Bolivia: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
02 Jun 2011
eISBN:
9781455272525
Language:
English
Keywords:
ISCR; CR; background color; food inflation; draft law; GDP deflator; debt service; debt structure; sustainability framework; debt indicator; creating flow; Public and publicly-guaranteed external debt; Fiscal stance; Depreciation
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Bolivia’s public debt sustainability has continued to improve as a result of fiscal surpluses. Debt ratios continue to display ample margins with respect to risk thresholds and are expected to decline further under the baseline scenario. Debt service is projected to remain low, reflecting predominantly long maturities of remaining stocks of both domestic and foreign debt. The path of debt ratios would deteriorate somewhat under standard stress tests, but would remain within manageable bounds over the medium- and long run. Therefore, the risk of debt distress is assessed to be low.

Abstract

Bolivia’s public debt sustainability has continued to improve as a result of fiscal surpluses. Debt ratios continue to display ample margins with respect to risk thresholds and are expected to decline further under the baseline scenario. Debt service is projected to remain low, reflecting predominantly long maturities of remaining stocks of both domestic and foreign debt. The path of debt ratios would deteriorate somewhat under standard stress tests, but would remain within manageable bounds over the medium- and long run. Therefore, the risk of debt distress is assessed to be low.

BACKGROUND

1. Bolivia’s gross public debt (domestic and external) has fallen significantly over the last years, benefiting from MDRI and fiscal surpluses. Between 2003 and 2010, gross debt has fallen from 96 to 40 percent of GDP, while external public debt has declined from 66 to 15 percent of GDP, with MDRI accounting for 2.9 billion dollars in 2006 and 2007.

2. Bolivia’s changing debt structure and the accumulation of significant deposits have further reduced debt vulnerabilities. Since 2005, average maturities have been successfully extended and foreign currency exposure has been reduced. Moreover, with the accumulation of net deposits of the non-financial public sector at the Central Bank—amounting to about 21 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 as net debt has declined from 71 percent in 2005 to 18 percent of GDP in 2010. On account of declining gross debt, debt ratios would reach very low levels during the projection period. The average maturity of the outstanding external public debt remains longer than 20 years at year-end 2010 (with 65 percent of the total debt concentrated between 11 to 30 years and 32 percent beyond 31 years). Effective average interest rate of the total public debt was about 3.6 percent at year end 2010.

BASELINE SCENARIO

3. The main assumptions of the baseline scenario for the period 2011-2031 are:

  • Average annual real GDP growth: 4.5 percent until 2016 and 4 percent until 2031.

  • Inflation: 5.0 percent in 2012 and 4.0 percent between 2013 and 2031.

  • Export and import growth: in line with the medium-term staff projections and the assumption of stable import and export ratios to GDP over the long term. Net FDI is assumed to remain broadly stable in real terms of GDP, mainly influenced by the operations of foreign companies operating in the natural resource sector.

  • Financing strategy: commercial debt is expected to remain nil, with CAF expected to remain as the main source of financing. Until distribution of revenues and responsibilities among different levels of government is clarified, central government will continue relying on domestic financing. The excess funds at the level of the non-financial sector will continue to be accumulated as deposits.

  • Average concessionality of the public sector borrowing: projected to be around 15 percent, in the medium-term, based on projected disbursements of official loans and the concessional financing conditions (grace period of about 7 years and interest rates below market rates).

4. Bolivia’s public and external debt is expected to remain sustainable throughout the projection period and the risk of debt distress is low. Bolivia is classified as a medium performer in terms of its policy and institutional capacity, measured by the three-year average of the World Bank’s Country Policy and Institutional Assessment (CPIA) scores.1 All the debt burden indicators for Bolivia are well below the specific indicative thresholds for medium performers. Hence, Bolivia’s risk of debt distress is low - an assessment that would hold even under significant stress tests2.

5. Under the baseline scenario, Bolivia’s indebtedness and debt service levels would remain well manageable. Specifically, the gross non-financial sector public debt-to-GDP ratio—40 percent in 2010—is projected to decline gradually to 30 percent by 2016, and to 16 percent in 2031. The total stock of external debt (public and private) is projected to fall to 19.5 percent of GDP by 2016, and to stabilize at 12.6 percent of GDP by 2031. Consequently, Bolivia’s risk of debt distress is very low—an assessment that would hold even under significant stress tests.3

STRESS TESTS

6. Standard stress tests suggest that Bolivia’s low public and external indebtedness is resilient to a series of shocks. Under the most extreme stress test to external debt—a combined shock to debt concessionality, GDP growth, export growth, and external inflation—the ratio of the NPV of debt to GDP deteriorates somewhat and eventually returns to a downward trajectory. In all cases, it would remain well below risky levels. Flow indicators also remain manageable under all stress tests. For public debt, the biggest risk stems from a temporary or permanently lower GDP growth, however, tests indicate that ratios remain within manageable levels. Assuming an adverse scenario where oil prices decline by 30 percent in 2012-16, Bolivia’s non-interest current account would move from a surplus of about 4 percent of GDP to a nearly balanced position. This would mean that, with the same levels of projected external debt, net international reserves would remain broadly stable and decline gradually in terms of GDP, to about 35 percent of GDP in 2016; this level is judged to be still strong and external debt indicators would remain below the thresholds.

7. Bolivian authorities agree with the assessment of low risk of debt distress. Staff discussed the assumptions with the authorities, as well as the strong dependence of the external and fiscal positions on hydrocarbon revenues. The authorities see upside risks to growth in the medium-term and are confident that their policies (i.e., industrialization of minerals and hydrocarbons) will result in more stable external and fiscal positions, making them less vulnerable to terms of trade shocks.

Table 1a

Bolivia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–2031

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Non financial 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.

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

Table 2a

Bolivia: Sensitivity Analysis for Key Indicators of Public Debt 2011-2031

(In percent of GDP, unless otherwise indicated)

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Sources: Bolivian authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 3a

External Debt Sustainability Framework, Baseline Scenario, 2008-2031 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = 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 projections also includes contribution from price and exchange rate changes.

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

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

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

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 PV of new debt).

Table 3b

Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2001–2031

(In percent)

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Sources: Country authorities; and staff estimates and projections.

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.