Fitch Upgrades Bolivia's Foreign Currency IDR to 'BB-'; Outlook Stable
October 3, 2012 Fitch Ratings
--Long-term foreign currency IDR upgraded to 'BB-' from 'B+';
--Short-term foreign currency IDR affirmed at 'B';
--Long-term local currency IDR upgraded to 'BB-' from 'B+';
--Country ceiling upgraded to 'BB-' from 'B+'.
The Rating Outlook is Stable.
Bolivia's upgrade reflects the country's strengthened external buffers, improved sovereign debt profile and greater diversification of financing sources, which provide ample flexibility to cope with commodity cycles and adverse domestic and external shocks. In addition, increasing public investment levels could support growth momentum over the forecast period.
The country's relatively high commodity dependence in terms of fiscal and external accounts as well as weaker GDP per capita and human development indicators represent weaknesses for the sovereign's credit profile. In addition, regulatory uncertainty, nationalization risks, social conflicts and institutional capacity constraints continue weighing on private investment and government policy effectiveness.
International reserves covered 50% of GDP, 14 months of current external payments and 4x foreign currency deposits in the banking sector in 2011, mitigating risks related to commodity dependence, moderate albeit declining financial dollarization and limited exchange rate flexibility. Bolivia could record the largest international liquidity ratio and the strongest net sovereign external creditor position among 'BB'-rated sovereigns through 2014.
The initiative to use USD1.2 billion, 9% of net international reserves, to finance industrialization and productive projects by public enterprises is not likely to have a material impact on external solvency indicators due to its relatively limited size in relation to net international reserves presently totaling USD13.4bn. Further transfers of international reserves are not presently programed, but cannot be discounted.
Economic activity accelerated 5.2% in 2011 from 4.1% in 2010, raising the country's five-year average (4.7%) growth above the 'BB' median (3.7%). Rising hydrocarbons production, still favorable commodity prices and increased total public investment could further enhance growth performance.
General government debt fell to 32% in 2011 and could drop below 30% by 2014 driven by primary fiscal surpluses and higher economic growth. The authorities prudently used part of the commodity windfall to redeem high-yielding obligations and improved the currency and maturity composition of domestic debt through liability management operations. Bolivia's developing local market, broad access to multilateral support and expected issuance of global bonds increase the sovereign's financing flexibility.
Bolivia's ratings incorporate its moderate inflation record, declining dollarization, healthy banking system and stable currency regime. However, accommodative policies, rapid credit growth and rising real estate prices, if sustained, could increase vulnerabilities in the broader financial system. Fitch also notes that there is lack of transparency on the health of unregulated financial institutions which poses risks of contingent liabilities to the sovereign.
Regulatory uncertainty, state intervention and a relatively poor business environment limit increased private investment, especially in the development of new hydrocarbon reserves. The country approved a new constitution in 2009 but has yet to upgrade the legal frameworks, especially in key sectors of the economy such as hydrocarbons, mining, banking and public enterprises.
Increased social conflicts over the use and control of natural resources challenge the government's agenda and increase policy unpredictability. Capacity constraints in public entities could slow down the implementation of the ambitious public investment program.
Further strengthening of the macroeconomic and fiscal policy frameworks and implementation of reforms that spur greater private investment, improve the sustainability of hydrocarbons production in the medium-term and lead to higher growth would be positive for creditworthiness. Significant deterioration in the external and fiscal solvency ratios and unraveling of the growing hydrocarbon production trajectory could put downward pressure on the ratings. Crystallization of significant contingent liabilities from the regulated and unregulated financial sectors could be credit negative.
Company — Bolivia