Fitch Affirms Bolivia's IDR at 'B-'; Outlook Stable

Business Wire, July 15, 2008

NEW YORK -- Fitch Ratings affirms Bolivia's local and foreign currency Issuer Default Ratings (IDRs) at 'B-'. The Rating Outlook is Stable. Fitch has also affirmed the short-term IDR at 'B' and the country ceiling at 'B-'.

Bolivia's manageable external debt burden following sizeable write-offs under the Multilateral Debt Relief Initiative (MDRI) and the country's abundant natural resources support the sovereign's creditworthiness. At the same time, severe social, regional, and political fragmentation as well as widespread poverty and poor social indicators will constrain Bolivia's ratings to the 'B' category for some time.

'As a result of the Multilateral Debt Relief Initiative, debt sustainability is not a pressing issue at this time,' said Casey Reckman, Associate Director in Fitch's sovereign group. Fitch forecasts general government debt as a percentage of GDP to decline to 30% by year-end 2008, nearly on par with the 'B' median of 29%. As compared to revenue, Fitch expects general government debt to equal the 2008 category median of 104%.

Reflecting US$1.17 billion of additional debt relief from the Inter-American Development Bank (IDB) and a marked accumulation of international reserves, Bolivia became an overall net creditor in 2007. Given Bolivia's still favorable terms of trade, Fitch expects this position to continue improving in 2008. Nevertheless, Bolivia's commodity dependence renders it vulnerable to external shocks. The country's 2008 international liquidity ratio of 900%, which compares favorably to the 'B' median of 305%, mitigates this concern.

Owing to a favorable external environment, Bolivia's overall macroeconomic performance remained relatively strong through 2007. Hydrocarbons and extractive sector exports will continue to support current account surpluses and moderate GDP growth of 4.0%-5.0% over Fitch's forecast horizon. Fitch projects international reserves excluding gold, already at record levels, to increase by over US$1.8 billion in 2008, reaching US$6.4 billion by year-end. However, domestic and external price shocks as well as rising inflationary expectations have underpinned a significant increase in inflation, which Fitch projects will end 2008 at 17.5%. Fitch is also concerned that sustained fiscal slippage could lead to a deterioration in Bolivia's macroeconomic performance.

Despite its vast natural resource endowment, Bolivia is among the poorest countries in Latin America, a factor which constrains the sovereign's ratings due to policy implications and contributions to social unrest. Institutional weakness also leaves Bolivia vulnerable to instability as issues including the direction of macroeconomic policy, regional autonomy, and the constituent assembly process continue to polarize Bolivian society. Although the government's interventionist economic policy has been popular with President Morales's supporters, the private sector's vehement opposition represents another dimension of Bolivia's political, social, and regional conflict.

'Stronger institutions and improvements in the rule of law are needed to attract investment, sustain growth, and increase living standards over the medium- to long term,' said Reckman.

A key credit concern is whether Bolivia's government will maintain adequate relationships with foreign hydrocarbons companies to ensure further development of Bolivia's vast natural gas reserves and sustain export growth. State intervention in the sector has reduced incentives for maintaining and attracting new foreign investment in what is a dynamic driver of growth and government revenue. In fact, the productive capacity of Bolivia's hydrocarbons sector is now close to full utilization, which in the absence of significant new investment will limit future export volume growth.

An easing of social tensions which results in improved governability could benefit creditworthiness. Similarly, an adequate policy response to inflationary pressures and/or an eventual decline in commodity prices could boost Bolivia's ratings. While not Fitch's base case scenario, broader civil unrest resulting from further intensification of regional and social divisions could put downward pressure on the sovereign's ratings. Sustained fiscal slippage could also undermine creditworthiness if it jeopardizes the maintenance of macroeconomic stability and a sustainable debt burden.

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