La Paz -- Standard & Poor's (S&P) Ratings Services assigned its 'BB-' issue rating and '4' recovery rating on the Plurinational State of Bolivia's first international US dollar bond issuance, US$500 million of bonds due in 2022. At the same time, S&P affirmed the 'BB-/B' sovereign credit ratings on Bolivia with a stable outlook.
According to S&P, the ratings on both the sovereign and the proposed notes reflect improvement in the government's debt burden, coupled with the country's strengthened external indicators--one of the strongest among its peers. The general government debt burden fell to 31% of GDP in 2011 from 36% of GDP in 2010, partly because of the government's low fiscal deficit and high nominal GDP growth. The recovery rating of '4' reflects Standard & Poor's expectation for 30%-50% recovery on the notes in a default scenario that would incorporate a sharp fall in exports as a result of a prolonged decline in commodity prices or severe political problems.
Years of current account surpluses have led to a sharp build-up in Bolivia's international reserves. This provides the country with an important buffer against potential external economic shocks, especially given its high dependence on natural gas and mining exports. Bolivia's international reserves cover more than 11 months of current account payments, more than 100% of its financial sector's total deposits, and 50% of its GDP. However, even if the government's proposal to use up to $1 billion of the international reserves
for infrastructure projects materializes, the country's external indicators would remain one of the strongest among the sovereigns rated in the 'BB' category.
Over time, the falling level of dollarization will improve the country's monetary policy's effectiveness. Dollarization in Bolivia fell to just 29% in terms of bank credit and 36% in terms of deposits in 2011 from almost 90% in both categories in 2004.
In 2012, we expect the general government to post a similar deficit of almost 1% of GDP--despite higher government revenues--because of increased public spending. In 2011, the general government balance recorded a deficit of 1.1% of GDP. Strong fiscal revenue flows from both high prices on hydrocarbons and
the higher tax burden on foreign companies operating in the sector underpinned Bolivia's strong fiscal performance during the past five years.
A fragmented political landscape--because of strong divisions among regional, social, and ethnic lines--continues to constrain the sovereign ratings.
Political tensions remain high because of the entrenched discord between President Evo Morales and a vociferous, but fragmented, opposition. Partly because of Bolivia's political landscape, foreign direct investment remains relatively low. This remains a key structural weakness that constant revisions
to the country's investment policies and nationalization of so-called strategic sectors of the economy exacerbate.
Another rating constraint is the country's high dependence on revenues from its natural gas and mining sectors. More than 70% of the country's exports are based on natural gas and minerals, and more than 30% of general government revenues come from these sources.Outlook
The stable outlook reflects S&P's expectation that Bolivia will continue to adhere to cautious fiscal and monetary policies in the coming years, as it has during the past five years, despite the high level of political turmoil. S&P expects low general government deficits to lead to further declines in the country's debt burden as a percentage of GDP during the next three years.
"We could raise the ratings if the political landscape becomes more conducive to private-sector investment," said S&P. "We could also consider an upgrade if the credibility of Bolivia's monetary policy improves as a result of further de-dollarization, or if general government tax revenues from sources other than the mining and hydrocarbon sectors increase, making them less dependent on these sectors with volatile prices."
"On the other hand, if the political landscape deteriorates, leading to a reversal in cautious macroeconomic policies, we could lower the ratings. Absent corrective fiscal measures, a sharp, sustained fall in natural gas prices could also lead to a downgrade," S&P concluded.