Bolivia: 2018 Article IV Consultation—Press Release and Staff Report
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
21 Dec 2018
eISBN:
9781484392041
ISBN:
9781484392041
Language:
English
Keywords:
ISCR; CR; fiscal policy; commodity; exchange rate; U.S. dollar; current account; private sector; monetary policy; foreign reserve; interest rate
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2018 Article IV Consultation-Press Release and Staff Report

Abstract

2018 Article IV Consultation-Press Release and Staff Report

Context

1. After fifteen years of impressive growth and poverty reduction, Bolivia is facing a more challenging period. The country registered annual real GDP growth of 4.8 percent on average between 2004–17 and built up sizable foreign reserves and fiscal buffers, a result of broadly prudent management of revenues emanating from the commodity price boom. The share of the population living in extreme poverty fell by half to 17 percent. The authorities have set ambitious goals to eradicate extreme poverty, improve access to health and education, and promote state-led industrialization under their “Patriotic Agenda 2025”. The first phase has involved large-scale public investment under the five-year (2016–20) Plan de Desarrollo Económico y Social (PDES). Since 2014, in a context of lower commodity prices, the strategy of expansionary macro policies has resulted in large fiscal and current account deficits, reserve losses, and higher public debt.

2. The political situation is uncertain. The presidential election is scheduled for late 2019. While Bolivian voters in 2016 rejected an amendment to the country’s constitution that would have allowed President Morales to run for re-election, Bolivia’s constitutional court this year ruled that he can run for re-election indefinitely. While he says he is ready to leave, Morales cites pressure to stay from the public and the ruling party Movimiento al Socialismo (MAS), which asserts that he will be their candidate.

Past IMF Policy Recommendations

Policy advice in recent years stressed the need to gradually tighten fiscal and credit policies to help restore external balance, reinforce the financial health of public enterprises, strengthen the fiscal policy framework, move to remove fuel subsidies and increase the effectiveness of social spending, and reform product and labor markets (Table 1). The authorities have taken some measures towards adopting a medium-term fiscal framework (MTFF); removed some export restrictions; and raised prices on some types of gasoline and electricity. The authorities prepared an AML/CFT National Strategy in 2016, although that has stalled in parliament; they also set up a Vice Ministry of Institutional Transparency and Fight Against Corruption within the Ministry of Justice (Annex IV).

Table 1.

Bolivia: Past Fund Policy Recommendations

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Source: Fund staff.

1/ The authorities did not agree with most of these recommendations.

Recent Developments: Gas Price Reprieve

3. Bolivia remains one of the fastest-growing economies in Latin America. Real GDP grew by 4.2 percent in 2017, driven by stronger-than-expected agriculture growth. On the demand side, growth was driven by private consumption and public investment, including by state-owned enterprises (SOEs) and their subsidiaries. Higher goods exports, robust domestic demand, and strong agriculture output helped sustain growth in the first half of 2018 (Figure 1). At 1.8 percent (y/y) in August 2018, consumer price inflation remains low, reflecting stable administered prices, low import prices in the context of the stabilized exchange rate, the good harvest, and supply management policies. A study by a foreign company released in August 2018 estimated proven gas reserves (1P) in Bolivia at 10.7 TCF compared to 10.45 TCF in 2013.

Figure 1.
Figure 1.

Bolivia: Real Sector Developments

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

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

4. The fiscal deficit is still large. As a percent of GDP, the deficit of the non-financial public sector (NFPS) increased to 7.8 in 2017 from 7.2 in 2016, though the increase largely reflected a one-off timing effect of advance salary and pension payments in late 2015 that had the effect of lowering the deficit in 2016. Recurrent fiscal deficits since 2014 have been financed by direct credits to SOEs by the central bank (BCB), some use of government deposits, and foreign borrowing. Gross (net) public debt rose to about 51 (35) percent of GDP in 2017 from about 37 (12) percent of GDP in 2013, but remains lower than the levels observed in many ‘BB-‘rated (Fitch, Standard & Poor’s) countries (Tables 3–4, Figure 2).1

Figure 2.
Figure 2.

Bolivia: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Ministry of the Economy and Public Finances, Central Bank of Bolivia and Fund staff estimates.1/ The calculated fiscal impulse in 2017 is due mostly to a one-off calendar effect due to advance payments of salaries and pensions in December 2015 instead of in January 2016 which reduced the deficit in 2016 and implied a large change in the deficit in 2017. Excluding this effect implies a smaller impulse.
Table 2.

Bolivia: Selected Economic and Financial Indicators

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Sources: International Monetary Fund, Information Notice System; 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, and BCB loans to FINPRO and FNDR.

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

All foreign assets valued at market prices.

The authorities use a different definition.

Official (buy) exchange rate.

The REER based on authorities’ methodlogy is different from that of the IMF.

Table 3.

Bolivia: Operations of the Combined Public Sector 1/

(In percent of GDP unless otherwise specified)

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

The operation of mixed-ownership companies, primarily in the telecom, 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).

Includes net lending.

Primary balance before nationalization costs minus hydrocarbon related balance (latter defined as the sum of direct hydrocarbon tax (IDH), royalties, and the operating balance of state oil/gas company (YPFB) minus YPFB investments.

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

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

Gross foreign public debt includes sovereign bonds issued internationally but held by residents.

Table 4.

Bolivia: Non-Financial Public Sector Total Debt

(In percent of GDP unless otherwise specified)

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Sources: Bolivian authorities; and IMF staff estimates.

Gross foreign public debt includes sovereign bonds issued internationally but held by residents.

uA01fig01

Fiscal Balances

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; and IMF staff estimates.
uA01fig02

NFPS Financing and Total Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; and IMF staff estimates.

5. While higher gas and minerals prices are helping, SOEs continue to run sizable deficits. Key public enterprises significantly increased capital investments on industrial projects which, combined with lower commodity prices, caused sizable overall deficits during 2015–17. These were financed mostly with BCB loans, which reached about 13 percent of GDP by end-2017. Operating balances have strengthened recently owing to higher commodity prices.

uA01fig03

Public Investments

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; and IMF staff estimates.
uA01fig04

Public Enterprises Overall Fiscal Balance 1/

(Billions of Bolivianos)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; and IMF staff estimates.1/ Excludes subsidiaries of SOEs.

6. Monetary conditions remain supportive of growth. With a slowdown in deposit growth and still strong credit growth, bank liquidity tightened in early 2018. In response, the BCB lowered the reserve requirement on foreign currency deposits—from 35 (43) percent to 25 (33) percent for term deposits (demand deposits)—following a similar move in 2017, stipulating that banks could use the released resources only for new lending in local currency to ‘productive sectors’ and social housing. Banks’ excess liquidity with the BCB has recently stabilized and average deposit and interbank rates are at or below the inflation rate. Lending rates have remained stable, reflecting the rate ceiling and temporary effects of the change in the calculation of the BCB’s reference rate (Tasa de Referencia), to which most floating-rate loan rates are linked (Figure 4). While lending to the “productive sectors” remains strong at 23 percent in July 2018, the pace is moderating as large banks reach credit targets set under the Financial Services Law (FSL). This is reflected in a narrowing “credit gap”.2

Figure 3.
Figure 3.

Bolivia: External Sector Developments

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Central Bank of Bolivia, Haver Analytics, Inc., and Fund staff estimates.
Figure 4.
Figure 4.

Bolivia: Monetary Developments

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Central Bank of Bolivia, National Institute of Statistics, and Fund staff estimates.
uA01fig05

Credit Gap Estimations 1/

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; and Fund staff estimates.1/ Using 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.

7. The banking sector appears sound, although some indicators have been deteriorating. The overall capital adequacy ratio of the banking system stands at 12.2 percent, with all banks above the regulatory minimum of 10 percent (Annex V). Non-performing loans (NPLs) rose slightly to 1.9 percent of total loans in June 2018 from 1.7 percent a year earlier but remain low by international standards due in part to robust credit growth. The share of restructured loans rose from 1.2 percent at end-2014 to 2.4 percent in June 2018 and banks’ return on equity fell from 17 percent in 2016 to 12 percent in 2018, respectively. It is worth noting that Bolivia’s pension funds play an important role in the banking sector by providing long-term deposits to banks and investing in banks’ subordinated debt. Bank profitability is declining due largely to narrowing interest margins (Figures 4–5).

Figure 5.
Figure 5.

Bolivia: Financial Sector Developments

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: ASFI and Fund staff calculations.1/ Licensed institutions only.2/ The estimations include credit extended by the addition of new financial institutions created during the period, including development institutions (Instituciones Financieras de Desarrollo).3/ Contributions refer to 2018M6 over 2017M6 levels.
uA01fig06

Exports and Commodity Prices

(y/y 3-months moving average)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data; Haver Analytics; and Fund staff estimates.
uA01fig07

Bolivia: BOP 2018 H1 Development

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 379; 10.5089/9781484392041.002.A001

Sources: Authorities’ data and Fund staff estimates.

8. The external current account deficit has started to narrow, but not the overall balance of payments deficit. In the first half of 2018, export revenues grew by 17 percent (y/y) due to higher commodity prices and an increase in non-traditional exports related to the removal of some export restrictions. Imports increased by only 5.3 percent, reflecting low import prices, although unrecorded imports may have increased based on the emergence of a larger statistical error in the first half of 2018 (Box 2). With FDI lower-than-expected, so far in 2018 only about 50 percent of the current account deficit has been financed by capital inflows. As a consequence, international reserves have been declining, falling to US$8.7 billion at end-September from US$10.3 billion at end-2017; they remain adequate by IMF standard metrics (Figure 3).

Outlook: Vulnerabilities Underlie Robust Growth

9. The baseline outlook projects robust growth in the near term. Continued accommodative policies combined with a second Christmas bonus (Doble Aguinaldo) would support demand while higher commodity prices and lower capital imports would help reduce the “twin” deficits (fiscal and external current account). Real GDP is forecast to grow by 4.5 and 4.2 percent in 2018 and 2019, respectively, benefiting in part from new ethanol projects that will boost agriculture activity. The deficit of the NFPS is projected to improve slightly to 7.4 and 6.3 percent of GDP, respectively, in 2018 and 2019, owing mainly to higher hydrocarbon revenues, better SOE performance, and lower capital spending. The external current account deficit as a percent of GDP is projected to fall to 4.8 and 4.6 percent in 2018 and 2019, respectively.

10. In the medium term, real GDP growth is projected to moderate and macro-imbalances to decline slowly. Growth is forecast to converge to its potential of 3.7 percent—as estimated by staff—reflecting limited impulse from macroeconomic policies, including weaker private investment and lower total factor productivity in the post-commodity boom period. Based on a review of the PDES program, the authorities intend to hold public investment steady in nominal terms, reorienting investment toward urban development, health, and youth employment as large-scale capital projects wind down. The key fiscal assumptions comprise: (i) broadly flat investment that reduces the investment-to-GDP ratio from 13.7 to 9.2 percent by 2023; and (ii) growth in the wage bill below that of nominal GDP. If implemented as envisaged, this change would help lower the deficit of the NFPS to about 3.8 percent of GDP by 2023 and slow the rate of growth in public debt, which would peak at 54.4 percent of GDP in 2022. The current account deficit is expected to narrow slowly to 4.4 percent of GDP by 2023 as moderating imports of capital goods are partly offset by lower capital inflows and weaker remittances. International reserves would decline slowly, falling below the Fund’s reserve adequacy metric by 2020 and to four months of imports by 2023 (Table 7).

Table 5.

Bolivia: Financial System Survey 1/

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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.

Table 6.

Bolivia: Summary Balance of Payments

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Sources: Central Bank of Bolivia, National Institute of Statistics, and Fund staff calculations.
Table 7.

Bolivia: External Vulnerability Indicators

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

11. Risks to the baseline are tilted downwards (Table 8).

  • On the downside, the highest probability risks stem from: (i) political uncertainty related to the 2019 elections that could affect economic policy decision making and/or lead to social unrest; (ii) failure to discover new gas and mineral fields, which would have an increasingly negative impact on the balance of payments; and (iii) failure to freeze public investment as envisaged. Other risks include a larger-than-expected rise in the US dollar or interest rates, lower-than forecast commodity prices and capital inflows, worse-than-expected spillovers from economic strains in Argentina and Brazil, and costs related to spillovers from the crisis in Venezuela.

  • Upside risks could arise from new discoveries of gas and mining reserves; more rapid success bringing on stream projects in hydrocarbon industrialization, electricity generation, and lithium production; and higher-than-expected hydrocarbon prices.

Table 8.

Bolivia: Risk Assessment Matrix

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