Economic Analysis - Falling Popularity Impedes Fiscal Consolidation Under Morales - APR 2017


BMI View: Bolivia will continue to run a significant budget deficit in 2017 and 2018, as revenue from hydrocarbon sales remains deflated and the government ramps up spending in an effort to bolster lagging support for the Morales administration .

Bolivia's fiscal deficit will remain wide in 2017 and 2018, before beginning a gradual narrowing from 2019 onwards. The government's historical fiscal prudence under President Evo Morales has been undermined by a steep downturn in revenues derived from the hydrocarbon sector, with the budget balance turning negative in 2014 and 2015 for the first time in his decade-long tenure. Offsetting measures have been limited, as the Morales administration has been slow to cut spending amid growing opposition and lagging approval ratings. With this in mind and the 2019 election on the horizon, we expect government expenditure to increase in 2017 and 2018, partially offsetting revenue gains from a recovering hydrocarbons sector.

We expect a narrowing of the budget deficit in 2017 to 4.3% of GDP, from 6.2% in 2016, supported by a rebound of hydrocarbon sales. Rising expenditures will widen the balance to 5.0% of GDP in 2018, before we see a gradual narrowing and surplus towards the end of our forecast period in 2024.

Deficit Will Remain Wide Through 2019 Elections
Bolivia - Budget Balance, % of GDP (RHS) and Total Revenue and Expenditure, BOB % y-o-y (LHS)
Source: BCM, BMI

Deficit Driven By Hydrocarbon Downturn

Revenue from hydrocarbon sales will improve in 2017, although revenues will remain below recent highs in light of structurally lower oil prices. A steep decline in global energy prices have been the primary driver of Bolivia's fiscal deficits. The price of Bolivia's hydrocarbon exports is linked to the West Texas Intermediate benchmark, which bottomed in early 2016. This decline has weighed heavily on Bolivia's total revenues, causing a fall of 24.3% since September 2014 ( see chart below). Our Oil & Gas team forecasts WTI benchmark to average USD55.5/bbl in 2017, from USD43.5/bbl in 2016, which will support revenues.

Revenues Hit Hard By Hydrocarbon Downturn
Bolivia - Total Revenues And Hydrocarbon Sales , BOBmn (6mma)
Source: BCB, BMI

Consolidation Will Only Come After Election

With President Morales set to face strong opposition in his bid for a fourth term in the 2019 election, we expect the government will ramp up expenditures in a bid to gain favourability in the run up to the elections. Morales, although being constitutionally barred from running for a fourth term, has been selected as his party's candidate, and opposition has ramped up as a result ( see 'Morales' Attempt For Fourth Term Will Be Rejected', January 12). Increasing capital expenditures will be a priority. The government approved USD49.0bn capital expenditure agreement in early 2016, which includes investments in state enterprises, investment into exploration and the development of new gas reserves, and industrialization programs at expanding exports.

Persistent Deficits Weigh On Long-Term Stability

An increasing debt load and falling international reserves will weigh heavily on Bolivia's sovereign credentials, as fiscal deficits persist over the coming years. The fiscal debt has been financed to an extent by Bolivia's international reserves, which fell from USD15.5bn in November 2014 to USD10.7bn in October 2016. The Bolivian government has also sought financing by tapping capital markets, increasing total external debt from USD6.0bn in March 2011 to USD9.9bn in March 2016. As we expect Bolivia's fiscal deficit to remain significant over the coming years, the country risks additional downgrades following a Fitch downgrade of Bolivia sovereign debt in July 2016.

Consolidation Will Only Come After Election

With President Morales set to face strong opposition in his bid for a fourth term in the 2019 election, we expect the government will ramp up expenditures in a bid to gain favourability in the run up to the elections. Morales, although being constitutionally barred from running for a fourth term, has nonetheless been selected as his party's candidate, and opposition has ramped up as a result ( see ' Morales ' Attempt For Fourth Term Will Be Rejected ' , January 12). Increasing capital expenditures will be a priority, with a USD49.0bn capital expenditure agreement, approved in early 2016, including investments in state enterprises, investment into exploration and the development of new gas reserves, and industrialization programs at expanding exports.

Persistent Deficits Weigh On Long-Term Stability

An increasing debt load and falling international reserves will weigh heavily on Bolivia's sovereign credentials, as fiscal deficits persist over the coming years. The fiscal debt has been financed to an extent by Bolivia's international reserves which have fallen from USD15.5bn in November 2014 to USD10.7bn in October 2016. The Bolivian government has also sought financing by tapping capital markets, increasing total external debt from USD6bn in March 2011 to USD9.9bn in March 2016. As we expect Bolivia's fiscal deficit to remain significant over the coming years, the country risks additional downgrades following a Fitch downgrade of Bolivia sovereign debt in July 2016.