This 2008 Article IV Consultation highlights that Bolivia’s overall fiscal position has improved in 2008. Booming hydrocarbon and mining exports, together with high remittance inflows, led to a record-high current account surplus and large reserve accumulation, with major pressures on monetary/exchange rate policy during the first three quarters of 2008. Executive Directors have noted that strong hydrocarbon and mining exports have continued to support Bolivia’s growth and macroeconomic performance. Directors have also emphasized the importance of well-designed structural reforms for further strengthening Bolivia’s fiscal position.

Abstract

This 2008 Article IV Consultation highlights that Bolivia’s overall fiscal position has improved in 2008. Booming hydrocarbon and mining exports, together with high remittance inflows, led to a record-high current account surplus and large reserve accumulation, with major pressures on monetary/exchange rate policy during the first three quarters of 2008. Executive Directors have noted that strong hydrocarbon and mining exports have continued to support Bolivia’s growth and macroeconomic performance. Directors have also emphasized the importance of well-designed structural reforms for further strengthening Bolivia’s fiscal position.

Background

1. Bolivia’s gross public debt (domestic and external) decreased significantly over the last two years, benefiting from fiscal surpluses following the MDRI. The gross public debt-to-GDP ratio—35 percent in 2008—is projected to decline further to 23 percent by 2013, and to 16 percent in 2027. Similarly, the NPV of public debt-to-GDP ratio is projected to decline from 33 percent in 2008 to 16 percent during the DSA’s projection period. Moreover, with the accumulation of deposits of the nonfinancial public sector in the financial system—amounting to about 18 percent of GDP at present—the solvency of the public sector measured by the net public debt (i.e., gross debt minus those deposits) has improved even more significantly. On account of declining gross debt, net debt ratios would reach very low levels during the projection period.

Baseline scenario

2. The main assumptions of the baseline scenario for the period 2008–27 are:

  • Average annual real GDP growth: 4.2 percent until 2013, on account of implementation of already identified mining projects, declining to 4 percent during 2014–27.

  • Average deflator inflation: 6.7 percent per year until 2013, in line with the latest medium-term staff projections, and would decline further to 4 percent over the long term.

  • Export and import growth: in line with the medium-term staff projections and the assumption of 7½ percent growth beyond 2013. The latter would imply stable import and export ratios to GDP over the long term.

  • FDI: in line with expected investments for the hydrocarbons and mining sectors.

  • Financing strategy: commercial debt is expected to remain nil, with CAF expected to remain as the main source of financing.

  • Average concessionality of the public sector borrowing: projected to evolve, in the medium-term, according to the pipeline of official loans. Over the longer run, concessionality is expected to decrease gradually.

3. Given the above assumptions, Bolivia’s external debt is expected to remain sustainable throughout the projection period. After a projected small deficit in 2009, the fiscal position would remain close to balance in the period 2010-2013, with an average overall surplus of about 0.1 percent of GDP. Afterwards, the fiscal position would weaken gradually, mainly reflecting lower hydrocarbons-based revenues in relation to GDP, reaching a deficit of about 1 percent of GDP by the end of the projection period. Under the baseline outlook, Bolivia’s indebtedness and debt service levels would remain very manageable. Specifically, the total stock of external debt (public and private) is projected to fall to about 16 percent of GDP by 2013, and to stabilize around 5½ percent of GDP by 2027. Consequently, Bolivia’s risk of debt distress is very low2—an assessment that would holds even under significant stress tests.

Stress tests

4. Standard stress tests suggests that Bolivia’s low external indebtedness is resilient to severe exogenous shocks. Under the most extreme stress test—a combined shock to debt concessionality, GDP growth, export growth, and external inflation—the ratio of the NPV of debt to GDP deteriorates significantly but eventually stabilizes. In all cases, it would remain below risky levels. Flow indicators also remain manageable under all stress tests.

Table 1.

Bolivia: External Debt Sustainability Framework, Baseline Scenario, 2005-28 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Staff simulations.

Includes both public and private sector external debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For proj. also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).

Table 2.

Bolivia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-27

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.
Figure 1.

Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2008-2027

Citation: IMF Staff Country Reports 2009, 027; 10.5089/9781451805857.002.A003

Source: Staff projections and simulations.Note: Scenarios based on recent history yield better outcomes on NFA because of recent large current accountsurpluses. It is assumed that this would translate into larger reserve accumulation as opposed to a reduction in gross debt
Table 3.

Bolivia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008-2027

(In percent of GDP, unless otherwise indicated)

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Sources: Bolivian authorities; and Fund staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Nonfinancial public sector gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Table 4.

Bolivia: Sensitivity Analysis for Key Indicators of Public Debt 2008-2027

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Sources: Bolivian authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one s.d. divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 2.
Figure 2.

Bolivia: Indicators of Public Debt Under Alternative Scenarios, 2008-2027 1/

Citation: IMF Staff Country Reports 2009, 027; 10.5089/9781451805857.002.A003

Sources: Staff projection and stimulations.1/ More extreme stress test is test that yields highest ratio in 2018.2/ Revenues including grants.
1

Since Bolivia is an IDA blend country, this DSA was not conducted jointly with the World Bank.

2

The World Bank’s three-year average IDA Resource Allocation Index (IRAI) classifies Bolivia as a medium performer with respect to the overall quality of its macroeconomic policies and the related risk thresholds on NPV of debt-to-GDP and debt-to-exports ratios (40 percent and 150 percent, respectively) leave the country’s current levels with significant safety margins.

Bolivia: 2008 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Bolivia
Author: International Monetary Fund
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    Bolivia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2008-2027

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    Bolivia: Indicators of Public Debt Under Alternative Scenarios, 2008-2027 1/