MACRO REPORT: Facing record deficit, Bolivia eyes bioceanic rail link

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Tuesday, November 29, 2016

Bolivia's President Evo Morales signed an agreement in early November with his Peruvian counterpart Pedro Pablo Kuczynski to push for the planned Brazil-Peru bioceanic railway to run through Bolivia.

The project will bridge the region's Atlantic and Pacific ports, and would provide a crucial export corridor for landlocked Bolivia, which is facing a record deficit as prices of natural gas (its main export) plummet.

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Later in the month, the Morales administration declared a state of emergency to cope with a severe drought amid the highest temperatures seen in a century. A government decree will fast-track funding to invest in potable water projects.

ECONOMY

Bolivia's economy grew 3.2% in the second quarter of 2016, a six-year low, and well short of the 4.9% expansion in Q1, as prices for the country's key hydrocarbon exports remained muted.

Ratings agency Moody's changed in June its outlook on the government's senior unsecured bonds to negative. The change took into consideration Bolivia's deepening fiscal and trade account deficits, which it said was reflected in "persistent fiscal and balance-of-payment pressures," as well as the lack of a fiscal adjustment to compensate for lower hydrocarbon revenues. 

In October, the IMF said that the Bolivian economy's growth will slow to 3.7% this year and 3.9% in 2017, following 4.8% growth last year.

INFLATION

Bolivia recorded inflation of 0.37% for October, bringing the 12-month rate to 3.50%. Prices of food drove the increase, statistics office INE said.

For full-year 2016, the country expects inflation of 5.3%.

FX RATE

Bolivia has a fixed foreign exchange rate that has kept the boliviano trading at a sell rate of around 6.96 per US dollar and a buy rate of 6.86 for the last five years.

There have been calls from economists and politicians this year to implement a flexible FX rate to counteract the economic slowdown in the South American region.  

INTEREST RATE

In line with the central bank's expansive monetary policy, Bolivia's key rate has maintained a level close to 0% since the end of 2015. It is currently in the range of 0.001% to 0.5%.

The rate dropped from above 2% in 2014 to less than 1% by mid-2015.

UNEMPLOYMENT

The latest available data released by Bolivia's labor ministry put the jobless rate at 3.2% for full-year 2015, from 3.5% the year before. The IMF estimated it at 4%, and projects that unemployment rate to hold through 2017.

BALANCE OF TRADE

In the first quarter of 2016, Bolivia saw a trade deficit of US$458mn, compared to 1Q15's deficit of US$193mn.

Exports of natural gas, which accounts for 75% of the country's exports, declined to US$594mn in 1Q16, from US$1.059bn in 1Q15, as prices have tumbled.

FISCAL DEFICIT/SURPLUS

In its June report, Moody's projected the country's fiscal deficit would remain above 6% of GDP in 2016-17, following a 2015 deficit of 6.6% of GDP.

Morales has refused to cut government spending despite plummeting natural gas prices. The IMF also expects the budget deficit to reach a 13-year high by year-end.

FINANCING

The World Bank has said it will provide around US$2bn in loans to Bolivia through 2020. The multilateral's representative Nicola Pontara said the financing will support the country's 2016-20 economic and social development plan. Part of those loans are expected to be destined to support different productive sectors in the Bolivian economy, as Pontara said economic diversification is key for Bolivia.

POLITICAL SCENARIO

While Morales' approval rating climbed as high as 75% during his three terms in power, he lost the chance to run for a fourth term in a February constitutional referendum by 51% to 49%.

According to polling company Ipsos, Morales' approval rating dropped to 46% in October, down from 49% in April. His disapproval rating rose to 44% from 40% in the previous survey. The government as a whole saw its approval rating drop to 42% from the previously polled 45%.

Bolivia held a referendum earlier this month to decentralize its government and give more autonomy to its regions. Ten territorial entities supported the statutes of the regional charters in the referendum, while another five opposed them.

"What follows now is that the regions that approved the document put their rules and regulations in force gradually," minister of autonomy Hugo Siles said.