commodity prices have been on a trend decline since 2011, stabilizing only very recently, albeit at significantly lower levels compared to their peak. As one of the most commodity-dependent countries in Latin America (Box 1), Bolivia has suffered a massive decline in commodity terms of trade over the last few years, which has led to a reduction in income of close to 14 percent of GDP (charts). A period of lower commodity prices is expected over the medium term, posing significant challenges in making further progress towards the targets set out in the authorities’ Patriotic Agenda 2025, including eradication of extreme poverty, better access to health and education, and state-led industrialization. To achieve these targets, the government is anchoring policies on a 5-year Plan de Desarollo Economico y Social (PDES) that scales up public investment projects to sustain high growth. As a result, the sizable fiscal and external current account surpluses generated over a decade have now turned into large twin deficits.

Decline in Commodity Terms of Trade, 2014Q2-2016Q2

(In percent of GDP)

Source: Gruss (2014).

Real GDP Growth and Oil Price

Source: Haver Analytics, Inc

2. Political challenges have grown. While Movimiento al Socialismo holds a ⅔ majority in Congress, President Morales lost a referendum in February 2016 that would have allowed him to stand for reelection (for a fourth consecutive term) in 2019. Protests by miners that led to the death of the Deputy Interior Minister, strikes by truck drivers and the handicapped, and requests for bailouts from subnational governments have added to the challenges. In light of slowing growth, the government announced that the second monthly Christmas bonus would not be paid in 2016.

Box 1.Impact of Oil and Gas Production in LAC and Bolivia

There exists a strong positive long-run relationship between real GDP per capita and the real value of hydrocarbons production in Latin American and Caribbean (LAC) oil and gas producers. Panel co-integration analysis for the period 1980–2014 suggests that a 100 percent increase in the value of oil and gas production increases the level of GDP by 14 percent on average. The relationship is particularly pronounced in Trinidad and Tobago and Venezuela while for Bolivia it is close to the LAC average. Between 2000 and 2014, the real value of oil and gas production per capita in Bolivia increased by about 370 percent, while real GDP per capita increased by 43 percent. The developments in Bolivia over the recent boom period are thus very close to what one would have expected based on this general relationship.

GDP per Capita and Hydrocarbons Production per Capita in Bolivia

At the provincial level in Bolivia, real GDP per capita in the main gas producing region (Tarija), increased nearly 150 percent during the boom in the 2000s. The huge gas fields discovered in Bolivia in the late 1990s are located in the southern province of Tarija, which now produces about 70 percent of all Bolivian gas. The massive growth in the extractive sector and the related fiscal windfall (with Tarija receiving more revenues than all other 8 provinces combined in 2014) does not seem to have produced important spillovers to other sectors. The only sector besides the oil and gas one which grew substantially more in Tarija than in the rest of Bolivia was construction.

Departmental Real GDP Per Capita

Real GDP Growth in Ta rija and the Rest of Bolivia (2001-2014)

The gas boom and associated fiscal windfall reduced poverty in producing municipalities. Data from the 2001 and 2012 population censuses indicates that the large gas discoveries were associated with significant reductions in poverty of around 10 percentage points (as measured by population without access to basic necessities) in directly affected municipalities. Gas producing municipalities also experienced a very large increase in public sector employment (more than 1 standard deviation) as well as important increases in construction and manufacturing employment. In municipalities with mining—which is more labor intensive but generated a smaller fiscal windfall—a larger reallocation of labor away from agriculture, a positive migration effect, but a smaller reduction in poverty was observed.

Impact of Resource Boom on Local Economic Development

3. The economic expansion continues, but fiscal and external imbalances are growing:

  • Economic growth in Bolivia remains among the highest in Latin America, but has slowed (chart). While real GDP growth over the last 12 months to June 2016 was 4.4 percent, this masks a significant slowdown recently, with 2016Q2 growth of 3¼ percent (y-o-y). This outcome partly reflects temporary supply shocks in the hydrocarbons and agriculture sectors, with the latter due to a drought linked to the La Niña climate phenomenon. Consumption growth has been strong given solid real wage increases, but unemployment has increased slightly to 4.4 percent (Table 1 and Figure 1). Inflation has remained moderate (3.5 percent y-o-y in October 2016), despite rapid monetary growth (Table 2 and Figure 2), due in part to falling import prices and stable administered prices.
  • While public debt remains moderate, fiscal imbalances are growing. The fiscal deficit reached 6.9 percent of GDP in 2015 due to sharply lower hydrocarbon revenues and large increases in spending. This was mainly financed by Central Bank of Bolivia (BCB) net credit (either the use of the government deposits or direct credit to SOEs). There has been a broad decline in tax collections through June 2016, reflecting also falling imports and corporate profits, but the shortfall has been partly offset by restraint in current expenditures. Gross public debt remains moderate at 43 percent of GDP in August 2016, while net debt is lower at 28 percent of GDP (Table 3 and Figure 3). At the subnational level, the financial positions of several administrations that rely heavily on hydrocarbons-related revenues have significantly worsened.
  • Reserves remain substantial, but the current account deficit has widened. After being in surplus for over a decade (2003-14), the current account registered large deficits of 5.8 percent of GDP in 2015 and about 7 percent of GDP in 2016Q1.1 This reflects a marked drop in export prices (and some weakness in hydrocarbon export volumes), which have been only partly offset by import compression. Given the widening current account deficit, reserves have dropped sharply, by US$2.1 billion in 2015 (about 6 percent of GDP) and an additional US$2.3 billion through mid-October 2016 (Table 4 and Figure 4). Nevertheless, at 32 percent of GDP, reserves remain more than adequate by any metric.
  • The fall in hydrocarbon prices is putting pressure on the financial health of public enterprises. Over the past several years, public enterprises have been ramping up their spending, particularly investments. This had been sustained by vigorous revenues, supported by relatively high global hydrocarbon prices (chart). However, the increase in spending, combined with the sharp fall in hydrocarbon prices has tipped their financial balance into negative territory over the past couple of years, which has largely been financed by the central bank.
Table 1.Bolivia: Selected Economic and Social Indicators
I. Social and Demographic Indicators
GDP per capita (U.S. dollars, 2015)2,900Poverty headcount ratio (percent of population, 2015)38.6
Population (millions, 2015)11.5Gini index (2015)47.0
Life expectancy at birth (years, 2014)68Adult literacy rate (percent, 2015)95.1
Infant mortality rate (per thousand, 2015)30.6Net primary education enrollment rate (2011)82.2
II. Economic Indicators
Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, and Fund staff calculations.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Excludes reserves from the Latin American Reserve Fund (FLAR) and Offshore Liquidity Requirements (RAL).

All foreign assets valued at market prices.

Official (buy) exchange rate.

Baseline Projections
201020112012201320142015201620172018201920202021
Income and prices(Annual percentage changes)
Real GDP4.15.25.16.85.54.83.73.93.53.53.53.5
Real GDP excluding hydrocarbons3.55.04.46.25.45.45.23.73.53.43.83.6
GDP deflator8.814.67.16.02.0−4.6−2.07.15.24.84.24.7
CPI inflation (period average)2.59.94.55.75.84.13.74.85.05.05.05.0
CPI inflation (end-of-period)7.26.94.56.55.23.04.65.05.05.05.05.0
(In percent of GDP, unless otherwise indicated)
Investment and savings
Total investment17.019.817.719.021.019.220.919.118.017.316.515.8
Public sector9.510.510.511.312.413.513.512.211.511.010.39.8
Private sector7.18.47.87.78.67.87.26.86.56.36.26.0
Stockbuilding0.40.8−0.70.00.1−2.10.20.00.00.00.00.0
Gross domestic savings23.925.527.126.022.413.211.914.014.414.814.414.3
Gross national savings25.025.625.723.920.513.212.814.114.114.413.913.8
Public sector11.111.412.312.010.16.65.45.55.35.65.04.9
Private sector13.914.213.411.910.46.67.48.68.88.88.98.9
Saving/investment balances 1/8.05.88.14.9−0.6−6.1−8.1−5.0−4.0−2.9−2.6−2.0
Public sector1.70.81.80.7−2.3−6.9−8.1−6.7−6.2−5.4−5.3−5.0
Private sector6.75.85.64.21.8−1.30.21.72.32.52.72.9
Combined public sector
Revenues and grants33.236.237.839.139.937.735.035.234.534.633.933.6
Of which: Hydrocarbon related revenue10.211.413.013.512.79.16.46.86.06.35.65.5
Expenditure31.535.436.038.443.344.643.041.940.740.139.238.6
Current22.824.225.124.928.229.127.827.827.527.427.327.3
Capital 2/8.711.211.013.515.015.515.214.113.212.611.911.3
Overall balance after nationalization costs1.70.81.80.7−3.4−6.9−8.1−6.7−6.2−5.4−5.3−5.0
Of which:
Non-hydrocarbon balance, before nationalization costs−8.1−9.6−9.7−11.1−13.2−14.1−12.2−11.4−10.2−9.7−9.0−8.6
Total gross NFPS debt 3/38.535.735.736.137.040.646.747.648.849.451.252.0
NFPS deposits20.821.424.224.020.316.615.112.410.38.57.97.3
External sector
Current account 1/3.90.37.22.40.2−5.8−7.6−4.7−3.8−2.9−2.6−2.3
Merchandise exports32.434.641.337.937.025.021.021.820.520.319.318.5
Of which: natural gas14.116.120.119.818.111.37.07.97.67.76.66.3
Merchandise imports28.332.831.431.431.629.127.525.423.422.621.120.0
Capital and financial account0.88.6−0.91.22.70.8−0.4−0.6−0.10.30.20.0
Of which: direct investment net3.43.63.95.71.94.10.51.01.52.02.53.2
Overall balance of payments4.78.96.33.62.9−4.9−8.0−5.4−3.8−2.6−2.4−2.3
Terms of trade index (percent change)−11.158.07.30.0−2.2−16.3−10.19.51.90.9−1.50.5
Net Central Bank foreign reserves 4/5/
In millions of U.S. dollars9,73012,01913,92714,43015,12313,05610,3448,3306,7215,5704,4423,945
In percent of broad money80.083.080.071.464.748.136.526.419.514.810.98.8
Exchange rates 6/
Bolivianos/U.S. dollar (end-of-period)6.96.96.96.96.96.9n.a.n.a.n.a.n.a.n.a.n.a.
REER, period average (percent change)−4.91.95.25.67.90.1n.a.n.a.n.a.n.a.n.a.n.a.
Money and credit(Annual percentage changes, unless otherwise indicated)
Credit to the private sector19.923.019.418.915.017.617.515.211.010.59.510.0
Credit to the private sector (percent of GDP)36.036.839.040.943.751.559.561.662.863.964.965.7
Broad money12.517.720.216.215.616.24.511.19.39.18.69.2
Interest rates (percent, end-of-period)
Deposits (effective rate)0.91.71.22.72.5n.a.n.a.n.a.n.a.n.a.n.a.n.a.
Lending (effective rate)10.410.810.611.48.0n.a.n.a.n.a.n.a.n.a.n.a.n.a.
U.S. dollar and dollar-indexed deposits (in percent of total deposits)43.834.526.321.017.615.615.615.615.615.615.615.6
U.S. dollar and dollar indexed credit (in percent of total credit)38.630.721.315.810.28.03.03.03.03.03.03.0
Memorandum items:
Nominal GDP (in billions of U.S. dollars)19.824.127.330.933.233.233.837.640.944.447.952.0
Oil prices (in U.S. dollars per barrel)79.0104.0105.0104.196.250.843.050.653.154.456.358.0
Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, and Fund staff calculations.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Excludes reserves from the Latin American Reserve Fund (FLAR) and Offshore Liquidity Requirements (RAL).

All foreign assets valued at market prices.

Official (buy) exchange rate.

Sources: Ministry of Economy and Public Finances, Central Bank of Bolivia, National Institute of Statistics, UDAPE, and Fund staff calculations.

The discrepancy between the current account and the savings-investment balances reflects methodological differences. For the projection years, the discrepancy is assumed to remain constant in dollar value.

Includes nationalization costs and net lending.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Excludes reserves from the Latin American Reserve Fund (FLAR) and Offshore Liquidity Requirements (RAL).

All foreign assets valued at market prices.

Official (buy) exchange rate.

Figure 1.Bolivia: Real Sector Developments

Sources: National Institute of Statistics, Central Bank of Bolivia, Haver Analytics, Inc., SEDLAC, World Bank, and Fund staff estimates.

Table 2.Bolivia: Financial System Survey 1/
Baseline projections
201020112012201320142015201620172018201920202021
(Flows in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets7,24512,99914,5635,3688,474−10,886−16,854−10,566−7,914−4,582−4,30665
(Flows in millions of U.S. dollars)1,0882,0252,1237831,235−1,587−2,457−1,540−1,154−668−6289
Net domestic assets1,0291,3134,33914,18913,02538,75626,41933,37829,28827,32827,78727,023
Net credit to the public sector−7,487−5,654−6,132−4,0284,39813,45412,37211,37211,37211,37210,68610,000
Credit to the private sector8,25811,42311,83213,78413,03817,57120,58620,93417,47418,43218,52121,307
Other items (net)258−4,456−1,3624,433−4,4117,731−6,5391,072442−2,476−1,421−4,284
Net medium and long-term foreign liabilities (increase -)−1,123−620−1,150263−1181,8441,1941,1941,1941,1941,1941,194
Broad money9,39814,93320,05219,29521,61826,0268,37221,61820,17921,55222,28625,895
Liabilities in domestic currency12,56216,35422,03620,81922,02224,5867,28918,16116,91017,99618,56821,431
Foreign currency deposits−3,164−1,421−1,985−1,525−4041,4401,0833,4563,2703,5563,7194,464
(Stocks in millions of Bolivianos, unless otherwise indicated)
Net short-term foreign assets77,63590,634105,197110,565119,040108,15491,30080,73472,82068,23863,93163,996
(Stocks in millions of U.S. dollars)11,18713,21215,33516,11717,35315,76613,30911,76910,6159,9479,3199,329
Net domestic assets8,4589,77114,11028,29941,32480,080106,499139,877169,165196,493224,280251,303
Net credit to the public sector−17,492−23,145−29,277−33,305−28,906−15,452−3,0808,29219,66431,03641,72251,722
Credit to the private sector49,66861,09072,92286,70699,744117,315137,901158,835176,308194,740213,262234,569
Other items (net)−23,718−28,174−29,536−25,103−29,514−21,783−28,321−27,249−26,807−29,283−30,704−34,988
Net medium and long-term foreign liabilities (increase -)1,7101,090−60203851,9293,1234,3175,5106,7047,8989,092
Broad money84,38299,315119,367138,661160,279186,305194,677216,295236,474258,026280,313306,207
Liabilities in domestic currency57,37573,72895,765116,584138,606163,192170,481188,643205,552223,548242,116263,547
Foreign currency deposits27,00725,58723,60222,07721,67323,11324,19627,65230,92234,47838,19742,661
(Changes in percent of broad money at the beginning of the period)
Net short-term foreign assets9.715.414.74.56.1−6.8−9.0−5.4−3.7−1.9−1.70.0
Net domestic assets1.41.64.411.99.424.214.217.113.511.610.89.6
Net credit to the public sector−10.0−6.7−6.2−3.43.28.46.65.85.34.84.13.6
Credit to the private sector11.013.511.911.59.411.011.010.88.17.87.27.6
Other items (net)0.3−5.3−1.43.7−3.24.8−3.50.60.2−1.0−0.6−1.5
Net medium and long-term foreign liabilities−1.5−0.7−1.20.2−0.11.20.60.60.60.50.50.4
Broad money12.517.720.216.215.616.24.511.19.39.18.69.2
Liabilities in domestic currency16.819.422.217.415.915.33.99.37.87.67.27.6
Foreign currency deposits−4.2−1.7−2.0−1.3−0.30.90.61.81.51.51.41.6
Sources: Central Bank of Bolivia, and Fund staff calculations.

The financial system comprises the central bank, commercial banks and nonbanks, and the Banco de Desarrollo Productivo (BDP), which is a state-owned second-tier bank.

Sources: Central Bank of Bolivia, and Fund staff calculations.

The financial system comprises the central bank, commercial banks and nonbanks, and the Banco de Desarrollo Productivo (BDP), which is a state-owned second-tier bank.

Figure 2.Bolivia: Monetary Developments

Sources: Central Bank of Bolivia, National Institute of Statistics, and Fund staff estimates.

Table 3.Bolivia: Operations of the Consolidated Public Sector 1/
Baseline projections
20112012201320142015201620172018201920202021
Revenue33.236.237.839.139.937.735.035.234.534.633.933.6
Taxes26.328.931.833.733.731.328.728.828.828.728.328.0
IDH and royalties7.78.310.311.510.87.65.15.45.35.45.15.0
Direct taxes4.65.55.76.06.26.16.16.16.16.06.06.0
o/w: Corporate income tax3.84.65.05.35.45.45.45.45.45.45.45.4
Indirect taxes14.015.215.716.216.717.617.517.317.417.217.116.9
o/w: VAT7.28.18.79.09.09.19.08.99.08.98.88.7
o/w: Excise tax on fuel1.61.51.31.31.31.31.41.41.41.41.41.4
Grants1.10.80.70.30.30.40.30.30.30.30.30.3
Other revenue5.86.55.45.15.96.15.96.15.45.65.35.3
Nontax revenue3.43.02.62.73.84.54.64.64.64.64.64.6
Public enterprises operating balance2.53.22.62.01.91.51.31.40.70.80.50.5
Central bank operating balance−0.10.20.10.30.20.10.00.10.10.20.20.2
Expenditure31.535.436.038.443.344.643.041.940.740.139.238.6
Expense22.824.225.124.928.229.127.827.827.527.427.327.3
Compensation of employees9.59.39.09.110.412.612.211.711.511.311.110.9
Purchases of goods and services2.23.02.12.32.83.83.73.73.73.73.73.7
Interest1.41.21.01.01.01.01.01.11.11.21.41.5
Domestic1.11.00.80.60.50.50.50.60.70.81.01.2
Foreign0.30.20.20.30.40.50.50.40.40.40.40.4
Subsidies 2/0.92.13.13.02.01.30.81.51.41.51.41.5
Social benefits 3/7.87.98.88.99.58.48.17.97.97.87.87.7
Other expense1.10.71.10.72.62.02.01.91.91.91.91.9
Other1.10.71.10.71.52.02.01.91.91.91.91.9
Nationalization cost0.00.00.00.01.10.00.00.00.00.00.00.0
Net acquisition of nonfinancial assets 4/8.711.211.013.515.015.515.214.113.212.611.911.3
o/w: Public Enterprises0.91.92.83.23.74.74.44.34.03.93.83.7
Gross operating balance10.412.012.714.211.78.67.27.37.07.26.66.3
Net lending/borrowing (overall balance)1.70.81.80.7−3.4−6.9−8.1−6.7−6.2−5.4−5.3−5.0
Net financial transactions1.70.81.80.7−3.4−6.9−8.1−6.7−6.2−5.4−5.3−5.0
Net incurrence of liabilities−1.7−0.8−1.8−0.73.46.98.16.76.25.45.35.0
External1.01.82.32.51.31.91.61.51.51.41.21.1
Disbursements4.14.75.54.02.33.12.52.32.32.22.12.1
Amortizations−3.0−2.8−3.2−1.1−0.9−1.1−0.8−0.8−0.7−0.7−0.9−0.9
Other external0.0−0.10.0−0.5−0.1−0.1−0.1−0.1−0.1−0.1−0.1−0.1
Domestic−2.7−2.6−4.1−3.12.05.06.55.24.74.04.13.9
Banking system−5.3−3.5−3.4−2.11.85.95.34.44.03.73.32.8
Central Bank−4.9−2.7−3.3−2.41.85.84.73.93.63.33.02.8
Commercial banks−0.4−0.9−0.10.20.00.10.60.50.50.50.20.0
Pension funds0.00.0−0.7−0.8−0.80.00.00.00.00.00.00.0
Other domestic2.60.9−0.7−1.00.2−0.91.10.80.70.20.81.1
Memorandum items:
Primary balance3.12.12.81.6−2.4−5.9−7.0−5.7−5.1−4.2−3.9−3.4
Overall balance before nationalization1.70.81.80.7−2.3−6.9−8.1−6.7−6.2−5.4−5.3−5.0
o/w Non-hydrocarbon primary balance 5/−6.7−8.3−8.7−10.1−12.3−13.1−11.2−10.3−9.1−8.5−7.6−7.1
Overall balance as a share of non-hydrocarbon GDP1.80.91.90.7−2.5−7.3−8.5−7.1−6.5−5.7−5.5−5.2
Hydrocarbon related revenue 6/10.211.413.013.512.79.16.46.86.06.35.65.5
Hydrocarbon balance 7/9.810.411.411.711.07.24.24.74.04.33.73.6
Nonfinancial public sector gross public debt 8/38.535.735.736.137.040.646.747.648.849.451.252.0
o/w gross foreign public debt15.414.815.717.017.319.120.319.819.719.619.318.9
Nonfinancial public sector gross public debt
(in percent of non-hydrocarbon GDP)41.138.639.540.341.043.349.150.051.352.053.654.5
Sources: Ministry of Economy and Public Finances and Fund staff calculations.

The operation of mixed-ownership companies, primarily in the telecommunications, electricity and hydrocarbon sectors, are not included.

Includes incentives for hydrocarbon exploration investments in the projection period.

Includes pensions, cash transfers to households, and social investment programs (previously classified as capital expenditure).

The authorities’ programs of social investment, including school breakfast, recurrent costs on basic sanitation and social management are reclassified to currentspending.

Primary balance before nationalization costs minus hydrocarbon related balance.

Hydrocarbon related revenues are defined as direct hydrocarbon tax (IDH), royalties, and the operating balance of state oil/gas company (YPFB).

Hydrocarbon related revenues minus YPFB capital expenditures.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Sources: Ministry of Economy and Public Finances and Fund staff calculations.

The operation of mixed-ownership companies, primarily in the telecommunications, electricity and hydrocarbon sectors, are not included.

Includes incentives for hydrocarbon exploration investments in the projection period.

Includes pensions, cash transfers to households, and social investment programs (previously classified as capital expenditure).

The authorities’ programs of social investment, including school breakfast, recurrent costs on basic sanitation and social management are reclassified to currentspending.

Primary balance before nationalization costs minus hydrocarbon related balance.

Hydrocarbon related revenues are defined as direct hydrocarbon tax (IDH), royalties, and the operating balance of state oil/gas company (YPFB).

Hydrocarbon related revenues minus YPFB capital expenditures.

Public debt includes SOE’s borrowing from the BCB but not from other domestic institutions.

Figure 3.Bolivia: Fiscal Developments

Sources: Ministry of the Economy and Public Finances, Central Bank of Bolivia and Fund staff estimates.

1/ The fiscal impulse is calculated as the change in the cyclically-adjusted and non-hydrocarbon primary fiscal balance.

Table 4.Bolivia: Summary Balance of Payments(In millions of U.S. dollars, unless otherwise indicated)
Baseline projections
201020112012201320142015201620172018201920202021
Current account766771,97074961−1,923−2,563−1,786−1,571−1,298−1,232−1,211
Trade balance8124312,6762,0141,783−1,384−2,209−1,354−1,233−998−868−765
Exports, f.o.b.6,4028,35811,25411,69812,3018,3027,1008,1888,5609,0349,2539,641
Exports, c.i.f.7,0529,21511,99112,37213,0288,9127,7108,7979,1709,6439,86210,251
Natural gas2,7983,8855,4796,1136,0123,7712,3582,9563,1703,3983,1653,254
Mining2,3963,4293,7443,0773,9292,8523,1643,4823,5773,6863,8113,966
Soy - related4966289771,2111,083795856822818846873902
Other1,3631,2731,7911,9702,0041,4941,3311,5371,6041,7132,0132,128
Imports, c.i.f.−5,590−7,927−8,578−9,684−10,518−9,686−9,309−9,542−9,793−10,032−10,121−10,406
Services (net)−263−369−342−627−1,099−535−657−451−205−133−144−156
Income (net)−864−1,161−1,629−1,908−1,707−1,173−866−1,181−1,365−1,429−1,512−1,627
Transfers (net)1,0811,1751,2661,2701,0841,1691,1691,2011,2311,2621,2921,337
Capital and financial account1572,083−258372909280−149−228−39147103713
Capital transfers−766655000000
Direct investment (net)6728591,0601,7506485031693766288881,1971,665
Gross investment9159541,5052,0302,1131,0606939501,2021,4351,7531,885
Disinvestment and investment abroad−293−95−445−280−1,465−557−524−574−574−547−556−584
Portfolio investment (net)90186−360−429−561−91765−148−125−163−359−336
Public sector263537651−4581,101838562596629665604581
Disbursements5387771,1351,2437591,0328398819259711,0191,070
Amortization−528−607−829−279−231−376−276−285−295−306−415−489
Other (net)253367346−1,423573182000000
Private sector−101−611−815−1,045−1,303−1,163−946−1,052−1,171−1,243−1,339−1,197
Errors and omissions−7591,107−8005491,0181,015000000
Overall balance9232,1601,7121,122971−1,643−2,712−2,014−1,610−1,151−1,129−497
Financing−923−2,160−1,712−1,122−9711,6432,7122,0141,6101,1511,129497
Memorandum items:
Current account (in percent of GDP)3.90.37.22.40.2−5.8−7.6−4.7−3.8−2.9−2.6−2.3
Current account (in percent of non-hydrocarbon GDP)4.10.38.02.70.2−6.2−8.0−5.0−4.0−3.1−2.7−2.4
Non-energy current account (in percent of non-hydrocarbon GDP)−6.0−10.6−7.9−13.7−14.7−13.9−11.7−9.4−8.3−7.4−6.0−5.7
Merchandise exports (in percent of GDP)32.434.641.337.937.025.021.021.820.520.319.318.5
Merchandise imports (in percent of GDP)−28.3−32.8−31.4−31.4−31.6−29.1−27.5−25.4−23.4−22.6−21.1−20.0
Net official reserves (end-of-period)9,73012,01913,92714,43015,12313,48010,7688,7537,1435,9924,8634,366
(in months of imports of goods and services)17.615.716.815.214.114.211.69.37.46.04.84.1
Foreign direct investment (in percent of GDP)3.43.63.95.71.94.10.51.01.52.02.53.2
GDP (in millions of U.S. dollars)19,78624,13527,28230,88333,23733,23833,79837,61240,93244,41147,86952,028
Capital account (in percent of GDP)0.88.6−0.91.22.70.8−0.4−0.6−0.10.30.20.0
Errors and omissions (in percent of GDP)−3.84.6−2.91.83.13.10.00.00.00.00.00.0
Export value growth (in percent)29.130.634.63.95.2−32.5−14.515.34.55.52.44.2
Export volume growth (in percent)28.5−26.025.86.610.6−15.1−0.912.73.24.72.13.7
Export prices growth (in percent)0.476.47.0−2.5−4.9−20.5−13.72.41.30.80.30.4
Import value growth (in percent)23.041.88.212.98.6−7.9−4.92.52.72.61.82.8
Import volume growth (in percent)8.827.08.515.811.7−3.0−4.01.02.21.91.12.4
Import prices growth (in percent)13.011.6−0.3−2.5−2.7−5.1−1.01.50.50.70.70.4
Sources: Central Bank of Bolivia, National Institute of Statistics and Fund staff calculations.
Sources: Central Bank of Bolivia, National Institute of Statistics and Fund staff calculations.

Figure 4.Bolivia: External Sector Developments

Sources:Banco Central de Bolivia and Fund staff estimates and calculations.

1/ Value for 2016 based on cumulative year/year growth rate for January-May.

Real GDP Growth

(In percent, y/y)

Source: Haver Analytics, Inc.

1/ Includes ARG, BRA, CHL PER, PRY and URY.

Fiscal Balances

(In percent of GDP)

Sources: Authorities’ data and staff calculations.

Current Account

(In percent of GDP)

Source: Source: Central Bank of Bolivia.

Public Enterprises Consolidated Revenues and Oil Prices

(Percent of GDP (left scale); US$ per barrel (right scale))

Source: Thomson Reuters Datastream; Bolivian authorities; and IMF staff calculations.

Note: excludes subsidiaries of SOEs.

4. Financial indicators are relatively solid, but vulnerabilities are growing as credit growth remains high. While low by regional standards (chart), banks’ overall capital adequacy ratio stood at 12 percent in mid-2016, with all banks above the regulatory minimum of 10 percent. The return on bank equity is at relatively high levels (12 percent in June 2016), but profitability continues to decline given a higher tax burden and reduced interest margins. Private sector credit increased by about 8 percentage points of GDP in 2015—well above its trend, suggesting the possibility of growing systemic risks (chart). To finance the rapid credit growth while maintaining reasonable capital ratios, banks have increased issuance of subordinated debt. Nevertheless, taking into account the large real appreciation of the currency (see paragraph 15), financial conditions have tightened for exporters and import substituting sectors (chart). At the same time, dollarization of deposits has fallen significantly and stabilized at around 17 percent as of mid-October 2016, while credit dollarization is around 3 percent of total loans (Annex I and Figure 5).

Figure 5.Bolivia: Financial Sector Developments

Sources: ASFI and Fund staff calculations.

/1 Licensed institutions only.

/2 Contributions refer to 2016M6 over 2015M6 levels.

Capital Ratio, 2016Q2

(In percent of risk weighted assets)

Source: IMF FSI and ASFI.

/1 Data are for December 2015.

Credit Gap Estimations

Sources: Authorities’ data and IMF staff calculations.

Note: Estimations use one-sided HP filter. Credit gap analyses assume that large deviations from trend growth will lead to higher probability of a correction (“bust phase”) in the future.

Contribution to the Financial Conditions Index

Sources: Bolivian Authorities; and IMF staff estimates.

5. Implementation of previous Fund advice has been mixed. The authorities have taken some measures towards adopting a medium-term fiscal framework, including creating a Macro-Fiscal Unit at the Ministry of Finance to produce fiscal projections and requiring subnational governments and public enterprises to prepare multi-year budgets. However, recommendations to improve the non-hydrocarbon fiscal balance, discontinue central bank lending to enterprises, and gradually allow greater exchange rate flexibility have gained limited traction (Table 5).

Table 5.Bolivia: Past Fund Policy Recommendations and Implementation
RecommendationsStatus
Enhancing the Fiscal policy framework
Improve the non-hydrocarbons balanceNot implemented. The non-hydrocarbons deficit continued to widen.
Adopt a medium-term fiscal frameworkIn progress. The authorities adopted a five-year development plan, required public enterprises to prepare multi-year budgets, and created a Macro-Fiscal Unit at the Ministry of Finance to produce fiscal projections.
Improving Monetary and Exchange Rate Policies
Discontinue central bank lending to public enterprisesNot implemented. Central bank lending to public corporations has continued.
Gradually allow greater exchange rate flexibilityNot implemented. There has been a stable exchange rate vis-à-vis U.S. dollar since November 2011.
Safeguarding Financial Stability
Continue strengthening supervisionPartially implemented. Credit registry coverage was expanded and the depositor protection fund was created. Regulatory requirements were strengthened, including the inclusion of market risks to capital requirements, increasing in the primary capital requirement (from 5 percent to 7 percent of risk-weighted assets and contingencies), and issuing guidance on operational and interest risks. The Financial Stability Council met for the first time in August 2015.
Modify interest rate caps and credit quotas.Limited progress. Financial insitutions have been given five years to comply, with intermediate annual targets to guide the progress. The July 2015 decree watered down the meaning of productive sectors by allowing tourism and intellectual property-related loans to be included, and loans given to “nonproductive” sectors for productive purposes can now be classified as “productive.” Nevertheless, small lenders are experiencing difficulties in meeting the targets.
Increasing Potential Growth
Resolve legal and regulatory uncertainty; ensure transparent and incentive compatible hydrocarbons and mining fiscal regimesSome progress. The government approved a hydrocarbon incentives law in December 2015, which provides incentives for crude oil and condensates production (on a dollar per barrel of production basis). While likely to stimulate production from existing fields, the law falls short regarding making exploration investments substantially more attractive.
Source: Fund staff.
Source: Fund staff.

Outlook and Risks

6. Near-term growth should remain relatively high by regional standards as external and fiscal deficits widen. With continued supportive fiscal policy (including higher investment spending by subsidiaries of national hydrocarbons and electricity companies, YPFB and ENDE, respectively), strong credit growth, resilient private consumption, and a carryover from 2015 of over 2 percent, growth is expected to reach 3.7 percent in 2016 and 3.9 percent in 2017 despite the negative supply shocks. Notwithstanding some government measures to mitigate the impact of the drought (e.g. a new loan facility from the Bank of Productive Development), agricultural output is expected to decline by about 4 percent in 2016. Gas production is expected to marginally decline despite a recovery in 2016H2 with the entry into production of a new field. The slight growth rebound in 2017 reflects an expected recovery in agriculture. The fiscal and current account deficits are projected to widen in 2016 to 8.1 percent and 7.6 percent of GDP, respectively, given the full impact of low commodity prices on export receipts and tax revenues as well as high levels of public spending. This will involve significant recourse to public sector deposits and central bank credit. Regarding inflation, the drought might lead to some uptick in food prices in the coming months, but pressures are expected to moderate thereafter.

7. Over the medium term, growth is expected to converge to its potential of 3.5 percent, while buffers will continue to be eroded. Staff’s potential growth forecast is based on estimates of a dynamic general equilibrium model for Bolivia (and supported by the findings of the October 2015 WEO) which show that the commodity bust will lead to lower income and spending, generating a marked reduction in potential growth (Box 2). In the absence of corrective measures, fiscal and external current account deficits are expected to persist over the medium term, further eroding policy buffers (international reserves are forecast to further decline to close to 7½ percent of GDP or 4 months of imports by 2021).2

8. Risks to this outlook are tilted to the downside. On the domestic side, growth could be adversely affected by: (i) a slower rebound in agricultural production in 2017; (ii) a faster decline in gas production (impacting negotiations over the Brazil supply contract, Annex II); and (iii) excessive credit growth volatility linked to the lending quotas, interest rate caps, and increased taxation in the financial sector.3 External downside risks arise from the possibility of: (i) further U.S. dollar strength; (ii) even lower commodity prices; and (iii) additional weakness in key emerging markets (including Brazil and China). Absent policy adjustment, a combination of these risks could rapidly deplete buffers and lead to severe macroeconomic stresses (Table 6).

Table 6.Bolivia: Risk Assessment Matrix1/
Source/Nature of Risk (Direction/Likelihood)Expected Impact and Recommended Response
External Risks
Persistently lower energy prices (/Low): Lower than expected energy prices would weigh on fiscal and external deficits, further eroding buffers. It would also reduce the attractiveness of much-needed private sector exploration and investment in the hydrocarbons sector.High. Gradually introduce fiscal adjustment, allow greater exchange rate flexibility, and improve the business climate to help facilitate investment and diversification.
Slowdown in China (/ Low to Medium) and other large EMs/frontier economies including Brazil (/Medium): A slowdown in China could affect exports(volumes and prices) for key export commoditiesincluding hydrocarbons and minerals. A slowdown in Brazil could affect exports (particularly for non-gasproducts).Medium to High. Temporarily maintain accommodative monetary and fiscal policies as allowed by existing buffers. Permit some role for the exchange rate as a shock absorber by allowing some flexibility.
Sharp rise in risk premia with flight to safety and U.S. dollar appreciation (/Medium): Further appreciation would exacerbate the boliviano’s overvaluation, limiting diversification. Higher interest rates could affect future placements of sovereign bonds and banks’ credit quality (many loans are indexed to a variable reference rate).Low to Medium. Gradual exchange rate flexibility can address overvaluation. Ensuring policy credibility will help preserve access to international financial markets. Close financial supervision will prevent risks from building in the financial sector.
Domestic Risks
Distortions in the financial system (/Medium): Compliance with the Financial Services Law could lead to a credit crunch in the non-productive sector, or excessive lending to the productive sector and social housing could result in weaker credit quality.Low to Medium. Modify key provisions of the law (interest rate caps, credit quotas, timelines for compliance) via decrees as needed if material risks emerge.
Larger impact of drought on agriculture (↓/High):Recent climate conditions have implications for growth, inflation, and non-traditional exports.Low to Medium. Revise trade policies as needed to contain the inflationary impact; temporary and targeted support to contain growth impact.
Natural gas production and reserves (↓/Me dium): The success of ongoing exploration activities is not assured and existing fields may be exhausted earlier than expected. Uncertainties may influence negotiations on the extension a supply contract with Brazil, which expires in 2019.Medium to High. Improve the environment for private sector participation in the hydrocarbons sector. Move forward proactively on the Brazilian contract negotiations.
Delay in policy adjustment (↓/High): In the absence of consolidation, debt and external buffers could run down and raise questions on the sustainability of policies.Medium to High. Narrow the non-hydrocarbon fiscal deficit to contain debt accumulation. The fiscal adjustment should also help narrow overall balance of payments deficits.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

9. Nevertheless, there continue to be several upside risks. In particular, growth could be higher because of: (i) better-than-expected quality of infrastructure spending;4 (ii) greater success in discovering and exploiting new gas reserves, and/or in bringing downstream industrialization and electricity generation projects on stream; and (iii) a stronger recovery in oil prices. Bolivia also has some of the largest lithium deposits in the world, which would provide a major windfall if lithium battery production can be made commercially viable over the medium term.

Box 2The Impact of the Commodity Boom/Bust: A DSGE Model for Bolivia

Dynamic Stochastic General Equilibrium Model

The model has a continuum of heterogeneous households, including: farmers; informal, private and public sector workers; and entrepreneurs. Three distinct periods of time are defined: pre-commodity boom (2000–05), boom (2006–14), and bust (2015–21). The model is calibrated to the pre-boom period using Bolivia’s macroeconomic and household survey data, and then the price shocks, structural changes (migration and skill changes) and policy changes are fed into the model to test its predictions for the boom period and forecast the impact of the commodity bust.

Commodity Boom

The 2 percent increase in potential growth observed during the period 2006–14 (chart) is explained mostly by the commodity price boom increasing profitability in the energy and agricultural sectors, and government revenues. This allowed for more infrastructure investment, improving private sector productivity. The increase in the urban labor supply due to rural to urban migration and the substantial increase in the fraction of skilled individuals in this urban labor force helped the industrial sector to expand and take advantage of the increased private sector productivity.

In terms of distributional implications, the increase in the urban labor supply and its average skill level led to higher incomes in urban areas. These factors also reduced the skills premium, accounting for about ⅓ of the observed decline in inequality (chart). In addition, higher agricultural demand and a larger increase in productivity in agriculture (the sector with lower initial average productivity) reduces inter-sectoral inequality with the urban sector. This accounts for another ⅓ of the observed decrease in inequality. Higher government revenues allowed for a substantial expansion in social programs, which account for the remainder of the observed decline in inequality.

Potential Growth Impact of Commodity Cycle

(In percent)

Change in Gini During Boom

(In percentage points)

Commodity Bust

Model simulations suggest that the bust could reduce medium-term potential growth by about 1½ percentage points. The forces at play are somewhat symmetric to the boom. First, the direct impact of lower commodity prices accounts for slightly more than half of the expected decline, with the rest explained by a combination of general equilibrium effects. Policies that increase fiscal space to support infrastructure investment and enhance the efficiency of such investment can halve the impact of the bust on growth.

Regarding the distributional implications, lower agricultural export prices affect large farmers more than smaller ones, and hence reduces the rural Gini. The urban Gini increases as private sector wages decline more than public sector ones, and civil servants are relatively well paid. The national Gini also rises given the increase in inter-sectoral inequality (chart). The economic slowdown triggered by the bust in energy and commodity prices also lowers incomes across the board. This reduces the pace of poverty reduction. Better targeting cash-transfers can go a long way to mitigate inequality this impact.

Change in Gini Coefficient

(In percentage points)

Source: National authorities and IMF staff calculations.

Policy Discussions

In the context of low commodity prices, the overarching priority is to adapt policies to anchor strong, balanced and durable growth; continued progress in poverty reduction; and guard against downside risks. Given still large buffers, the authorities can take a measured approach to adjustment and sequencing reforms with the following priorities: (i) steadily reducing the non-hydrocarbons primary deficit and ensuring the financial health of SOEs; (ii) allowing greater exchange rate flexibility; (iii) improving incentives for hydrocarbons exploration; and (iv) bringing wage growth in line with changes in productivity.

A. Preserving Buffers and Strengthening the Fiscal Framework

10. While committed to continuing large public investment projects, the authorities are prepared to be flexible and pragmatic regarding implementing the PDES. This is important because the projected levels of public investment envisaged in the original 5-year plan could widen the overall deficit to 15–20 percent of GDP, and increase public debt to about 100 percent of GDP by 2021. This is markedly above the threshold marking high risk of debt distress for emerging markets.

Bolivia: Fiscal Balances and Public Debt(In percent of GDP)
ActualProjections
2015201620172018201920202021
Baseline scenario
Overall balance−6.9−8.1−6.7−6.2−5.4−5.3−5.0
Non-hydrocarbon primary balance−13.1−11.2−10.3−9.1−8.5−7.6−7.1
Public debt40.646.747.648.849.451.252.0
Active scenario
Overall balance−6.9−8.1−6.0−5.3−3.9−3.2−2.4
Non-hydrocarbon primary balance−13.1−11.2−9.6−8.2−7.1−5.7−4.7
Public debt40.646.746.847.246.446.345.0
Sources: Bolivian authorities; and IMF staff estimates.
Sources: Bolivian authorities; and IMF staff estimates.

11. Staff’s baseline scenario is consistent with a flexible approach to implementing the PDES. In particular, the baseline has a lower spending level than in the PDES, consistent with the historical execution rate for investment projects and external financing constraints. Accordingly, the non-hydrocarbons primary deficit declines gradually from around 13 percent of GDP in 2015 to 7 percent of GDP in 2021. The ratio of gross public debt to GDP is projected to increase from 41 percent of GDP in 2015 to about 52 percent of GDP by 2021. In the absence of further fiscal adjustment, the ratio would continue to increase and surpass high risk thresholds (Annex III).

12. To maintain buffers, staff recommends a more ambitious consolidation than in the baseline scenario, but that is steady and safeguards development spending. The exhaustibility of natural resources makes it imperative to reduce the non-hydrocarbon primary budget deficit toward a sustainable level (i.e., which stabilizes the debt-to-GDP ratio at around current levels). Given moderate levels of net public debt, and the need to improve infrastructure and support social policies to reduce poverty, staff recommends measures that allow a reduction in the non-hydrocarbons primary deficit by about 1.3 percent per year on average over the next 5 years (active scenario). The consolidation could be achieved mainly through streamlining expenditures. Such an adjustment would help reduce vulnerabilities with limited impact on growth:

  • Spending. Key measures are to gradually reduce the wage-to-GDP ratio by moderating future wage adjustments, bringing the ratio closer to the regional average (chart); rationalize public investment and strengthen its management; gradually reduce energy subsidies while strengthening social safety nets (potentially yielding up to 1 percent of GDP); and increase the efficiency of social spending. For the latter, staff recommends: (i) higher but progressive fees for users of social services; (ii) greater competition in the provision of social services; (iii) better targeting of social benefits; and (iv) reform of finance mechanisms for health spending (away from the capacity-based remuneration towards a system that rewards performance) to increase incentives for cutting costs (Box 3).
  • Revenues. The introduction of a progressive income tax or reforming the complementary VAT regime (RC-IVA) would be desirable. While difficult to implement, this reform could bring in additional revenue of around 1 percent of GDP. Staff also recommends simplifying the tax regime for small companies, and reforming the tax system for the hydrocarbon and mineral extraction sectors (see paragraph 23 below). While it may have an adverse impact in the short term, a transparent and incentive-compatible tax system for extractive sectors would help discover new reserves/deposits, and thus generate new revenues in the longer term.

Government Wage Bill in LAC, 2015

(In percent of GDP)

Source: IMF Government Compensation and Employment Dataset.

13. Additional policies to reduce local governments’ reliance on gas revenues and increase their revenues are needed, notwithstanding some recent measures. Staff welcomes subnational government efforts to streamline spending, but cautions against across-the-board cuts.5 The introduction of the “Ley del Sistema de Planificación Integral del Estado” in January 2016 will also help improve coordination between various levels of government, and the central government’s ability to monitor subnational fiscal developments. Over the near term, staff recommends strengthening own-source revenues of subnational governments. Possible measures are higher property taxes on real estate and vehicles. Over the medium term, transfers to subnational governments should rely more on criteria such as population size, development needs, and means-testing, rather than primarily on hydrocarbons revenues.

Box 3Efficiency of Social Spending in Bolivia

Comparisons with other countries suggest inefficiencies in health spending. These inefficiencies occur largely in the process of transforming intermediate resources (e.g. number of physicians, nurses, midwives, and hospital beds) into health outcomes. This outcome is partly related to weaknesses in the payment system for general practitioners, who are paid fixed salaries independent of results they produce, and hospitals that are largely financed based on capacity considerations. The latter reduces hospitals’ incentives to cut costs. Also, there are no co-payments made by recipients of health services, which may lead to excessive demand for these services.

Health Efficiency Frontier, Latest Value Available

Source: IMF Expenditure Assessment Tool (EAT).

Bolivia’s spending on education as a share of GDP is well above the levels in its peer countries, but results are relatively poor. At more than 8 percent of GDP, Bolivia’s spending on education largely exceeds the average of 5 percent for LAC. While there is no standardized data available in terms of education outcomes such as PISA scores, Bolivia lags most LA countries in terms of teacher-student ratios and enrollment rates. Staff analysis suggests that there are inefficiencies in producing education outputs: Bolivia’s net enrollment rates are low for the given level of education spending in purchasing power terms. Bolivia also lags other LAC countries in terms of final outcomes for education, as indicated by the number of the medals and awards in the International Mathematical Olympiads compared with the education spending on secondary education per student. Furthermore, Bolivia ranks low in terms of the number of patents per capita granted by the U.S. Patents and Trademarks Office despite the fact that Bolivia’s research and development expenditure (about 0.2 percent of GDP) is close to the average for LAC.

Education Spending and Outcome, Primary, Latest Value Available

Source: IMF Expenditure Assessment Tool (EAT).

The following factors may have contributed to inefficiencies in education spending. First, the shares of wages and investment in total primary education spending are large, leaving a smaller share for spending on non-wage recurrent expenditures such as books for libraries and laboratory equipment. Second, coordination issues in decision making may be contributing to excess spending since decisions about establishing schools are made by local governments while teachers are financed by the central government. Third, public spending on education mostly benefits households with higher income as children from these families are more likely to continue their education.

Spending on subsidies and social protection is high by regional standards, but only a small share reach the poor. The government spends 1–2 percent of GDP on fuel subsidies, which mainly benefit producers and the rich (World Bank, 2015). It spends 2–3 percent of GDP on social programs, but only a small share of this spending reach the poor since no or limited means’ testing is used to identify beneficiaries for most social programs (Lustig and others, 2013, Arauco and others, 2013, and World Bank, 2015).

  • 14. Structural fiscal reforms in medium-term budgeting and SOE oversight are essential to containing risks going forward:Building on previous steps taken, develop and communicate effectively a medium-term framework to anchor the consolidation described above. Further efforts should include a faster transition to multi-year budgeting and introducing a fiscal target for the non-hydrocarbons primary balance. This target should be designed so as to assure debt sustainability while also accounting for the state of the business cycle and building cushions to absorb volatility in hydrocarbon prices. Equally important would be to clearly communicate the authorities’ policy intentions to the population to avoid surprises and unexpected reactions.
  • Exercise greater oversight of SOEs’ activities and strengthen the evaluation and transparency of their investments. Investments by YPFB and ENDE are increasing considerably under the PDES, and a large share of this is carried out by subsidiaries that are currently classified outside the non-financial public sector (NFPS). Indeed, in 2016, about half of YPFB’s investments are to be executed by subsidiaries, while the number is close to 80 percent for ENDE. To manage associated risks, staff recommends monitoring and publishing SOEs’ financial operations and balance sheets as a first step to including all of them in the fiscal accounts of the NFPS. Staff also suggests that the efficiency of SOEs and their new investments be assessed on nonsubsidized gas and electricity input prices (Annex II).

B. Allowing Greater Exchange Rate Flexibility and Improving the Monetary Policy Framework

15. The boliviano is assessed to be overvalued and diversification remains modest. Despite a moderate depreciation in recent months, the boliviano—de-facto stabilized against the U.S. dollar—has appreciated by 49 percent in real effective terms since January 2010 (chart), while exports are highly concentrated in commodities whose prices remain low (chart). Significant mandatory minimum and average wage increases—that have largely exceeded productivity growth—have also eroded competitiveness. This is reflected in Bolivia slipping in international rankings of competitiveness.6 Against this backdrop, the two EBA-lite approaches (the current account and real effective exchange rate models) and the external sustainability assessment suggest a significant overvaluation of the boliviano (Annex IV).

Real Effective Exchange Rates

(Indexes, January 2010=100)

Sources: Information Notice System and Fund staff calculations.

1/ The LA-5 countries include Brazil, Chile, Colombia, Mexico, and Peru.

Exports, by Type of Product

(In percent of GDP)

Sources: Banco Central de Bolivia.

16. Staff sees merit in gradually permitting greater exchange rate flexibility. Such a transition would help address longstanding competitiveness and diversification challenges, facilitate the adjustment to lower commodity price prices, and limit the potential impact of future shocks. It would also help cement the tremendous progress on de-dollarization and build capacity to manage exchange rate risks by requiring agents to internalize the effects of two-way flexibility. Importantly, with buffers still ample, the financial sector stable, and macroeconomic performance solid, preparations for greater flexibility could take place in fairly tranquil conditions—a key factor behind smooth transitions to greater flexibility in other countries. Policies to implement the transition will need to be carefully crafted and clearly communicated, with a view towards keeping inflation expectations anchored, building market infrastructure, and strengthening policy and analytical capacity as needed.

17. Central bank independence and a strong BCB balance sheet are critical elements of the reform process. The BCB’s exposures to the SOEs—especially the state owned natural gas and electricity companies—have grown substantially in recent years (Annex II). To avoid potential conflicts with the BCB’s commitment to price stability, the BCB’s exposures to the SOEs should be phased out. Instead, the developmental spending currently financed by BCB credit should be transferred to a separate agency, funded by other means, and guided by transparent investment rules, strong governance, and a clearly-stated development mandate.7

C. Cementing Financial Sector Stability and Promoting Financial Inclusion

18. While containing several important reforms, the Financial Services Law continues to lead to high credit growth and appears to skew lending away from small borrowers. The implementation of some Basel II–III principles, setting up of a deposit insurance scheme and credit registry, and creation of a Financial Stability Council—which meets every quarter—were welcome steps. The quotas and interest caps on the so called “productive sectors” and social housing, however, are inducing banks to expand credit rapidly, potentially lowering credit quality.8 With the July 2015 decree broadening the definition of these sectors, large institutions appear set to meet the credit targets for 2016, but some small institutions are experiencing difficulties in meeting the targets. Additionally, there are risks that the law is producing negative effects on financial inclusion. In particular, all segments of the financial sector are increasing the average size of loans, while the growth in the number of borrowers has declined substantially (chart). In the microcredit sector there are signs of disintermediation and a shift of activity towards unregulated lenders (chart).

Average Loan Size and Number of Borrowers

Sources: ASFI and IMF International Financial Statistics (IFS).

Number of Borrowers - Microfinance Institutions (MFI) 1/

Sources: ASOFIN, and IMF Staff Calculations

1/Includes all ASOFIN members.

2/ Through May-2016

19. Key provisions of the Financial Services Law should be modified to reduce distortions and avoid an unnecessary buildup of risk. Heightened risks owing to rapid credit growth warrant close monitoring, and the credit quotas should be relaxed to avoid excessive and potentially poor-quality credit growth. The interest rate caps, which are set by decree, should be phased out to better reflect the costs of doing business and inherent risks. More market-oriented mechanisms to improve financial access should be considered (e.g., partial credit guarantees). Finalizing and publishing a housing price index will also help inform the analysis of credit risk.

20. Stress tests suggest that while the system as a whole remains stable, there are risks related to credit growth, funding and credit concentration, and liquidity needs that mainly affect smaller banks.9 Staff considered several scenarios of possible stress to the system that highlight latent risks, the most relevant being higher nonperforming loans (NPLs) and liquidity shortages (Annex V):

  • Credit risk: An adverse economic climate along with rapid credit expansion could result in a sharp increase in NPLs in the medium term. Moreover, lower profitability in such an environment would reduce the scope for building capital through retained earnings.10 In the event the NPL ratio doubles, capital would need to be raised to meet regulatory requirements in just over half of banks (chart). An even more adverse scenario, which involves a quadrupling in NPLs (a “one-in-twenty year” shock, calibrated using historical patterns; a level that is still well below the peak observed in 2002) would leave nearly all banks with some capital shortfall. Although nontrivial, these losses remain broadly manageable (0.2 and 1.2 percent of GDP, respectively).
  • Concentration risk: The single largest credit exposure exceeds 10 percent of regulatory capital in 10 banks in the system, and the five largest exposures together exceed half of the regulatory capital in 8 banks in the system. This represents an important potential risk stemming from the default of a small number of borrowers, especially for a few small banks.
  • Liquidity risk: There is currently sufficient liquidity at the system level, with an aggregate liquidity coverage ratio of around 110 percent (chart).11 However, a stress scenario corresponding to the largest deposit withdrawal rates observed in recent years suggests that several small banks would struggle to cover required liquidity needs, but with no systemic implications.

Bank Capital Adequacy Ratios

LCR-based Liquidty Stress Tests

D. Enhancing Potential Growth and Inclusiveness

21. Accelerating structural reforms will boost potential growth. Notwithstanding Bolivian real wages being among the lowest in the region, wage policies should aim to ensure that labor costs are in line with productivity given that the growing wedge is becoming a major constraint to the private sector (chart). In this regard, the government’s decision not to pay the second Christmas bonus in 2016 should help competitiveness. Other measures include improving the business climate more generally—helping realize important complementarities between the private and public sector—and reducing export and domestic price restrictions.

Labor Productivity and Real Labor Income

(Indexes, 2000=100)

Sources: SEDLAC; ILO; and Fund staff calculations.

22. Improving exploration incentives in the hydrocarbons sector is another key priority. The new hydrocarbon incentives law (December 2015) provides incentives for crude oil and condensates production, and is likely to stimulate more production from existing fields. However, the law could have incentivized exploration investment more, as the effective tax burden remains high. Hence boosting production sufficiently to meet growing internal and external demand will likely be challenging. To attract further foreign direct investment into exploration, the government could allow expensing investments in exploration for hydrocarbon tax purposes and introduce an accelerated depreciation scheme for development expenditures.

23. Strengthening the design of social programs can help preserve the significant poverty and inequality reduction (charts) in face of the commodity bust. The commodity boom helped reduce inequality by increasing agricultural incomes and causing a decline in rural-urban inequality. Government policies and increased hydrocarbons revenues also facilitated more infrastructure spending and expanded social programs. Looking ahead, lower growth will likely reduce the pace of poverty reduction. The Gini coefficient could also start to rise as rural-urban inequalities increase with stresses in the agricultural sector and development spending facing constraints. Better targeting and improved efficiency of social spending could help given a tighter revenue envelope, but will require building capacity to means test benefits, introducing more competition in the provision of social services, and more focus on performance.

Gini Inequality Index

Source: INE SEDLAC (CEDLAS and The World Bank)

/1 Includes ARG, BRA, ECU, SLV, HON, MEX, PRY, PER and URY.

Population Under Poverty and Extreme Poverty

(In percent)

Source: National Statistics Institute (INE).

E. Authorities’ Views

24. The authorities do not share staff’s views on short and medium term growth prospects for Bolivia. The authorities expect to reap greater benefits from their current and previous 5-year development plans and viewed staff’s projections as overly pessimistic. They pointed to IMF forecasts which had underestimated growth during the past decade. The authorities stressed that strong public investment, one of the main engines of internal demand growth, and higher execution rates, will boost growth both in the near and long term. Moreover, the authorities argued that these measures will generate new income streams, and current twin deficits – which largely reflect high public investment levels – are thus both expected and transitory in nature.

25. The authorities did not favor staff’s key policy recommendations. More generally, they questioned if the IMF should make policy recommendations for Bolivia. The authorities’ 2017 budget is being planned on the basis of relatively low oil prices ($45 per barrel as in the 2016 budget), taking into account the less favorable external environment. They nevertheless expect output growth of around 4.8 percent. The authorities argued that significant public spending plans in the 2017 budget and beyond, notwithstanding their impact on large fiscal deficits, are oriented towards economic diversification and finding new sources of revenue. At the same time, authorities stressed that current spending levels remained well controlled. They did not concur with staff’s recommendation to gradually reduce the non-hydrocarbon deficit over the medium term (a concept they do not like because it is difficult to explain to the public).

26. The authorities pointed to the existing mechanisms of subnational fiscal adjustments, which automatically limit persistent fiscal deficits over the medium term. Although departmental governments are highly dependent on mining and hydrocarbon revenues, they are required by the existing legal framework (Ley de Autonomías) to finance their operations through their own resources and savings from previous years, which induces an automatic fiscal adjustment towards a balanced budget. Under the law, the central government is under no obligation to transfer additional resources to departmental governments. Moreover, the authorities said that the fiscal position of local governments (municipalities) had not weakened. They argued that the loss in revenue of local governments from lower hydrocarbon revenues was counterbalanced through tax sharing and existing transfer mechanisms, which have benefitted from a set of tax and customs administration measures executed by the central government.

27. The authorities view the coordination of policies between the Ministry of Finance and the BCB as a key tool to promote economic growth and stability. They see the coordination between these entities as adequate, and do not see the need to phase out the BCB’s economic development role. The authorities view the BCB loans to SOEs as a key source of financial resources directed towards strategic investment projects that are part of their industrialization plans. In addition, the authorities argued that the returns obtained by the BCB on these operations are higher than those derived from alternative financial investments.

28. Notwithstanding the depreciation of neighboring currencies, the authorities do not see an exchange rate misalignment. The authorities argued that exchange rate stability shielded the domestic economy from inflationary pressures and other adverse effects of exchange rate volatility observed in other countries in the region. Moreover, pointing to the experience of neighboring countries, the authorities do not believe that more exchange rate flexibility would lead to higher economic diversification, and would only have a limited impact in addressing external imbalances.

29. The authorities disagreed with staff’s analysis suggesting the financial sector law may have led to increased credit and other risks. They argued that credit growth was not excessive given that credit was flowing to productive sectors and NPLs were the lowest in the region. The authorities emphasized that banks remained profitable, and maintained that decreasing numbers of borrowers and rising loans sizes were a result of reclassification and did not indicate a reversal of gains in financial access. They explained that a housing price index was built, but more time would be needed before it could be published.

30. The authorities highlighted their efforts to reduce poverty and inequality. They argued that their social policies have played a fundamental role in reducing poverty and inequality. They are also implementing and designing a number of projects to support the agriculture sector and rural areas, some involving financial support from IFIs. They explained that their efforts to improve irrigation and support farmers as well as building roads would help boost rural incomes and thus reduce inequality even further.

Staff Appraisal

31. After a decade of substantial economic and social progress, underpinned by sound macroeconomic management, Bolivia is being challenged by low commodity prices. Bolivia recorded strong growth accompanied by a substantial buildup of fiscal and external buffers, and achieved significant reductions in poverty and inequality. However, Bolivia now faces the challenge of adjusting to the new low commodity price normal while preserving and building on the economic and social gains achieved in the past. Given still sizable policy buffers and developmental needs, the authorities can take a measured approach to this adjustment, but it needs to start soon.

32. Growth will remain robust, but imbalances are growing. Growth is projected at 3.7 percent in 2016, despite temporary supply shocks given support from a sizeable public investment plan and rapid credit growth. But given lower commodity prices, potential growth is estimated at 3.5 percent, which is significantly lower than in the boom years. And relatively low hydrocarbon prices combined with robust public spending levels is leading to sustained large fiscal and external deficits, absent any significant adjustment. Rapid wage growth and sizeable exchange rate appreciation in real effective terms have eroded Bolivia’s competitiveness.

33. Key policy priorities are the consolidation of the non-hydrocarbon primary balance and allowing for greater exchange rate flexibility. Existing external sector pressures render policy adjustment indispensable. The gradual consolidation of the non-hydrocarbon primary deficit, especially through streamlining spending, would help ensure longer term fiscal sustainability. It will also be important to adopt a credible medium-term fiscal framework which includes activities of SOEs more systematically. Likewise, gradually transitioning towards a more flexible exchange rate regime would help facilitate the adjustment to lower commodity prices and provide an important line of defense against future external shocks.

34. Increasing private investment is key to medium-term prospects, while improving the efficiency of social spending can help preserve the inequality and poverty reduction. The existing hydrocarbon sector framework should be strengthened to increase the incentives for much needed exploration activities. Reigning in wage growth, to prevent increases in labor costs not aligned with productivity growth, and eliminating distortionary policies in product markets would improve private sector participation and efficiency. Importantly, the short horizon of current proven reserves of natural gas adds to the urgency to improve the business climate and governance, helping promote the development of non-commodity sectors. Better targeting and improved efficiency of social spending could help mitigate the negative impact of lower commodity prices on inequality and poverty given a tighter revenue envelope. This will require building capacity to means test benefits, introducing more competition in the provision of social services, and more focus on performance.

35. Data provision is broadly adequate for surveillance, although some shortcomings are present. Progress has been made to strengthen the quality of statistics, including working towards full subscription of the Special Data Dissemination Standard (SDDS). Timely publication of macroeconomic data according to a pre-announced schedule, improving data on quasi-fiscal activities of subsidiaries of SOEs outside of the fiscal accounts, and publishing a real estate price index would be further important steps to improve transparency.

36. Staff proposes holding the next Article IV Consultation with Bolivia on the standard 12-month cycle.

Annex I. Financial Stability Assessment

1. Financial Soundness Indicators suggest vulnerabilities have increased to “medium” since the first half of 2015, driven by rapid credit growth. However, banks’ balance sheets remain healthy, with low structural risks. The deposit-to-loan ratio remains high, while foreign exchange exposure is limited given low deposit and credit dollarization. The leverage ratio remains at acceptable levels, and non-performing loans are low. Bank profitability has been declining, but still remains robust. Looking ahead, the financial services law may lead to new risks building up, and vigilance regarding asset quality and the speed of credit growth needs to be maintained.

Bolivia2014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q2Latest
Overall Financial Sector RatingLLMMMMMMM
Credit cycleLLMHHHHHH
Change in credit / GDP ratio (pp, annual)2.42.83.54.46.27.78.08.08.0
Growth of credit / GDP (%, annual)6.06.98.510.414.617.518.217.017.0
Credit-to-GDP gap (st. dev)−0.50.10.02.12.92.91.81.81.8
Balance Sheet SoundnessLLLLLLLLL
Balance Sheet Structural RiskLLLLLLLLL
Deposit-to-loan ra tio122.7148.2133.4128.5129.1129.5135.6127.9127.9
FX liabilities % (of total liabilities)23.119.918.619.419.118.917.117.717.7
FX loans % (of total loans)9.46.35.55.04.23.52.92.52.5
Balance Sheet BuffersLLLLLLLLL
LeverageLLLLLLLLL
Leverage ratio (%)8.27.97.77.77.77.47.47.57.5
ProfitabilityLLLLLLLLL
ROA1.21.21.11.01.01.00.80.80.8
ROE16.016.914.813.813.815.111.311.911.9
Asset qualityLLLLLLLn.a.L
NPL ratio1.61.51.71.01.61.51.71.61.6
NPL ratio change (%, annual)−1.2−2.64.3−33.81.9−0.7−1.2n.a.−1.2
Vulnerability codes
Low
Moderate
High
Sources: Bolivian authorities; and IMF staff estimates.
Sources: Bolivian authorities; and IMF staff estimates.

2. Bolivia’s financial stability map shows an increase in risks since Q1 2014. Both macroeconomic and inward spillover risks have increased, reflecting emerging large fiscal and external deficits. Credit risks are on the rise, marked by strong credit growth, a slight increase in non-performing loans, and declining bank profitability. The level of overall macro-economic risks for Bolivia is now higher than the level of global risks reported in the April 2016 Global Financial Stability Report. Market and liquidity risks are lower than the level of global risks as Bolivian banks’ deposit-to-loan ratios are higher than in those in other countries.

Financial Stability Maps

Annex II. Hydrocarbons Sector, Public Enterprises, and the Central Bank Balance Sheet

Hydrocarbons sector prospects

Following large natural gas discoveries in the late 1990s, and fueled by high prices, Bolivia increased gas production volumes eightfold over 1998–2014. The large increase in production made Bolivia a key regional gas supplier. At the peak in 2013–14, roughly 31 percent of fiscal revenues, 8 percent of GDP and over 50 percent of export revenues came from hydrocarbons.

Since 2014, gas production has been falling, as the fields discovered in the 1990s are nearing the end of their production cycles. Gas production fell by over 1 percent in 2015. It is expected to fall by another 1–2 percent in 2016 but should recover in 2017 as a new field (Incahuasi) came on stream in August 2016.

Exploratory activity has been limited over the past 10 years (graph). Incahuasi, which was discovered in 2004, was the last big field discovered in Bolivia. A high government tax take and the state oil company’s (YPFB) focus on exploitation over exploration have been impediments to exploration. Proven reserves are now estimated at about 10 Tcf, equal to a maximum of 10 years of production at current volumes.

YPFB has recently ramped up exploration spending significantly,1 however, and Bolivia remains an underexplored country with vast potential. YPFB estimates that the total potential of fields currently being explored is around 29–35 TCF, with expected discoveries of 5–10 TCF (applying subjective discovery probabilities). Crucially, the authorities are also trying to attract FDI into hydrocarbon exploration to complement YPFB’s efforts. Foreign financing and know-how appear crucial to making exploration a success. The hydrocarbon investment law passed in late 2015 is a step in the right direction but more could be done to make costly and risky exploration activity attractive for international companies.2

Hydrocarbon Exploration Activity in Bolivia

Sources:Yacimientos Petroliferos Fiscales Bolivianos, Agencia Nacional de Hydrocarburos, and IMF staff calculations.

* Projections for 2016–20.

Most of the potential for discoveries lies with a few large projects in non-traditional zones. The most promising prospects are Huacareta (being explored by BG-Shell); Azero (by Total); and San Telmo (by Petrobras). There is also some potential for additional discoveries in traditional production zones (mainly Boyuy and Boycobo by Repsol). It is important to keep in mind, however, that the timeline for projects in non-traditional zones is quite long, with discovery results not to be expected before 2018–19 and production at some point in the mid-2020s if drilling is successful. Boyuy or Boycobo, on the other hand, could be producing by 2019 if successful.

Staff projections show that there are risks to Bolivia’s being able to meet internal and external gas demand over the period 2016–25. Using the current pipeline of exploratory projects and the likely production curve of existing fields, staff projected a baseline, as well as an upside and a downside scenario for Bolivian gas production. While production is expected to increase in the years until 2019, from currently about 60 million cubic meters per day to close to 70, Bolivia would struggle to meet internal demand and minimum contractual export volumes even under the baseline scenario after 2021.

Natural Gas Production Scenarios

(In millions of cubic meters per day)

Sources: Staff estimates and projection based on data by national authorities, authorities of Tarija, YPFB, Fundacion Jubileo, Petrobras, Total, Repsol and BG-Shell.

Industrialization projects

At the same time, the government is pursuing an ambitious program of downstream hydrocarbon industrialization and electricity generation to move into higher value-added sectors. A core element of the government’s five-year development plan is to transform Bolivia into a South American energy hub, moving exports away from natural gas and into petrochemicals and electricity. Staff baseline projections currently envisage exports from industrialization projects to increase total goods exports by 2 percent in 2021 (in a best case scenario, exports could be higher by another 6 percent in 2021).

Industrialization investments are concentrated in a number of large projects executed by YPFB and the state-owned electricity company (ENDE). YPFB is investing roughly US$4.3 billion in gas separation plants and petrochemical plants to turn natural gas into fertilizers and plastic (Table A1). Half of the amount is already executed with the largest project, a polyethylene (plastic) plant, still outstanding. ENDE is investing heavily in thermoelectric and hydroelectric power generation to be able to generate excess capacity to be exported to Bolivia’s neighbors (Table A2).

Table A1.Bolivia: YPFB Industrialization Projects
YPFB executed projectsProgressEstimated Start of ProductionCost and other information
Rio Grande liquid separation plantOperational as of August 2013Production started August 201380% of production for internal use. US$ 160 million financing from BCB.
Gran Chaco liquid separation plantOperational as of August 2015Production started August 2015Cost of project US$ 688 million. Financed with BCB credits. Exports to Peru and Paraguay of LPG. Ethane and liquefied petroleum gas (LPG) for internal use as an input for downstream industry.
LNGOperational as of February 2016Production started in February 2016Cost of project US $445 million. Part BCB financed. The project will allow delivery of gas to areas of the country not served well previously.
Ammonia and urea plantClose to completion as of October 2016 (had been scheduled for early 2016)Early 2017 but delays in railway construction (only 30-40% complete) could pose significant problems.Cost of project 955 million USD, financed by BCB loans to YPFB.
Polyethylene plantConstruction scheduled to start in early 2017Late 2021Projected cost of project is US$ 2,089 million with US$ 1,847 million to come directly from the BCB.
Table A2.Bolivia: ENDE Investment Project
ProjectProgressEstimated Start of ProductionProjected capacityEstimated costOther comments
Proyecto Termoelectrico de Entre RiosCompletedSummer 2010110 MW
Planta Termoelectrica del SurCompleted2014160 MW
Planta Termoelectrica WarnesCompletedAutumn 2015200 MW
Proyecto Eolico QollpanaIn ConstructionSummer 201624 MW
Proyecto Hidroelectrico MisicuniIn Construction2017120 MWUS$ 137 millionFinancing from IDB and TGN
Proyecto Planta Solar UyuniIn Construction201760 MWUS$ 94 millionFinancing from BCB.
Proyecto Planta Solar OruroIn ConstructionSummer 201750 MWUS$ 54.5 millionFinancing from FINPRO
Proyecto Hidroelectrico San JoseIn ConstructionApr-18124 MWUS$ 245 millionFinancing from IDB and CAF
Ampliacion Planto Termoelectrica Entre RiosContract signedLate 2019380 MWUS$ 463 millionFinancing from BCB.
Ampliacion Planta Termoelectrica del SurContract signedLate 2019320 MWUS$ 463 millionFinancing from BCB. Transmission line to Argentina (Yaguacua-Tartagal-San Juancito) being built during the same time
Ampliacion Planta Termoelectrica WarnesFinancing from BCB obtainedLate 2019280 MWUS$ 406 millionFinancing from BCB.
Proyecto Hidroelectrico MiguilasIn Construction2020200 MWUS$ 448 millionFinancing from BCB.

While there are significant upside risks associated with a successful implementation of these projects, there are also a number of downside risks. In particular, a potential shortage in gas as an input is a concern, as are the elevated costs, logistical issues and a lack of guaranteed markets. Overall, the financial viability of the projects is not clear from available information.

Risks to Financial Health of Public Enterprises and the Central Bank Balance Sheet

Most of the financing for the industrialization projects comes directly from the central bank (Table A5). Apart from large loans to YPFB and ENDE for the above mentioned projects, the BCB is also lending to the state mining company, COMIBOL (table). Loans to SOEs are issued in bolivianos at highly concessional terms, including subsidized interest rates (averaging less than 1 percent), generous grace periods (3 to 7 years) both for principal and interest payments, and relatively long maturities (18 to 30 years). Loans to ENDE and COMIBOL are ultimately guaranteed by the Treasury with TGN securities.3

Outstanding Amount of BCB Loans to Public Enterprises
YPFBENDECOMIBOL
In millions of Bolivianos1 2,5634,6122,149
In percent of BCB’s capital1,000367171

The fall in hydrocarbon prices is putting pressure on the financial health of key public enterprises. Largely due to the industrialization projects and exploration activity, public enterprises have ramped up their spending (Table A3). However, the increase in spending combined with the sharp fall in hydrocarbon prices has recently tipped these’ enterprises’ balance into negative territory. By virtue of its size, YPFP accounts for the bulk of the overall deficit in the consolidated public enterprise sector. Almost the entire deficit of the sector has been financed by the central bank (chart).

Table A3.Bolivia: Operations of Consolidated Public Sector Enterprises(In millions of Bolivianos)
Operations of the Consolidated Public Enterprises
Millions of Bolivianos
200120022003200420052006200720082009201020112012201320142015
Total Revenue3,5332,3213,1211,6821,0796,27918,25134,31030,17831,76042,36351,68262,75268,30954,516
Current revenue3,5072,2953,1021,6611,0546,22418,11033,95929,84931,55541,18651,48661,79466,26852,612
of which YPFB3,2141,9832,8261,2977155,71615,90030,74826,73727,64235,13645,16254,09756,74142,774
of which COMIBOL457584110761629621,0599121,2481,8131,5811,8641,9951,571
of which ENDE3035404045496069861222392494237251,053
Investment revenue2526182125551413513292051,1771959582,0411,904
of which YPFB0000000200126596610878
of which COMIBOL0143241810117391084101
of which ENDE1491217135426731211098728381
Total Expenditure3,2992,2853,2211,5941,0365,33218,79930,38227,63329,30939,07351,81464,26370,28560,020
Current expenditure3,2072,1823,1661,5359445,24017,73327,99426,22428,12535,91646,58557,51761,90749,296
of which YPFB3,1701,9992,8931,4127014,52216,20224,41525,12325,82130,34139,89050,18152,12640,707
of which COMIBOL2363493630366239428691,0481,3621,4681,4121,4221,239
of which ENDE394539384552525968132108175315927648
Capital expenditure92102555991921,0662,3881,4101,1843,1575,2296,7468,37810,723
of which YPFB657233318901,9115776131,7263,2684,7154,0954,447
of which COMIBOL51513151321138133774233966754581,477
of which ENDE3106133232721301082702449531,7412,026
Overall Balance23336−1018843947−5483,9282,5452,4513,290−132−1,511−1,975−5,503
of which YPFB38−21−74−118−181,163−1,1924,4251,0371,2083,1952,064−733628−2,302
of which COMIBOL171136723513232896−8813238−274−218125−1,145
of which ENDE2−118710−1−21−36−39−11771−169−748−1,215−1,240
Net Financing−233−36101−88−43−947548−3,928−2,545−2,451−3,2901321,5111,9755,503
of which from the Central Bank−18931995130−24−1,324596−5,373−817−1,840−1,4381,7562,1432,0766,523
Memorandum items:
Crude oil price (in US$ per bbl)25.926.131.141.456.566.172.499.661.779.495.194.297.993.348.7
Sources: Bolivian authorities; and IMF staff calculations.Note: These numbers relate to the public enterprises included in the consolidated non-financial public sector accounts only; they exclude the subsidiaries (mixed enterprises and mixed state enterprises) of these public enterprises
Sources: Bolivian authorities; and IMF staff calculations.Note: These numbers relate to the public enterprises included in the consolidated non-financial public sector accounts only; they exclude the subsidiaries (mixed enterprises and mixed state enterprises) of these public enterprises

Overall Fiscal Balance

(Percent of GDP)

Sources: Bolivian authorities; and IMF staff calculations.

Note: excludes subsidiaries of SOEs.

Scenario analysis suggests that public enterprises face important income risks going forward. Stress tests are performed using three scenarios based on different hydrocarbon price assumptions. Current revenues of YPFB are linked to the international oil prices. Current expenditures and other revenues move in line with nominal GDP, whereas the capital spending follows announced public investment plans and historical implementation rates (70–80 percent). Under the baseline scenario,4 given current low oil price levels, the overall sector’s balance deteriorates sharply this year (to -6½ percent of GDP), and only turns positive by 2019 (Figure). This entails a cumulative financing need of Bs 47 billion (about 11 percent of GDP) over the next five years. Under a more severe scenario, in which oil prices remain at US$30 per barrel over the next five years, the cumulative deficit would be around Bs 117 billion. Finally, only under a more benign scenario, in which oil prices recover to US$78 per barrel by 2020, would the overall balance turn positive after four years.

Public Enterprises: Consolidated Fiscal Balance

(Percent of GDP)

Source: Bolivian authorities; and IMF staff calculations.

These financial strains are compounded by the growing fiscal deficits of public enterprises subsidiaries outside of the NFPS and the future repayment schedule. Subsidiaries have also engaged in large investment projects, whose costs cannot be financed by current operating profits (Table A4), and have thus increased the indebtness of public enterprises. These include “mixed state enterprises” (empresas estatales mixtas) and “mixed enterprises” (empresas mixtas), partially owned by large SOEs, such as YPBF and ENDE, but outside the definition of the NFPS. In addition, public enterprises face substantial repayment schedules over the coming years (Figure), and as early as 2016–17 for YPFB. These risks are compounded by the large number of loans that have been approved but not yet disbursed by the BCB which, if fully implemented, would add further pressures to their repayment schedule in outer years, particularly ENDE.

Table A4.Bolivia: Profit and Loss Accounts of Selected Subsidiaries of Public Enterprises(In millions of Bolivianos)
20122013201420152012201320142015
YPFB GroupENDE Group
(1)Net profits before tax6,3476,7997,0551,311Net profits before tax1681988071,435
(2)Net profits after tax6,3476,7997,0551,311Net profits after tax1681988071,435
(3)Acquisition of fixed assets3,3013,6824,1984,379Acquisition of fixed assets4016859051,595
(4)=(2)-(3)Difference3,0453,1172,857−3,068Difference−233−487−97−160
YPFB TransporteENDE Empresa Electrica Valle Hermoso
(1)Net profits before tax594627658615Net profits before tax1421830
(2)Net profits after tax518557511503Net profits after tax1421830
(3)Acquisition of fixed assets1,072889648471Acquisition of fixed assets77734520
(4)=(2)-(3)Difference−554−332−13733Difference−62−52−3810
YPFB ChacoENDE Andina
(1)Net profits before tax1,085647945481Net profits before tax151023
(2)Net profits after tax867415762414Net profits after tax151022
(3)Acquisition of fixed assets661992643620Acquisition of fixed assets392930633324
(4)=(2)-(3)Difference205−577119−206Difference−392−925−623−302
YPFB RefinacionCorani (ENDE)
(1)Net profits before tax254674471505Net profits before tax725763
(2)Net profits after tax254674471505Net profits after tax574951
(3)Acquisition of fixed assets1714151,0341,500Acquisition of fixed assets168343
(4)=(2)-(3)Difference82259−563−995Difference42−349
YPFB Andina
(1)Net profits before tax1,2581,4562,0861,299
(2)Net profits after tax7901,0611,495875
(3)Acquisition of fixed assets1,4111,1109331,122
(4)=(2)-(3)Difference−621−50561−247
Sources: Annual financial reports of public enterprises and subsidiaries; and IMF staff calculations.Notes: YPFB’s ownership share is 98.6 percent of YPFB Transporte, 99.3 percent of YPFB Chaco, 99.9 percent of YPFB Refinacion, and 51 percent of YPFB Andina. ENDE’s ownership share is 100 percent of Empresa Electrica Valle Hermoso, 60 percent of ENDE Andina, and 100 percent of ENDE Corani. All these subsidiaries are not included in the consolidated non-financial public sector accounts.
Sources: Annual financial reports of public enterprises and subsidiaries; and IMF staff calculations.Notes: YPFB’s ownership share is 98.6 percent of YPFB Transporte, 99.3 percent of YPFB Chaco, 99.9 percent of YPFB Refinacion, and 51 percent of YPFB Andina. ENDE’s ownership share is 100 percent of Empresa Electrica Valle Hermoso, 60 percent of ENDE Andina, and 100 percent of ENDE Corani. All these subsidiaries are not included in the consolidated non-financial public sector accounts.

Public Enterprises Estimated Repayment Schedule

(millions of Bolivianos)

Source: Central Bank of Bolivia; reported financial accounts of YPFB, COMIBOL, and ENDE; and IMF staff calculations. Note: ENDE* includes loans that have been approved, but for which the BCB had not disbursed any sums as of December 31, 2105.

Loans to public enterprises are likely to hinder the BCB’s ability to generate positive net income. For every dollar lent, the central bank would only receive the subsidized interest rate from public enterprises. Equally, the central bank will have to: (i) likely pay a higher interest rate on its own securities (for sterilization purposes),5 or (ii) forgo interest income owing to a reduction in NIR (in line with public enterprises’ demand for imported capital goods). Interest rates on central bank securities are currently low, but historically these have been higher than rates on loans to public enterprises, and the expected normalization in U.S. interest rates will put upward pressure on BCB’s interest rates. These factors would adversely affect the central bank’s net interest income over the coming years.6

Annex III. Debt Sustainability Analysis—Baseline Scenario

Staff’s analysis applying the Public DSA framework for Market-Access Countries suggests that risks to Bolivia’s public debt are moderate in the medium term (2016–21). At 43 percent of GDP in August 2016, Bolivia’s public debt is moderate by international standards, but it has grown significantly in recent years and is projected to reach about 52 percent of GDP in 2021. Medium-term risks remain manageable if the authorities continue their pragmatic approach to implementing public investment plans (as under the baseline projections), with the financing need remaining below the respective benchmark under most standard macroeconomic shocks through 2021 (except for 2016, when the financing need is 10.2 percent); under the primary balance shock, the gross financing need is projected to exceed 10 percent of GDP in 2017–18.

Definition and debt profile: Public sector debt in this DSA includes all financial obligations of the central government and subnational governments as well as liabilities of non-financial state-owned enterprises to the central bank (BCB). After declining to 35.7 percent of GDP in 2012, public sector debt increased to 40.6 percent of GDP in 2015. The BCB’s lending to SOEs increased from 1.9 percent of GDP in 2011 to 9.2 percent of GDP in 2015. There was a 3.6 percentage point of GDP increase in gross public debt in 2015 relative to 2014, due mainly to an increase in external debt and BCB lending to SOEs. External debt accounted for about 47 percent of total debt at end-2015. Net public debt (gross debt excluding deposits of the general government and SOEs at the BCB) stood at 28 percent of GDP at end-August 2016.

Staff macroeconomic and fiscal assumptions: Growth is projected at about 3.7 percent and 3.9 percent in 2016 and 2017, respectively, and at 3.5 percent thereafter. Inflation is projected at about 5 percent in the medium term. The GDP deflator is projected to decline by about 2 percent in 2016, increase by about 7 percent in 2017, and increase by at 4.2–5.2 percent in 2018–21. The fiscal position is projected to improve, with the primary deficit declining to 3.4 percent of GDP in 2021 from 7 percent of GDP in 2016, as the limited financing and capacity constraints will restrict the authorities’ ability to carry out their capital expenditure plan. With an expected tightening of monetary policy in the US, interest rates are expected to increase. However, given the maturity structure of the outstanding debt stock, the impact of higher interest rates on new loans on the effective interest rate is gradual and limited. Under these assumptions, the gross financing needs of the public sector are projected to fall to about 8 percent of GDP in 2019–21 from about 10 percent of GDP in 2016. The public debt-to GDP ratio is projected to increase to about 52 percent in 2021.

Stress tests:

Primary balance shock. The primary balance in 2017–18 is hit by a shock equal to 1.9 percent of GDP (50 percent of the 10-year historical standard deviation of the primary balance-to-GDP ratio). The debt/GDP ratio increases to 52.6 percent in 2018 and then gradually increases to 55.7 percent in 2021, about 3.7 percentage points higher than baseline debt in 2021.

Growth shock. Real GDP growth rates are 1 percentage point lower in 2017–18 (100 percent of the 10-year historical standard deviation of real GDP growth rates). The debt-to-GDP ratio increases to 51.3 in 2018 and then gradually increases to 54.4 percent in 2021 (2.4 percentage points higher than in the baseline).

Interest rate shock. Real interest rates increase by about 330 basis points during 2017–21 (the difference between the average real interest rate in 2006–15 and the highest historical real interest rate). The debt-to-GDP ratio gradually increases to 54.3 percent in 2021 (2.3 percentage points higher than the baseline).

Exchange rate shock. The real effective exchange rate depreciates by 20 percent in 2017. The debt-to-GDP ratio increases to 50.1 percent in 2017 and then gradually increase to 54.2 (2.2 percentage points higher than the baseline).

Combined shock. A simultaneous combination of the previous four shocks would result in an increasing debt-to-GDP ratio, rising to 55.3 percent in 2017, 58.9 percent in 2018, and 63.1 percent in 2021 (11.1 percentage points higher than the baseline).

Contingent liability shock. A one-time increase in non-interest expenditures equivalent in 2017 to 10 percent of banking sector assets, combined with lower growth and lower inflation in 2017–18 (i.e., growth is reduced by 1 standard deviation), results in the debt-to-GDP ratio peaking at 55.9 percent in 2018, followed by a gradual increase to 58.9 percent in 2021 (6.9 percentage points higher than the baseline).

Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as the consolidated public sector. Public debt includes SOEs’ borrowing from the BCB but not from other domestic instituions.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Public DSA - Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Public DSA—Realism of Baseline Assumptions

Source : IMF Staff.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Bolivia, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Public DSA—Stress Test

Source: IMF staff.

Public DSA—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement 0.5 and 1 percent for change in the share of short-term debt 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt

4/ EMBIG, an average over the last 3 months, 31-Mar-16 through 29-Jun-16.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

External Debt Sustainability Framework, 2011–21(In percent of GDP, unless otherwise indicated)
ActualProjections
20112012201320142015201620172018201920202021Debt-stabilizing non-interest current account 6/
Baseline: External debt18.718.619.719.921.723.022.422.322.222.021.6−4.7
Change in external debt−1.7−0.11.00.21.81.3−0.6−0.1−0.1−0.2−0.4
Identified external debt-creating flows (4+8+9)−7.6−13.3−10.3−3.54.35.11.2−0.4−1.2−1.8−2.0
Current account deficit, excluding interest payments−0.8−7.6−2.8−0.75.36.44.73.72.72.21.7
Deficit in balance of goods and services−0.3−8.6−4.5−2.15.86.74.83.72.61.91.5
Exports38.344.941.540.728.526.527.026.225.624.824.0
Imports38.036.437.038.734.233.231.829.928.126.725.6
Net non-debt creating capital inflows (negative)−3.6−3.9−5.7−1.9−1.5−1.1−3.2−3.8−3.7−3.7−3.4
Automatic debt dynamics 1/−3.2−1.8−1.8−0.90.5−0.3−0.3−0.2−0.3−0.3−0.3
Contribution from nominal interest rate0.50.30.40.50.50.50.50.50.50.40.4
Contribution from real GDP growth−0.9−0.8−1.1−1.0−1.0−0.8−0.8−0.7−0.7−0.7−0.7
Contribution from price and exchange rate changes 2/−2.8−1.3−1.1−0.41.0
Residual, incl. change in gross foreign assets (2-3) 3/5.813.211.33.7−2.5−3.8−1.80.21.11.61.6
External debt-to-exports ratio (in percent)48.841.547.548.876.386.783.185.186.988.689.8
Gross external financing need (in billions of US dollars) 4/1.0−0.60.00.72.83.32.92.72.5 5.62.4 5.02.3 4.4
in percent of GDP4.3−2.20.02.08.510-Year10-Year9.67.76.75.65.04.4
Scenario with key variables at their historical averages 5/23.012.23.9−2.9−8.9−14.3−1.7
Key Macroeconomic Assumptions Underlying BaselineHistorical

Average
Standard

Deviation
Real GDP growth (in percent)5.25.16.85.54.85.01.03.73.93.53.53.53.5
GDP deflator in US dollars (change in percent)15.97.56.02.0−4.68.17.5−2.07.15.24.84.24.7
Nominal external interest rate (in percent)3.02.12.42.62.72.70.62.52.42.32.22.12.1
Growth of exports (US dollar terms, in percent)28.832.74.45.8−30.213.724.4−5.213.25.75.74.74.9
Growth of imports (US dollar terms, in percent)38.68.215.012.6−11.515.516.5−1.36.62.22.12.43.7
Current account balance, excluding interest payments0.87.62.80.7−5.35.36.0−6.4−4.7−3.7−2.7−2.2−1.7
Net non-debt creating capital inflows3.63.95.71.91.53.11.21.13.23.83.73.73.4

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Annex IV. External Stability Assessment

Key factors affecting Bolivia’s external sector—lower commodity prices and real effective exchange rate appreciation—have persisted since last year. As a consequence, the real exchange rate is assessed as stronger than warranted by medium-term fundamentals and desirable policies in 2016. Additionally, Bolivia’s performance in other measures of competitiveness slipped from already weak levels. In the absence of progress on relative price adjustments and the structural environment, gains in diversification away from natural resources has languished. A wide current account deficit opened up in 2015, and is set to continue going forward, sustained in part by import demand related to planned public investment. With limited capital and financial account flows, a drawdown in reserves has financed a large portion of the recent current account deficits. Still, reserves remain more than adequate by standard metrics.

A. Challenges Affecting the External Sector

1. International prices for Bolivia’s major exports have only partially recovered. The plunge in commodity prices dealt Bolivia one of its largest terms-of-trade shocks in its history. Peak to trough declines in prices ranged between 30 to 71 percent for hydrocarbons, metals, and soybeans and derivatives. Together, these goods accounted for more than three-quarters of Bolivia’s exports in 2015. Since bottoming out, there have been gains ranging between 11 and 51 percent, but prices remain below peak levels. Going forward, futures contracts indicate that prices for these commodities will strengthen only modestly over the next five years.

Commodity Prices

(indexes, January 2010=100)

Sources: Haver Analytics; Fund staff calculations.

2. The real effective exchange rate has been on an appreciating trend. The real value of the Boliviano has surged, principally reflecting sharp depreciations of major trading partners’ exchange rates (including Brazil and Argentina). As these countries’ currencies have been stabilizing in recent months, the Bolivian REER has slightly depreciated. As of September 2016, it depreciated 1.9 percent from a year ago, but the REER remains 49 percent appreciated relative to the January 2010 level.

Real Effective Exchange Rate

(change in log level relative to January 2010)

Sources: Information Notice System and Fund staff calculations.

3. Recent supply shocks in the hydrocarbon and agriculture sectors will be a drag on exports this year. Shipments of natural gas decreased temporarily mid-year, reflecting challenges at existing fields. The launch of operations at a new field in August restored output to normal levels, but overall natural gas export quantities are expected to be lower this year. In the agriculture sector, a major drought has been adversely affecting crop output, which is expected to decrease 4 percent this year.

4. Last year’s large current account deficit will likely widen this year, and remain substantial over the next few years. This year, the current account deficit will reach 7.6 percent of GDP. Exports are expected to decline, reflecting the full-year impact of commodity prices and the supply shocks in the agriculture and hydrocarbon sectors. Imports will remain high this year and into the medium term, driven by the authorities’ investment plans. Over the next few years, staff forecasts annual current account deficits to decrease but remain significant, declining to 2⅓ percent of GDP in 2021.

Bolivia: Overall Balance of Payments

(Percent of GDP)

Sources: National Authorities and Fund staff calculations and projections.

B. Reserves Remain Fully Adequate

5. A drawdown in NIR has largely been financing recent current account deficits. Although public sector external borrowing and foreign direct investment provided some offset, capital and financial account flows have not been fully financing the recent current account deficits, implying a drawdown in reserves. In 2015, reserves decreased US$2.1 billion and so far in 2016, they have come down another US$2.3 billion. Nevertheless, at US$10¾ billion through mid-October 2016, or around 32 percent of GDP, they remain high. Going forward, however, in the absence of policy adjustment, external deficits would persist, and reserves would continue trending down.

6. Still-high NIR levels remain more than adequate. Even with staff’s projection of a large current account deficit for 2016, reserves would decrease to still-elevated 30½ percent of GDP and cover 11.6 months of imports. At that level, reserves would be well above 100–150 percent of the Assessing Reserve Adequacy benchmark (applicable to countries with inflexible exchange rates), which stands at 16 percent of GDP. Reserves in excess of the benchmark are warranted in a country like Bolivia, because it is a commodity exporter that is vulnerable to price shocks. While buffers are ample in the near term, staff’s baseline has reserves falling below recommended levels in the medium term. This possibility underscores the need for adjustment.

International Reserves and Adequacy Metrics

(In percent of GDP)

Sources: Fund staff calculations.

C. Real Exchange Rate Assessment

7. Various techniques point to a real exchange rate that is stronger than fundamentals and desirable policies. The two EBA-lite approaches have been tailored to resource-rich countries and maintain common assumptions on appropriate levels of private credit, change in reserves, and capital controls.1 The additional assumptions specific to each approach and results include:

  • Current account: Desirable policies under this approach also entail a moderate fiscal deficit that allows the government to tackle pressing development needs but still stabilizes debt at prudent levels. On this basis, the framework finds that the current account norm is about -5 percent of GDP. To close the gap between that level and the expected 2016 outturn of -7.6 percent of GDP, the real exchange rate would need to depreciate by about 17½ percent.
  • Real effective exchange rate: The REER model assumes that the actual and optimal real interest rates coincide. With these assumptions, this approach finds an even larger REER overvaluation of 24 percent.

EBA-Lite Current Account Model

(Percent of GDP)

EBA-Lite: Real Effective Exchange Rate Model

(Log-level of the real effective exchange rate)

8. A depreciated real exchange rate would also be consistent with a stabilized net foreign asset position. Bolivia’s net international investment position (NIIP) is currently strong, after a significant improvement that coincided with debt relief, previous fiscal surpluses, and reserves accumulation. As of 2015, Bolivia held a slight net asset position against the rest of the world. Maintaining this high level into the medium to longer term (right chart; scenario 1) would require a current account surplus of 0.2 percent of GDP—a level consistent with a real depreciation of almost 17¼ percent. In light of Bolivia’s development needs, stabilizing the net position at a lower level may be appropriate. A stabilized net foreign asset level of -11.3 percent of GDP would be broadly consistent with the average level that prevailed in 2007, after the debt relief transactions concluded (HIPC and MDRI). In order to adhere to this level over the longer run (right chart; scenario 2), the current account would need to narrow to a deficit of around 2⅓ percent of GDP, entailing a real depreciation of about 10 percent.

EBA-Lite Methodologies: Summary Results for Exchange Rate Assessment 1/
Percent of GDP
Current

account

norm
Current

account

balance 2/




Gap




Elasticity




REER 3/
Current Account−5.0−7.6−2.6−0.1517.4
REER23.7
External Stability
Scenario 1: Stabilize 2015 NFA level0.2−2.3−2.6−0.1517.2
Scenario 2: Stabilize at 2007 level (11.3% of GDP)−0.8−2.3−1.5−0.1510.1
Source: Fund staff estimates.

Based on data for 2015 and projections for 2016. Regressions use sample restricted to oil and gas exporting countries only.

For the current account approach, the current account corresponds to the projection for 2016. For the external sustainability approaches, the value corresponds to the projection for 2021.

A positive number indicates overvaluation.

Source: Fund staff estimates.

Based on data for 2015 and projections for 2016. Regressions use sample restricted to oil and gas exporting countries only.

For the current account approach, the current account corresponds to the projection for 2016. For the external sustainability approaches, the value corresponds to the projection for 2021.

A positive number indicates overvaluation.

IIP Composition, by Instrument

(in percent of GDP, based on IIP data from EWN database)

Source: Lane and Milesi-Ferretti’s External Wealth of Nations Dataset, IMF WEO, Banco Central de Bolivia, and Fund staff calculations.

Net IIP: Actual & Projected

(in percent of GDP, based on IIP data from EWN database)

Source: Lane and Milesi-Ferretti’s External Wealth of Nations Dataset, IMF WEO, Banco Central de Bolivia, and Fund staff estimates and projections.

D. Weakening Performance in Other Measures of Competitiveness

9. Bolivia’s rankings on international comparisons of competitiveness have slipped. Bolivia’s placement in the World Economic Forum’s Global Competitiveness Index deteriorated from 105th place in 2014–15 to 117th place in 2015–16. Among the twelve subcategories, Bolivia performed above the median for Latin American countries in two areas, macroeconomic environment and institutions. Labor and goods market efficiency as well as business sophistication and innovation were particularly weak, underscoring the importance of reforms give the private sector a greater role in the economy. Perceptions of Bolivia’s logistics capability are also weaker than the median for Latin America and they have been declining over the past several years. Respondents were particularly critical of the quality and competence of logistics providers as well as customs, with both having even weaker ratings in the 2016 survey than in 2014. On the other hand, shipments and timeliness both improved a little.

Competitiveness Indicators

(Ranking among 140 countries)

Source: World Economic Forum, Global Competitiveness Report.

1/ Latin America & Caribbean WEO group, excluding small states and Venezuela.

Logistics Performance Index

(scores on index from very low (1) to very high (5))

Sources: World Bank.

1/ Latin America & Caribbean WEO group, excluding small states and Venezuela.

10. Real wages continue to grow ahead of productivity. Bolivia has closed the gap between its real minimum wage (measured in U.S. dollars) and those of other Latin American countries. This convergence largely reflects hikes in the nominal minimum wage in local currency. In Bolivia, this growth averaged 14.2 percent over the past 10 years, with only Uruguay having slightly faster nominal growth (14.9 percent). Other Bolivian wage policies have also driven rapid increases in labor incomes. Overall, real labor incomes have risen about 47 percent over 2000–14. However, labor productivity (real output per employed person) has grown less rapidly over this period (24 percent), causing a drag on competitiveness.

Real Minimum Wages in Selected Comparitor Economies

(In 2001 U.S. dollars)

Sources: ILO; National Authorities; IFS; Haver Analytics; and Fund staff calculations.

1/ Brazil, Chile, Ecuador, Paraguay, Peru and Uruguay. Ecuador data begin in 2001.

Labor Productivity and Real Labor Income

(Indexes, 2000=100)

Sources: SEDLAC; ILO; and Fund staff calculations.

11. These trends are likely holding back progress on diversification and expanding exports:

  • Diversification and complexity: The authorities’ objectives include diversification and production of higher value-added commodities. Each objective has been linked with higher longer-run growth empirically. To advance this agenda, they have advanced certain initiatives that have expanded certain non-traditional exports. However, overall, the share of nontraditional exports has changed little over the past 12 years. Instead, exports have remained principally concentrated in natural resource extraction (hydrocarbons and minerals).
  • Market share: Bolivia’s share of world exports has risen, largely reflecting increases in its main export commodities (hydrocarbons, minerals, and soy). However, its share of world real exports has remained broadly stable for some time. This indicates that Bolivia has been able to expand exports broadly in line with the world average.

Exports, by Type of Product

(In percent of GDP)

Sources: Banco Central de Bolivia.

Exports: Shares and Prices

(In percent of GDP)

Sources: World Economic Outlook; Haver Analytics; and Fund staff estimates.

Annex V. Stress Tests of the Bolivian Banking System

This annex provides background on the stress tests of the Bolivian banking system. Loan growth has picked up significantly, resulting in a fourfold increase in total lending since 2009. Although part of it reflects strong demand from a growing economy, it also points to potentially higher risks in the future. Thus, stress tests were performed to assess both the solvency and liquidity stance of banking sector in the face of potential shocks. These tests were conducted on the 13 general license banks (“Bancos Múltiples”) and the relatively large state-owned bank (Banco Union), on a bank-by-bank basis, using publically available balance sheet data and complementary data provided by the authorities as of end-June 2016. This annex provides details on the methodologies and assumptions used to derive the stress test results discussed earlier within this report.

Credit Risk

Reported data present some differences in reported and implied provisions, requiring some initial adjustments. Reported system-wide capital adequacy ratio (CAR) stands at 12.4 percent of total risk-weighted assets, with all 14 banks above the regulatory minimum ratio of 10 percent (Figure B1). However, in some cases, the reported levels of provisions appear to be lower than that required by existing loan classification. Thus, banks capital ratios were adjusted by the amount of “underprovisioning” derived from the reported loan classification and provisioning rates, lowering the system’s CAR to 12 percent, with no bank below the 10 percent threshold.1

Credit risk was modeled as a function of a set of macroeconomic variables. The NPL-ratio is modeled as a function of real GDP growth, real (lending) interest rates, and the real effective exchange rate (REER). To ensure that the model only produces predictions for the NPL-ratio between 0 and 100 percent, the following logit transformation is applied:

This logit transformation is then assumed to be a linear function of the three macroeconomic factors, and estimation model can be expressed as:

where μi captures the bank specific fixed effects, ∊i,t is a well-behaved error term, and α and the βis are parameters estimated using standard fixed-effects panel data techniques on quarterly data for the period 2001Q1 to 2016Q1 (Table 1).2

Table 1.Results of NPL Estimation Model
Dependent variable: Logit transformation of NPL ratio
VARIABLES(1)(2)(3)(4)
Real GDP growth−0.538***

(0.056)
−0.294***

(0.057)
Real interest rate0.182***

(0.012)
0.081***

(0.017)
REER, log−3.708***

(0.343)
−2.531***

(0.346)
Constant−1.096***

(0.273)
_4.747***

(0.091)
14.455***

(1.677)
9.603***

(1.852)
Observations229242242229
R-squared0.3020.4900.3400.608
Number of Banks14141414
Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1Source: IMF staff calculations.
Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1Source: IMF staff calculations.

An econometric model was used to simulate the joint distribution of possible paths for the explanatory variables and NPL-ratio. A vector autoregressive (VAR) model was used to estimate the joint historical behavior of real output growth, the real interest rate, and the REER. After the estimation of parameters, Monte Carlo simulations provide the possible future (joint) paths of the three explanatory variables. Then, the corresponding elasticities are used to project the future distribution of the NPL-ratio, which embeds the effect of combined shocks to real output growth, and interest and exchange rates (Figure).

Distribution of NPLs in Response to Macroecomic Shocks

(percent of total loans)

Source: ASFI; and IMF staff calculations. Note: the distribution and confidence intervals (percentiles) above were generated using one million repetitions.

Currency Risk

Direct and indirect currency risks are currently low in the Bolivian banking system. Existing regulation places limits on the net open FX positions of banks.3 Most banks present a fairly small net open FX position, and—with roughly half of the banks presenting a small long position, and the other half a small short position—there are no signs of one-sided FX speculation. Stress tests suggest that direct credit risks are low, and even under an extreme scenario (25 percent depreciation), the implied losses would be fairly small (180 million Bolivianos, or less than 0.1 percent of GDP). Moreover, levels of dollarization have fallen rapidly in recent years. Roughly 15–16 percent of assets and liabilities are currently denominated in U.S. dollars. On the asset side, most FX-denominated assets are made of cash and high-quality liquid assets, while credit dollarization represents a mere 2 percent of total loans. FX loans are generally provided to borrowers that receive hard currency income. However, by virtue of the small amounts involved, the presence of any “unhedged borrowers” is unlikely to pose a systemic risk.

Concentration Risk

Concentration risk was assessed based on the hypothetical default of the largest borrowers. In most banks, the largest single exposure represents an important share of total regulatory capital (Table 2). In particular, the largest exposure in two small banks is close to the regulatory minimum (20 percent of capital). Although for most banks the reported amount of collateral pledged against a large loan exceeds the amount of the loan, it does not eliminate the underlying risk as the collateral might suffer from valuation deficiencies or practical limitations (e.g. costly legal process, large execution times, etc.), or might be somewhat encumbered (e.g. syndicated loans). Stress tests show that the default of the single largest borrower would lead to system-wide losses of around 543 million Bolivianos,4 with the resulting capitalization of all banks above the 10 percent minimum. Whereas the hypothetical default of the largest 5 borrowers would lead to losses of about 1.86bn Bolivianos (0.8 percent of GDP) and would result in the undercapitalization of 6 banks.

Table 2.Largest Credit Exposures in the Banking System(In percent of total regulatory capital)
All BanksB1B2B3B4B5B6B7B8B9B10B11B12B13B14
Largest borrower11.41 6.61 9.51 8.71 4.71 6.81 6.13.31 3.71 4.51 9.09.00.80.11 2.8
Largest 5 borrowers46.46 4.19 1.98 1.34 1.67 9.96 5.71 0.15 7.34 7.57 6.53 7.43.20.45 9.3
Largest 10 borrowers76.41 00.31 39.11 29.25 9.81 41.91 17.01 5.39 0.97 9.19 4.36 3.05.00.71 01.5
Sources: Bolivian authorities; and IMF staff calculations.
Sources: Bolivian authorities; and IMF staff calculations.

Liquidity Risk

The assessment of the banking sector liquidity stance is based on the use of liquidity coverage metrics. Liquidity Coverage Ratio (LCR)-type proxies were constructed using bank-by-bank balance sheet data and assumptions in the spirit of Basel III. The LCR measures the banks’ potential net outflows over the next 30 days, and the counterbalancing capacity of the banks—i.e. the amount of available liquid assets (“liquidity buffer”)—to be able to cover these potential outflows. Banks should maintain an LCR above 100 percent. Specific deposit run-off rates and asset haircuts are included to emulate stress conditions. The assumptions embedded in the LCR proxy were based on the calibration suggested by Basel III. Furthermore, we construct an additional LCR-proxy calibrated on historically observed deposit run-off rates in Bolivia, which are much larger than the standard runoff rates embedded in the Basel III LCR (Table 3).

Table 3.Assumptions Used in Computation of LCR Proxie
Basel IIIBolivia-specific
Liquid Assets (“Liquidity Buffer”)assumed haircuts:
Cash00
Deposits at Central Bank00
Central Bank securities00
Government securities1515
Interbank claims100100
Loans (performing) maturing within 1 month5050
Other assets maturing within 1 month5050
Potential Outflowsassumed run-off rates:
Interbank deposits100100
Customer Deposits
Stable deposits525
Less stable deposits1050
Term deposits, RM > 1 month05
Other deposits 1/4040
Non-deposit liabilities maturing within 1 month100100

Include desposits from large non-financial corporates, sovereigns, central banks, and SOEs.

Source: IMF staff calculations.

Include desposits from large non-financial corporates, sovereigns, central banks, and SOEs.

Source: IMF staff calculations.
1Balance of Payments data in this report are compiled according to the fifth edition of the Balance of Payments Manual (BPM). The authorities are transitioning to the sixth edition of the BPM. In the first half of 2016, the current account balance compiled under the updated methodology was -6.5 percent of GDP.
2Reserves could be up to 3 percent of GDP higher if the US$1 billion of sovereign bond issuance in international capital markets goes ahead.
3Previous staff VAR analysis suggests that a 1 p.p. decrease in real credit growth lowers GDP growth by 0.2 p.p. the following year.
4Bolivia ranks 138 out of 160 countries in the World Bank’s 2016 Logistics Performance Index.
5Under current regulations, subnational governments have to almost automatically match their expenditures with revenues and past savings, with limited borrowing possibilities. Municipalities have been affected less than prefectures since the former have more own-source revenues through tax sharing with the central government.
6In the 2015–16 Global Competitiveness Index, Bolivia slipped to 117th place from 105th place in 2014–15.
7Enacting a new central bank law has been delayed, and a first draft is now expected in 2017 H1.
8The quotas are set at 60 percent for general license banks and 50 percent for SME banks.
9The exercise includes 13 general license banks and the relatively large state-owned bank (Banco Union).
10The Financial Services Law requires banks to retain 50 percent of their annual net profits to increase their capital base.
11Although Bolivia has not adopted the Basel III regulation (including LCR), liquidity stress tests were based on the computation of LCR proxies in the spirit of Basel III requirements and assumptions, using data for end-June 2016. The “Bolivia specific assumptions” allow for the largest deposit withdrawal rates observed in recent years in Bolivia to materialize throughout the banking system (an extreme assumption).
1See text figure. Data are for the sector as a whole. Total planned investment for 2016 was US$2,411 million, and exploration investment accounted for roughly 28 percent of total investment. For 2016, the scheduled total investment by YPBF headquarters, YPFB subsidiaries and private operators was 905.6, 942.7 and 562.6, respectively.
2For example, exploration spending could be allowed to be offset again hydrocarbon taxes.
3Loans to YPFB are guaranteed by the company itself through YPFB account receivables.
4The baseline scenario is based on the current WEO projections, with global oil prices rising smoothly from current levels to US$56.29 per barrel by the end of 2020.
5A central bank could choose not to conduct the needed sterilization to minimize interest income losses, but this would be in direct conflict with its price stability objective.
6The computation of overall net income does not only depend on the loans to public enterprises. Other assets (e.g. NIR) also generate profits, while other liabilities generate losses. Over the past couple of years, about half of the BCB’s revenues came from earnings on foreign assets, while half of its expenses (excluding transfers to the Treasury) were due to the cost of open market operations (i.e. interest payments on BCB securities).
1In particular, the settings for private credit are observed levels; zero for the change in foreign reserves; and the international average for capital controls.
1The reported capital may still suffer from additional deficiencies, reflecting in part limitations in quality of supervision, including issues related to the appropriate classification of loans, treatment of restructured loans, valuation of collateral and investment assets, dealing with related-party lending and on-lending practices, etc.
2To minimize any endogeneity issues, the dependent variable takes end-of-period (quarter) values, while the explanatory variables represent averages over the quarter. Robustness tests were also conducted using lags of the explanatory variables.
3Essentially, the current limit for an overall net long (short) open FX position is 30 percent (60 percent) of regulatory capital.
4Stress tests assumed a recovery rate of 50 percent on the reported collateral value.

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