BOLIVIA: The long game
March 17, 2013 - emergingmarkets.org

Lucien Chauvin
Gone are the days when long-term business plans were out of the question in Bolivia. But is the country's fast progress a matter of luck – or policy

Bolivian president Evo Morales celebrated his seventh year in office in late January with a national address detailing the changes in the country over the past 12 months and, more broadly, since his inauguration in 2006.

It was not a short speech by any means. Morales spoke for more than four hours, stressing Bolivia's thriving economy and plans to achieve developed-nation status by 2025.

Bolivia's gross domestic product has more than doubled to $26 billion in the past seven years. In 2012, gross domestic product likely expanded by 5.2%, and inflation was 4.5%, down from 6.9% the previous year, according to the Economic Commission for Latin America and the Caribbean (Eclac). The government forecasts GDP to grow by 5.5%, and inflation is targeted at 4.5% this year. Official statistics from the central bank have shown unemployment has dropped to 6% and poverty in 2012 was 45%, and trending downward. It topped 60% when Morales took office. Per capita income, while still the lowest in South America, increased substantially between 2006 and 2012, compared to the previous seven-year period.

Exports are booming, coming in at $11.8 billion in 2012, with a trade surplus of $3 billion. Export earnings are expected to be strong again in 2013. International reserves passed the $14 billion mark in January – they are now much higher than the country's debt – and there has been a major shift in the financial system, which has rapidly de-dollarized. Dollarization of the system peaked a decade ago, in April 2003, when 94.5% of deposits were in US currency. It has not been reversed completely, but it is close, with 80% of loans and 72% of deposits now in bolivianos. This has meant a massive monetary emission, jumping from 6 billion bolivianos in circulation in 2005 to 30 billion in 2012, or from $868 million to $4.34 billion at the current exchange rate.

In addition to this, in the final quarter of last year the government issued the country's first international bonds in nearly a century. The $500 million placement was oversubscribed nearly eight times, in a market where emerging and frontier countries' debt is being snapped up by investors hungry for higher yields as western countries' bonds offer near-zero returns.

Central bank governor Marcelo Zabalaga tells Emerging Markets that the macroeconomic stability is not only accepted as a given today, but it is changing the way Bolivia's 10.4 million people see the country.

LONGER-TERM PLANS
"It is possible today to talk about long-term plans, which is something that did not happen before in Bolivia. It was difficult to think about a plan lasting five years; now we are looking 12 years into the future. This is due to sensible policies since 2006 that are based on Bolivia's reality," he says.

Among the policies, some of which have been highly controversial, are nationalization of strategic industries, controls on specific exports and imports and a close micro-management of the economy, including weekly meetings between the central bank and Ministry of Economy and Public Finances (MEF) to analyse and respond to current events.

Government changes to the mining and energy businesses, including new contracts and royalty schemes for oil/gas companies, have vastly increased the state revenues. Revenue from oil/gas has increased ten-fold since 2006, going from around $300 million annually to $300 million monthly. This is due to a combination of factors, including more exports and better prices for natural gas. Of the $11.8 billion in exports last year, natural gas accounted for $5.4 billion.

The nationalizations, however, have raised eyebrows among foreign investors and Bolivia's private sector alike. The National Chamber of Commerce reported in February that nationalizations were keeping foreign investment away. The Chamber said foreign investment in 2012 was close to $850 million, while public investment was $1.6 billion.

The country is rated below investment grade by Fitch, and representatives of the rating agency say more stability is needed before Bolivia can be upgraded.

"The concerns are very much on the political risk under President Morales," Shelly Shetty, head of Latin America sovereigns at Fitch Ratings, told a recent seminar on the outlook for South American economies in London. "But Bolivia has shown over the years that it is not going the way of Venezuela."

Enrique Gómez, a former head of the natio-nal electric company, ENDE, says nationalization may seem effective today, but there appears to be no plan for the construction of power plants or exploration to increase oil/gas reserves. "The state is receiving more revenue, but it is unclear if it has any plans to ensure this revenue. The government is talking about the same hydroelectric plants planned back in the 1990s. If they are going to nationalize, they need to have a more coherent strategy," he says.

INFLATION WORRIES
Roberto Laserna, head of a Bolivian economic think tank, CERES, agrees that the country is doing well, but says that growth has come despite, rather than due to, government policies. "Bolivia has never before experienced such expansive and extensive growth like the one we are seeing right now ... but this has happened because of an increase in price for the raw materials we export. There is no direct relationship between the government's actions and economic growth," he says.

The government is constantly telling people about revenue and investing in projects and programmes, but "they never talk about results from this investment, because there is so little to show," Laserna adds.

Zabalaga not only refutes this, but says the government has become much more proactive in making sure liquidity in the economy works for Bolivians. The bank has made more than $1 billion in loans to state companies, primarily the state-run oil company, YPFB, and ENDE. The Morales administration also created the Fund for Investment for the Productive Revolution, which earmarks around $1.2 billion to be loaned to productive companies that have a majority state participation.

As head of the central bank, Zabalaga's principal concern is inflation. "We have stability today, which is something all central bankers want, but I still wake up every morning thinking about inflation," he says.

The administration recognizes that inflation will be slightly higher than in other countries in the region, because Bolivia still needs to address historic demands – higher salaries, increased social spending or better infrastructure – needed to improve the standard of living, according to Zabalaga.

"We have internal issues to address. The minimum wage in Bolivia is much lower than the minimum wage in the countries around us, and we need to increase this little by little. There are demands for improved quality of life that create a permanent tension and make inflation a little higher," he says.