I was really surprised to see Bolivia ranked higher than many other countries in Latam in the 2022 Fraser Institute's "Policy Perception Index" since Bolivia was almost simultaneously downgraded by Fitch and Moody's. But I wouldn't be surprised if the country experienced a major political/financial/currency/banking crisis in the next three years, similar to Argentina in the 2000s.
But how did this come to be?
Bolivia is no stranger to crisis, which is why it was the testing ground for the Chicago Boys' shock therapy in the mid-1980s. The reality is that under the socialist regime (Movement to Socialism "MAS"), Bolivia hasn't experienced a dramatic sudden collapse. During the last 18 years, it has been a slow economic fallout in the making due to the socialist redistributive government policies since no government can subsidize its way to prosperity.
Before Evo Morales, past governments launched an aggressive oil and gas exploration campaign after initial gas discoveries in the late 80s/early 90s. In 2006, Bolivia became a net Natgas exporter second in LATAM only after Venezuela (with pipelines to Brazil and Natgas prices fixed to international oil prices). After becoming president, Morales first nationalized and then taxed the golden goose to death, and with no new exploration for almost a decade, the Natgas production collapsed. Similarly, Morales adopted a new mining code and increased revenues from royalties. In 2008, the Bolivian government nationalized lithium, but has since failed to advance a single project.
The government used the money from the Natgas and mining bonanza to subsidize education, oil/diesel, and the poor and elderly. There is no question that Morales' policies brought Bolivia social progress with more prosperity, specifically for marginalized and indigenous people.
During his presidency, Morales consolidated power by weakening institutions. Over the last 20 years, the MAS has been linked to major corruption cases. In 2020 came COVID-19, which crippled most Latam economies; thereafter, Bolivian exports were severely impacted as the country got a splash of the Peruvian political crisis. Combined with the US dollar crisis (the Boliviano is pegged to the US dollar), this year caused a run on the banks that the government tried to manage for the last few months.
Today, gasoline and diesel are heavily subsidized (50%) to the point where there will be riots if this subsidy is removed. Therefore, the government runs massive deficits as a net energy importer after the Natgas imports contracted.
Similar to Argentina in 2000 or Bolivia in 1985 (Devaluation/hyperinflation): The question is not whether or not there will be a severe crisis. Instead, the question is when. The central bank stopped reporting its dollar reserves, and banks are experiencing long lines to withdraw dollars. Many regular citizens are now also buying Peruvian Sols to protect their savings.
The government has clearly become more authoritarian; there is more political persecution with more political prisoners, including the former president Jeanine Añez who has now been in jail for two years and the governor of Santa Cruz L.F. Camacho, leaders of the opposition.
What is the MAS doing to control this crisis?
1. Getting US dollars from whatever source is available to the government. Due to the scarcity of the U.S. dollar and the recent run to the banks, the government has tried to find solutions that can alleviate their crisis. The Bolivian government nationalized the pension funds (AFNs) and forced them to buy sovereign bonds that had no foreign institutional buyers. Arce also passed the "Gold Law," which allows the government to sell the country's gold reserves (Bolivia's last financial reserves). Also, the central bank has incremented the tax on remittances. Likely also Arce is looking to get some "Special loans" from any available sources, including the Chinese, the CAF, or the IMF.
2. Getting access to sanctioned oil from friendly evil countries. Internationally, Bolivia has also been actively lobbying Venezuela for an oil deal similar to what they signed with Nicaragua. Both countries recently signed a cooperation agreement that should make that possible.
3. Creating a path for success in the next election. Arce and Morales' political strategy has been finding a path for the MAS to win the next election, but Arce is not that charismatic and doesn't have the popular support to win, and unfortunately for the MAS, Morales cannot be re-elected without constitutional reform. The current political strategy then is presenting a fracture in the MAS, and positioning it as the opposition party which is just false flag tactic.
All these internal reforms will likely give the MAS/Arce 3-5 years of subsidies or one more election.
What about Natural resources:
Natural resources are the only sector likely to sustain in power a totalitarian government in Bolivia. Bolivia's natural resource exports accounted for over 70% in the last six years, with Natgas, Zinc Gold, and zinc concentrates, Silver, lead ore. The Natgas exports have been in decline since 2015 and are expected to continue to decline in the next 10 years.
Bolivia has some interesting miners, from explorers like New Pacific Metals, Eloro Resources to producers like Andean Precious Metals, and Santa Cruz Silver (former Glencore assets). Unfortunately, the in-country royalties are too high, discouraging significant investments in new projects. However, under the right political circumstances, new large projects may get a special government agreement to expedite "strategic projects" that will allow foreign firms to limit their risk while investing in the country.
Bolivia can also become - on relatively short notice - a lithium superpower; hence both China and the US are also extending support trying to get their hands on one of the largest reserves of lithium in the world.
But what if there is a more totalitarian government?
If the transition to autocracy is smooth (without a violent popular uprising), that may the best-case scenario for foreign investors; if that transition is abrupt and violent, it may be devastating for both new and existing projects that may become targets of nationalization/expropriation.
Unfortunately, Bolivia's Miracle is over!
The economic model in Bolivia is broken, and now everybody knows that... President Arce is just delaying the crisis. The likelihood of a currency devaluation, country default, major banking crisis, or the government doing something stupid is very real. With the recent downgrades from credit agencies, the cost of capital for in-country projects has increased.
This is where I wonder: How useful is the Fraser Institute Survey?
Tags: #boardroom $ELO, $NUAG, $SCZ, $APM #Bolivia #CountryRisk #JurisdictionRisk
Disclaimer: "A week is a long time in politics" therefore my views will evolve as new facts and events are known. This article represent my opinion, and it is not intended as a investment advice, nor is it a recommendation to buy or sell any financial instrument in any of the company/companies hereto mentioned.
