Publish in Perspectives - Wednesday, September 2, 2020
PalacioQuemado in La Paz, the residence of Bolivia's president. (Photo: RodrigoAcha)
Bolivian bonds provide good value, but will probably do better once the elections are over.
BY WALTER T. MOLANO
Bolivia sits in the center of South America. It is a country full of historical, cultural and geographical complexities. Once an outpost of the Inca Empire, it gained importance when the silver mines of Potosi were discovered by Spanish explorers in 1545. Bolivia has long had a treasure trove of natural resources, which have often been more of a curse than a blessing. They have been the cause of several vicious wars with neighboring countries, and to the loss of half of its territory, or an area equivalent to two times the size of Spain. These complexities help explain the challenges Bolivia has faced during its development.
Fortunately, the discovery of natural gas in the eastern section of the country, along with more focus on soybean production, allowed the economy to diversify and grow. The election of Evo Morales in 2005 also coincided with the Chinese-fueled commodity boom. Morales is a polemic figure, with close ties to the left-wing Bolivarian movement. However, he was a good economic steward, who helped keep the country’s credit on an even keel. Unfortunately, political volatility, pre-election spending and the decline of energy prices due to COVID-19 finally forced the credit rating agencies to downgrade the country in March. Still, we believe that Bolivia provides good value.
For the last six years, the country has averaged a GDP growth rate of 4.2% y/y. However, the IMF expects the economy to shrink by about 2.9% y/y this year. This is mainly due to the disruptive effects of COVID-19 and the decline in energy prices. The current account deficit widened to 5.5% of GDP in 2019 and international reserves have been falling. Moreover, the loss of royalties led to a sharp deterioration of the fiscal accounts, to an estimated shortfall of 7.2% of GDP this year. In regards to monetary policy, inflation is very low, with an annual rate of 1.35%. As a result, the central bank has allowed interest rates to also remain low. Unfortunately, Central Bank President Pablo Ramos Sánchez was implicated in the illicit movement of funds and is currently under investigation. Nevertheless, the exchange rate, the Boliviano, which is pegged to the dollar at a rate of 6.9 to 1, remains stable. Bolivia has three international bond issues, a ’22, ’23 and ’28, with a weighted average of 4.6 years. The coupon is roughly 5%. All of the bonds are trading at a discount, and provide good value. While Bolivian bonds have sold off, they are in the middle of the pack of the high yield sovereign space. Therefore, they have done relatively well.
They will probably do better once the elections are over.
Investors’ concerns were heightened by the political drama that began at the end of last year when President Evo Morales attempted to run for a fourth term in office. Although the initiative was rejected by a national referendum, he got a favorable ruling from the Supreme Court and he still put himself on the ticket. On election day, Morales claimed victory, but the Organization for American States (OAS) declared that the elections had been fraudulent. Senior military officials strongly suggested Morales resign, and he fled for Argentina. Although he was supposed to be replaced by Vice-President Alvaro Garcia, who is from the same party; he also resigned. The next person in the line of succession, Senate President Adriana Salvatierra of the same party, then also resigned. This left Jeanine Áñez, the Second Senate President and a member of the right wing MDS opposition party in charge. Leftist commentators screamed that Bolivia had suffered a right wing coup, but Morales’ MAS party still controls the legislature. New elections are now scheduled for October 18, 2020. The elections have been delayed several times, partially due to the fact that Interim-President Jeanine Áñez came down with COVID, along with several members of her cabinet. The most recent polls show Luis Arce Catacora, of the MAS party, in the lead, with about 31% of the vote. Former President Carlos Mesa is in second place, with 17% of the vote, and interim President Jeanine Áñez is in third place, with 16.5% of the vote. The rest of the field contains a pack of lesser known candidates. This means that a second round of voting will most likely take place, since no candidate has the 50% of the vote or the 40% of the vote plus 10% lead over the next candidate needed to win. A runoff election is scheduled for November 29th. Although the center-right party is the market’s favorite candidate, the MAS party has had a pretty good track record on managing the economy. Overall, Bolivia is a lowly levered economy, with a clean track record regardless of who is in charge. Therefore, it could be a good time to pick up bargains before election day.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.