Bolivia: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
Growth limited by insufficient investment
The recovery in 2010 has been relatively sluggish. Private consumption, buoyed by the pursuit of expansionary policy, has been the main growth driver. It has been coupled with a rebound in private investment, but public investment has been largely deferred. Strong growth in Brazil and Argentina has spurred hydrocarbon exports to these countries. Growth in exports was, however, partly offset by increased imports. Harvests have been hit by bad weather, whilst social movements and strikes have affected tourism and activity in the mining sector.
Growth may sag slightly in 2011. The hydrocarbon sector will continue to suffer from insufficient production and transport capacity. Agriculture could make a positive contribution to growth provided weather conditions improve. Activity will continue to be driven by public spending and domestic consumption. But administrative inefficiency and recurrent protest movements will continue to delay implementation of public investment projects. Further strikes are likely, affecting mining and manufacturing output.
Bolivia boasts a wealth of natural resources but suffers from an investment deficit. Private investors have been deterred by nationalizations and uncertainties surrounding legislation. However, the 2010/2015 national development plan provides for major projects in the hydrocarbon, mining and electricity sectors, which offer prospects for growth.
A financial position bolstered by steady raw materials prices
Public finances and external accounts alike are largely dependent on raw material prices. The rise in prices compared to 2009 has thus enabled the pursuit of expansionary policy. The fiscal budget, including grants, is expected to be balanced in 2011, as in 2010, and there may even be a small surplus as a result of the delay in the investment projects. Cancellation of public foreign debt from which the country has benefited brought the debt service burden down to manageable levels.
Despite an upturn in imports, external accounts are expected to show a relatively large current account surplus in 2011, comparable to the one in 2010. The debt cancellation in conjunction with economic growth paved the way for a significant reduction in external debt ratios. Although the ratio of debt to GDP is still relatively high, the debt service is now at manageable levels. There is little risk of a liquidity crisis. Bolivia has large foreign currency reserves that enable it to maintain the system of parity with the dollar.
Political instability and governance weaknesses are affecting the business environment
President Morales, who came to power in 2006, has now put his program (new constitution and nationalizations) in place. However, tensions remain, especially among the disgruntled American Indian populations. The separatist movements that caused a serious crisis in 2008 seem to be pacified, but new tensions could surface. Given the degree of poverty in the country, the social climate remains unstable. Moreover, World Bank governance indicators put the country at a high risk level.
Strengths
- Debt relief granted under the HIPC and MDRI programs
- Membership in the Andean Community and association with Mercosur
- Extensive natural resources (lithium, natural gas, zinc, silver, tin, etc)
Weaknesses
- Very poor social indicators with 60% of the population living below the poverty line
- Social and political instability, difficult business environment
- Security problems and drug trafficking
- Exports resting on a limited number of commodities (gas, oil, silver, zinc, soybeans), vulnerable to price changes
- Separatist tendencies in the Eastern plains (Santa Cruz, Tarija, Beni, Pando)