Dagong Downgrades the Sovereign Credit Rating Outlook of Bolivia to Negative
Dagong Global Credit Rating Co., Ltd.
March 13, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to downgrade the outlook for the sovereign credit ratings of the Plurinational State of Bolivia (“Bolivia”) from stable to negative, while maintaining both the country’s local and foreign currency sovereign credit ratings at BBB-. The expectation of interest hikes by the Federal Reserve has caused the government to tighten its short-term credit policy. Under the negative impact of volatility in commodity prices, Bolivia’s economic growth has slowed down, the fiscal balance and current account balance have come under pressure, and the government’s debt level has been rising. In the short term, Bolivia’s government solvency is facing a downturn risk.
The reasons for revising Bolivia’s sovereign credit outlook downwards are detailed below:
1. The political situation remains stable amid increasing uncertainty. While President Evo Morales seeks a fourth term, political conflicts have been aggravated, resulting in increasing uncertainty in the domestic political situation. The reduction in popular support for the Morales administration will negatively influence the government’s policy implementation in the short term. The expectation of interest rate hikes by the Federal Reserve has caused the government to tighten its short-term credit policy. Although the credit quota and interest rate limit policies will support the growth of core economic sectors, they will harm the healthy development of the credit market in the long run.
2. Obvious economic vulnerability will limit the country’s long-term wealth creation capability. Affected by the prolonged slump in commodity prices as well as natural disasters, Bolivia’s economic growth is forecast to slow to 3.6% by the end of 2016. In the short term, the recovery in natural gas, minerals and other commodity prices will be limited, and production will only increase slightly, constrained by the low-level infrastructure. As a result, exports will continue to be under pressure and public-sector investment provides the main momentum for economic growth. It is estimated that Bolivia’s economic growth in 2017 and 2018 will hover around 4.2%. In the medium and long terms, poor infrastructure conditions and weak technological capacity will increasingly constrain Bolivia’s economic growth potential. The high reliance on public sector investment will result in a high reliance on the energy and mineral sectors and render the economy vulnerable.
3. The fiscal deficit will remain high in the short term, lowering the stability of repayment sources. Due to a reduction in the profits of state-owned enterprises (SOEs) and the resultant lower tax revenue, Bolivia’s fiscal deficit deteriorated quickly throughout 2016, and is estimated to reach 8.1% by the end of that year. Despite the recovery in commodity prices being slow, it will benefit the profitability of SOEs and high public-sector investment and social welfare expenditure is likely to maintain Bolivia’s general government fiscal deficit at a maximum level of 7.9% in 2017 and 6.2% in 2018. Financing needs will reach 8.5% and 8.0% during the same periods. Under a strengthening US dollar, higher domestic and overseas interest rates will increase the government’s financing costs in the short term, thus lowering the stability of repayment sources.
4. There has been an obvious increase in government debt and a decrease in foreign exchange reserves, which has attenuated the stability of government solvency. The widening fiscal deficit will elevate the level of government debt. General government debt is estimated to reach 45.2% and 47.4% in 2017 and 2018, respectively. Owing to a deterioration in the balance of payments, Bolivia’s international reserves fell to 32.0% of GDP in October 2016. The government’s external debt burden has increased slightly under recent fiscal pressure and this will weigh heavily on the government’s ability to pay external debt.
Dagong has decided to maintain both the local and foreign currency sovereign credit ratings of Bolivia due for the following reasons:
In the short term, the recovery in commodity prices will relieve the fiscal pressure on the Bolivian government. Increased expenditure and investment in infrastructure and the gradual lifting of limitations on core resource sectors are expected to remove the constraints of poor infrastructure conditions and insufficient investment on economic growth potential. At the same time, Bolivia’s gross external debt remains at a low level and external support and financing channels remain smooth. This should secure government solvency.
Therefore, Dagong has decided to maintain both the local and foreign currency sovereign credit ratings of Bolivia. Meanwhile, we will continue to monitor all downgrading drivers and take prompt action as necessary.