ECONOMYNEXT – Fitch Ratings has downgraded Bolivia to CCC- from CCC amid continued money printing, saying not corrective economic measures were being implemented, despite external commercial debt being relatively low.
Euro bond debt was low at 4 percent of gross domestic product and had to pay 110 million US dollars on its two bonds.
But in 2025, a 333 million tranche is to be paid on a billion dollar 2028 bond which is likely to be a greater challenge, Fitch said.
Bolivia had also seemed to have lost market access with yields on its bonds at around 22 percent.
Total external debt fell absolutely by 1.5 percent to 12.3 billion US dollars, with net repayments to multilaterals.
The parliament where the ruling MAS party is divided into two factions has blocked new borrowings.
Bolivia’s central bank was continuing to print money up to June 2024, and parallel exchange rates had emerged along with forex shortages, after earlier forex rationing by the central bank.
Foreign reserves at end December 2024 were 1.98 billion dollars of which 1.89 billion were gold, and 47 million dollars were hard currency.
The BCB, Bolivia’s central bank, had bought 14.5 tonnes of gold from local producers to boost reserves. It is not clear whether the gold was bought through new notes, and whether they were sterilized, or not.
Unsterilized notes will fuel forex shortages and parallel exchange rates.
The BCB was trying to sell bonds to borrow dollars, like other countries with soft-peg do central bank swaps to avoid raising rates and which makes dollars available through a reduction in domestic investments.
Bolivia had a fairly credible pegged exchange rate until around 2015, data show, and it is not clear what the change in the operating framework that led to activist monetary policy and a run-down of reserves.
Unlike in Sri Lanka where the International Monetary Fund gave technical advice on how to calculate potential output leading to money printing and stop-go policies (foreign and stabilization crisis) and eventual default, good advice had been given on how to maintain the pegged exchange rate in the past.
However inflation rose to 9.90 percent in 2024, amid parallel exchange rates.
While parallel exchange rates allow the market to clear the demand from new money created by the central bank at a depreciated rate without using reserves (de facto partial float), prices of goods rise and the government was promising more subsidies, media reports show.
Meanwhile Fitch said it expected the fiscal deficit to remain wide at 9.1 percent of GDP in 2024, down from 9.7 percent deficit in 2023.
Publication of fiscal statistics have been delayed, with no fiscal data published yet for 2024.
Financing of the 2024 deficit partly by the central bank in the absence of international capital market access.
“…[A] default event does not yet appear probable, the margin of safety continues to erode as a result of dwindling foreign exchange (FX) availability and the absence of corrective economic and fiscal policy measures,” Fitch Ratings said.
Countries with forex trouble have to hike rates, reduce domestic investments through a credit crunch to restore credibility in the money monopoly and build reserves to repay maturing debt.
To reduce credit pressure as much as possible from government credit, taxes are raised. State enterprises which make losses as currencies depreciate also have to raise prices to stop funding losses with more borrowings (Colombo/Jan26/2025)