Good news for Bolivia: Fitch Revises Bolivia's Outlook from negative to Stable; Affirms IDR at 'B-'
Picture: 200 Bolivianos By: NEB / Bolivia Now
Article Source: Fitch Ratings
NEW YORK--(BUSINESS WIRE)--Fitch Ratings today revised the Outlook on Bolivia's long-term foreign and local currency sovereign Issuer Default Rating (IDR) to Stable from Negative, and affirmed the following ratings:
* Long-term foreign currency Issuer Default Rating (IDR) at 'B-'; Outlook to Stable;
* Long-term local currency IDR at 'B-'; Outlook to Stable;
* Short-term IDR at 'B';
* Country Ceiling at 'B-'.
Public debt reductions under the Multilateral Debt Relief Initiative (MDRI), maintenance of macroeconomic stability and positive economic prospects, underpinned by a favorable external environment, supported the revision of Bolivia's Outlook to Stable. 'Though political, social and policy challenges will continue to weigh on Bolivia's ratings, the MDRI and sustained growth have reversed the prior trend of deteriorating external solvency and liquidity ratios,' said Theresa Paiz Fredel, Senior Director of Fitch's Latin American Sovereign team.
As a result of the MDRI, debt sustainability is no longer a pressing issue. MDRI covered 100% of debt incurred by Bolivia before January 2005 to the IMF (US$230 million) and the World Bank (US$ 1.5 billion). Bolivia's public debt/GDP ratio declined to 32% by year-end 2006 from a peak of 60% at year-end 2004. Additional debt relief from the Inter-American Development Bank totaling US$1.2 billion will reduce the public debt/GDP ratio to below 20% of GDP this year. As other sovereigns in the 'B' rating category have also benefited from the MDRI, Bolivia's debt levels remain in line with similarly rated credits.
Despite divisive domestic issues including the direction of macroeconomic policy and the Constituent Assembly, Bolivia's overall macroeconomic performance has strengthened within the context of a favorable external environment. Inflation declined in 2006, though negative supply shocks and rapid monetary expansion are putting upward pressure on prices so far in 2007. The performance of the extractive sectors will continue to drive moderate GDP growth of around 4.5%, as well as a strong balance of payments over Fitch's forecast period. The latter has led to record accumulation of international reserves, which are projected to increase by over US$800 million this year, reaching more than US$4 billion by year-end. Additionally, changes in the hydrocarbons law and expenditure restraint have underpinned a significant fiscal adjustment as the general government balance reverted to a surplus of 3.5% of GDP in 2006 after peaking at an 8.9% of GDP deficit in 2002.
Bolivia's short-term economic outlook remains favorable, but the country faces many challenges and risks over the medium-to-long term, particularly with respect to attracting foreign direct investment, which is needed to develop its abundant natural resources and to deliver on gas contracts it has already signed with Argentina and Brazil. Better infrastructure, stronger institutions, and improvements in the rule of law are also critical to supporting growth and raising employment and living standards.
Now that the renegotiation of the hydrocarbons contracts has been successfully completed, more clarity on macroeconomic policy choice, particularly pertaining to other key sectors of the economy such as mining, electricity and telecommunications, would be positive for creditworthiness. Continued macroeconomic stability and/or an easing of social tensions which results in improved governability would also benefit Bolivia's credit fundamentals. By contrast, increased social and/or political instability that detracts from Bolivia's economic performance or affects debt service willingness could bring renewed pressure to Bolivia's ratings.