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Rating Action:

Moody's downgrades Bolivia's ratings to B1, changes outlook to negative

10 Mar 2020

New York, March 10, 2020 -- -- Moody's Investors Service ("Moody's") has today downgraded the Government of Bolivia's local and foreign currency issuer and senior unsecured debt ratings to B1 from Ba3, and changed the outlook to negative, concluding the review for downgrade that was initiated on 5 December 2019.

The decision to downgrade Bolivia's ratings reflects the material erosion of the country's fiscal and foreign exchange reserve buffers in recent years. Ongoing challenges in the country's hydrocarbon sector, due to both domestic and external factors, have also reduced prospects for economic growth, government revenue generation and foreign exchange earnings. Meanwhile, heightened political risk has increased policy uncertainty and negatively impacted growth, which has exacerbated the trend decline in fiscal and foreign exchange reserve buffers.

The negative outlook signals that, following the presidential election on 3 May, the new government will likely face material sociopolitical challenges in implementing fiscal policy adjustments and structural reforms that would significantly reduce the country's fiscal and external imbalances and preserve fiscal and foreign exchange reserve buffers at current levels. If unchecked, these negative pressures will likely put further downward pressure on Bolivia's sovereign credit profile.

Concurrently, Moody's lowered Bolivia's long-term foreign currency (FC) bond ceiling to Ba3 from Ba2, its long-term FC deposit ceiling to B2 from B1, and its local currency bond and deposit ceilings to Ba2 from Ba1. The short-term foreign-currency bond ceiling and the short-term foreign-currency bank deposit ceiling remain unchanged at Not Prime (NP).

RATINGS RATIONALE

RATIONALE FOR THE RATING DOWNGRADE TO B1

EROSION OF FISCAL AND FOREIGN EXCHANGE RESERVE BUFFERS

Bolivia's fiscal and foreign exchange reserve buffers have historically provided a key level of support to the country's Ba3 sovereign credit profile. However, these buffers have significantly diminished in recent years and risks of continued erosion are high.

The government's fiscal savings buffer declined to 13.2% of GDP in 2018, down from a high of about 27% of GDP in 2013, driven by sustained large fiscal deficits. During this same period, the government's debt burden increased to 55% of GDP at the nonfinancial public sector (NFPS) level, from 38%. In 2018, the general government's fiscal deficit widened to 6.0% of GDP from 5.0% in 2017. Cuts to public investment, following several years of high capital spending on large scale natural gas projects, helped to drive down total expenditures as a share of the economy. However, relatively weak tax receipts and declines in transfers from the SOE sector weighed on revenue intake.

At the same time, higher imports for the government's large infrastructure projects and lower global energy prices have led to sustained current account deficits and a material decline in the foreign exchange reserve buffer. Moody's expects Bolivia's current account deficit to remain large, but gradually narrow to about 4.0% of GDP in 2021 from 4.9% in 2018, driven by the tapering off of capital imports for the government's investment program. However, the outlook for exports remains uncertain due to negative pressures in the natural gas sector, driven by lower global energy prices and decreased volume demand from Government of Brazil (Ba2 stable) and Government of Argentina (Caa2 RUR), Bolivia's main export destinations. Moody's expects total exports to remain well below the levels experienced during the peak of the oil price boom in 2013.

As a result of these large twin deficits, Bolivia's foreign exchange reserve buffer has fallen significantly to $4.1 billion in December 2019 (10% of GDP), down from a high of $13.2 billion (40% of GDP) at the end of 2014. Although reserves still provide around 5.5 months of import cover, the ratio has declined and pressure on the country's fixed-exchange-rate regime could rise if reserve levels continue to fall. Nonetheless, Bolivia's external vulnerability indicator (EVI), a measure of foreign exchange reserve coverage of the current year's external debt obligations, has been lower than the Ba median over the past decade, reflecting the concessional nature of the government's external debt. While Moody's expects the EVI to rise as foreign exchange reserves fall, it will likely remain below the Ba-rated peer median of 53% through 2021.

STRUCTURALLY LOWER MEDIUM-TERM GROWTH DRIVEN BY WEAKER HYDROCARBON SECTOR AND POLICY UNCERTAINTY

Looking ahead, the Bolivian economy will enter into a new, more challenging period of moderating growth after nearly 15 years of strong government-led investment and poverty reduction. As a result, Moody's expects Bolivia's average real GDP growth rate to decline to around 3.0%, compared to an average of 4.6% in 2014-18 and 4.9% in 2009-13.

Bolivia's large public investment projects had supported robust growth rates in the past that were above the Ba-rated peer median. Higher global energy prices in the earlier part of the decade, combined with greater revenue intake for the government's state-owned energy company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), provided the government with fiscal space to significantly increase investment spending, which led to a peak of total economywide investment spending of 21.2% of GDP in 2017.

Moody's expects Bolivia's growth potential to moderate over the coming years as the country's hydrocarbons sector, which accounted for approximately 34% of exports (8% of GDP) in 2018, adjusts to relatively lower global energy prices, falling natural gas reserves and structurally lower demand for natural gas exports from Brazil and Argentina, the country's most important trading partners.

The October 2019 presidential election and subsequent resignation of President Evo Morales in November 2019 has further increased headwinds to Bolivia's medium-term growth prospects, due to heightened political risk and policy uncertainty. Material disruption to everyday economic activity following the election, from protests and social unrest, weighed on GDP growth in the fourth quarter, adding to significant weakness in the natural gas sector throughout the year. Moody's expects these disruptions to have contributed to a decline in annual real GDP growth to about 2.7% in 2019 from 4.2% in 2018, marking the lowest rate of growth since 2003 (the last time Bolivia experienced significant political turmoil).

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook is based on Moody's expectation that, following the 3 May presidential election, the new government will face significant sociopolitical challenges in implementing the structural economic and fiscal policy adjustments that would be required to materially reduce the country's fiscal and external imbalances, and preserve the fiscal and foreign exchange reserve buffers that provide key support to Bolivia's sovereign credit profile.

Moody's expects future fiscal deficits to remain around 6.0%. While the winding down of the government's capital expenditure program will contribute to gradual fiscal deficit and import reduction, the negative impact of heightened political risk and social unrest on economic activity, along with structurally weaker revenue intake and exports from the natural gas sector, will largely offset the government's expenditure reduction. In the absence of structural reforms to sustainably reduce the government's large fiscal and current account deficits, Bolivia's fiscal and foreign exchange reserve buffers will continue to decline, exerting negative pressure on the sovereign credit profile.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Bolivia's rating. Increased deforestation and large forest fires in the Bolivian Amazon rainforest have contributed to rising climate change and environmental risks. Natural resources development also pose environmental risks.

Social considerations are also material to Bolivia's credit profile, driven by a historically high incidence of poverty and inequality. Sustained high growth rates and government spending on social welfare have helped to reduce poverty and improve incomes. For instance, the share of the population living in extreme poverty declined to 15% in 2018 from 38% in 2006, and the Gini coefficient of inequality fell from about 0.60 in 2000 to around 0.47 in 2018. Meanwhile, GDP per capita has more than tripled from around $1,000 in 2005 to around $3,500 in 2018 (about $7,800 in purchasing power parity, PPP, terms). Nonetheless, overall poverty remains high, with a general poverty rate of around 38% of the population in 2018, and incomes remain very low compared to the Ba-rated peer median of $11,600 per capita in PPP terms, indicating more limited capacity of households to absorb income shocks.

Governance poses further material risks for Bolivia. This consideration is reflected in Moody's assessment of institutions and governance strength, which reflects relatively weak institutional arrangements and a high incidence of corruption and weak rule of law, balanced by somewhat stronger economic and monetary policy effectiveness.

WHAT COULD LEAD TO A DOWNGRADE

Moody's would downgrade Bolivia's rating if government policies are unable to contain the continued erosion of fiscal and foreign exchange reserve buffers that provide key support to the sovereign credit profile.

WHAT COULD LEAD TO A CHANGE IN THE OUTLOOK TO STABLE

Moody's would change the outlook to stable if the government implements policy adjustments that materially increase the likelihood that fiscal and foreign exchange reserve buffers will be preserved at current levels.

GDP per capita (PPP basis, US$): 7,842 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.5% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -6% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.9% (2018 Actual) (also known as External Balance)

External debt/GDP: 33% (2018 Estimate)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 05 March 2020, a rating committee was called to discuss the rating of Bolivia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially changed. The issuer's susceptibility to event risks has materially increased.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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