Economic Analysis - Expenditure Constraints Will Weigh On Growth - AUG 2017


BMI View : Bolivia's fiscal deficit will narrow modestly over the coming years, as revenues gain in line with higher average hydrocarbons prices. Less favourable financing conditions will underpin government efforts to constrain expenditures, which will feed through to slower economic growth.

  • Bolivia's fiscal deficit is likely to narrow over the coming years, supported by rebounding revenues from hydrocarbons sales.

  • Still, rising global interest rates will weigh on the government's ability to secure financing and underpin its efforts to constrain expenditure growth.

  • Relatively constrained expenditures will lead to slower overall economic growth.

Higher Revenues & Spending Restraint Make Their Mark
Bolivia - Budget Balance
f = BMI forecast; Source: BCB, BMI

We forecast Bolivia's fiscal deficit at 6.5% of GDP in 2017 and 6.3% in 2018. In 2016, the shortfall equalled 6.6% of GDP, below our 7.2% forecast ( see 'Falling Hydrocarbons Revenues Will Widen Deficit', April 7 2016), reflecting stronger GDP growth than expected and unanticipated late-year expenditure cuts. In December, when expenditures historically peak, they fell 43.1% y-o-y.

Hydrocarbon Revenue Will Pick Up
Bolivia - Revenues, BOBbn (6mma)
Source: BCB, BMI

Hydrocarbons revenues will rebound over the coming quarters. Despite near-term weakness, energy prices remain well above early 2016 lows and will likely trend higher over the coming quarters as global supply cuts reduce stockpiles ( see 'OPEC Intervention Crucial For Oil Price Stability Heading To 2018', May 23). Hydrocarbons revenues, which fell to a low of 12.4% of GDP and 28.7% of revenues in 2016, will rise to 13.6% of GDP in 2017 and 12.8% in 2018, equalling approximately 30.0% of total revenues.

Cuts To Current Expenditures Show Restraint
Bolivia - Expenditures, % y-o-y (6mma)
Source: BCB, BMI

Expenditures will rise at a relatively moderate pace. After largely cutting from capital expenditures in 2015, the government cut from current expenditures across much of 2016. Signalling its intention to trim its budgets, the Ministry of Economy has publicly argued over the proposed budget for upcoming judicial elections, scheduled for October. We expect total expenditures to remain at approximately 51.7% of GDP through 2018, up slightly from 49.7% of GDP in 2016 but down from approximately 54.7% over the preceding two years.

Financing Conditions Likely Constrain Government

We believe the government's efforts to rein in expenditures stem from increasingly unfavourable financing conditions. Though in March the government placed USD1.0bn in bonds at a favourable 4.50%, yields on the country's debt have since risen and will likely increase further as global interest rates rise in line with the tightening of US monetary policy ( see 'External Account Imbalances Point Towards Devaluation', March 22). Additionally, its external account imbalances have led to a deterioration of its foreign reserves, weighing on its sovereign credentials.

Expenditure constraints will compound headwinds to consumption and investment. Given the primary role that public spending plays in supporting consumption and driving investment, we expect that relatively reduced spending levels will lead to a broad slowdown in real GDP growth over the coming two years ( see 'Investment Slowdown Will Limit Growth', May 11). We forecast growth of 3.7% in 2017 and 3.9% in 2018, down from 4.3% in 2016.