Bolivia finds itself amidst a financial storm, with its sovereign bonds experiencing significant turbulence in recent times. After a precipitous drop of around 40% earlier in the year due to dwindling dollar reserves, Bolivia’s bonds staged a partial recovery following a law allowing the sale of gold reserves. However, this temporary relief was short-lived as the country faced a fresh setback in October, eroding more than 25% off the bond price within a three-week period, making it the worst performing sovereign debt in the developing world this year.
The catalyst behind this latest downturn was the announcement of former Bolivian President Evo Morales’ candidacy for the presidency, injecting uncertainty into an already fragile economic landscape. Bolivia’s political instability, characterised by legal uncertainties and a lack of stable rule of law, is deterring foreign private investors. “To attract those investors, you have to offer higher rates of return.” The senior portfolio strategist expanded, “As there is not much demand for Bolivia from investors measured against indices such as the JPM EMBI, of which Bolivia is not a part, this is already a problem.”
“there is not much demand for Bolivia from investors measured against indices such as the JPM EMBI, of which Bolivia is not a part, this is already a problem.”
Senior portfolio strategist, Bolivia
The bitter “political fight” between Morales and President Arce, who once enjoyed Morales’ backing but now finds himself at odds with his former mentor, has created an environment of uncertainty and impacts “directly on market confidence,” reported a financial analyst. Morales’ early candidacy announcement, even before any primaries, aims to secure the nomination of the Movement Towards Socialism (“MAS”) party. However, this move has led to internal party strife, potentially offering opposition parties an opportunity to rally against the divided MAS.
In the eyes of the financial analyst, “All the signals from Bolivia to the world are negative.” The ongoing political feud exacerbates the bleak signals emanating from the country. An economic analyst highlighted Bolivia’s trade deficit and high fiscal deficit spanning over seven years, leading to a lack of transparency and data accuracy. This financial unease, coupled with the announcement of Morales’ candidacy, triggered a sharp fall in bond prices. A financial analyst explained, “The markets did not take the announcement well. 45% is already junk bond. There is no difference between 45% and 20% from the confidence side. You have already entered that spiral of deterioration.”
“all the signals from Bolivia to the world are negative. The markets did not take the announcement well. 45% is already junk bond.”
Financial analyst, Bolivia
The uncertainty surrounding Bolivia’s political future and its economic stability has been compounded by other factors. A Bolivian senior portfolio strategist highlighted, “The fear of the absence of international reserves, a pending devaluation, a stronger dollar and a lack of income in dollars,” have all contributed to market jitters. The lack of demand for Bolivia’s bonds further hampers its economic recovery. While the Bolivian government could potentially buy back the bonds at a reduced rate, its financial constraints make this option increasingly unfeasible.
Looking ahead, Bolivia faces a challenging road to recovery. The deep-rooted political discord, coupled with economic woes and market uncertainty, make it difficult to predict a positive trajectory for the country’s economy. “If I can give a glimpse of the future, it is that more is expected to fall. But how much more?” The Bolivian senior portfolio strategist mused, “Even if they fall further, the Bolivian government could buy them back and recover 60% or more of what it issued. But again, it is known that the Bolivian state is broke and does not even have enough for that.”
“If I can give a glimpse of the future, it is that more is expected to fall. But how much more?”
Senior portfolio strategist, Bolivia
Unless Bolivia can find a resolution to its internal political struggles, restore investor confidence and implement effective economic reforms, the nation’s financial outlook remains grim, casting a shadow over its economic future.