Activity growth to mildly decelerate

In 2023, the economy should expand at a slightly slower pace. Activity is expected to be lifted by household consumption amid an improving job market and still moderate inflation. Indeed, despite the sharp rise in international commodity prices, consumer price pressures in Bolivia have remained contained due to the boliviano’s peg to the USD, subsidies, and price controls on food and fuel. Concomitantly, export growth should lose steam owing to the cooling-down of activity in its main trade partners (namely Brazil and Argentina) and to some softening of agriculture and mineral commodity prices (representing 20% and 52% of 2021 foreign sales, respectively). Conversely, a positive contribution to exports could come from the fact that the government has doubled efforts to boost natural gas exports through Decree No. 4794 of September 2022, which caps the use of gas for onsite power operations by industrial recipients. This aims to avoid a sharp deterioration of the energy-foreign trade balance, as domestic hydrocarbon production has slid in recent years, switching Bolivia to a net energy importer in 2022. In addition, public investment growth will be constrained by the limited fiscal leeway, while stricter global borrowing conditions will curb private investments. It is essential to mention that Bolivia holds the world´s largest lithium reserve. However, it remains underexplored and untapped. Amid the fierce global race to guarantee the metal’s supply, international players in the sector have shown interest in exploring Bolivian resources. Corporations from China, Russia, and the U.S. were in October 2022 on a shortlist of selected companies by authorities for a possible partnership with the state-owned company of lithium Yacimientos de Litio Bolivianos (the type of collaboration has not been determined yet).

Slow fiscal consolidation and broadly stable foreign deficit shortfall

The fiscal balance will remain in deep deficit, although it is expected to improve in 2023. Tax revenues should increase amid the continuing economic growth and the assumption of enduring historically high commodity prices. Conversely, ongoing substantial subsidies (including an estimated 3.7% of GDP in fuel subsidies) and rising borrowing costs will limit more vital fiscal consolidation. The deficit financing still largely relies on domestic sources, notably the central bank, which contributes one-third. In the context of sliding international reserves and a more expensive global bond market, Bolivia is expected to rely increasingly on multilateral donors, such as FONPLATA, IBRD and IADB, and the World Bank. Debt will rise further, albeit with a low external share (31% of GDP in 2021), mainly on concessional terms.

The current account deficit should remain broadly stable and low in 2023. The trade surplus is expected to switch back to an obligation as domestic demand decelerates relatively slower than the main export markets. In addition, expatriates’ remittances (3.6% of GDP in 2021) could also fall as the job market deteriorates in the primary origin of resources (Spain, Chile, U.S.). By contrast, the services deficit should narrow as freight costs curb and tourism flows continue to recover slightly (7% of GDP before COVID-19). In addition, the primary income deficit should also improve somewhat, underpinned by lower profit repatriation by foreign companies (amid relatively lower domestic activity growth and commodity prices). On the financing side, foreign direct investment will continue to contribute modestly to deficit financing due to the poor business environment. Moreover, in recent years, the country has registered meaningful values recorded as errors and omissions (averaging 2.7% of GDP between 2019 and 2021). Finally, declining international reserves (import coverage of 4.8 months as of September 2022) pose a relevant risk, notably amid limited exchange rate flexibility, tightening global credit conditions, and rising risk aversion.

Tired political environment

President Luis Arce, from the left-wing Movimiento al Socialismo party (MAS), took office in November 2020 and holds a majority in both houses of Congress. Nevertheless, Arce has faced recurrent protests on social matters. In addition, following the 10-year prison sentence imposed on former President Jeanine Añez (2019-2020) in June 2022 for an alleged coup attempt against former president Evo Morales (2006-2019), opposition groups protested, demanding her release. The conviction also drew criticism from several countries. In addition, the decision to postpone a national census until 2024 also aggravated tensions with the opposition (since the budget allocation and the legislative seats depend on the demographic density). As a result, in October 2022, protests took place in the conservative-led department of Santa Cruz, a central agriculture export hub that has experienced strong economic growth in recent years. Lastly, the MAS has split into factions since May 2022: one aligned with Evo Morales, another with Arce, and a third linked to current Vice-President David Choquehuanca. Overall, the continued fragile political environment is hampering governability and the passing of reforms. As for diplomatic ties with Chile, which were broken in 1978 due to a dispute over access to the sea, the two governments agreed in July 2022 to resume talks to normalize their relationship. Regarding Brazil, in mid-2022, the Brazilian state-owned oil company Petrobras signed a rider to the natural gas purchase contract with the Bolivian state-owned YPFB, extending the deadlines for Petrobras to withdraw contracted volumes (making room for Bolivia to meet the Argentine demand at a more favorable price amid limited supply capacity).