July 7, 2017 / 4:19 PM / a month ago

Fitch Affirms Bolivia at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, July 07 (Fitch) Fitch Ratings has affirmed Bolivia's sovereign ratings as follows: --Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', Outlook Stable; --Senior unsecured Foreign and Local Currency bonds at 'BB-'; --Country Ceiling at 'BB-'; --Short-Term Foreign and Local Currency IDRs at 'B'. KEY RATING DRIVERS Bolivia's ratings are supported by its strong external balance sheet, firm economic growth, and moderate public debt burden with low refinancing risk and debt service costs. These strengths are balanced by high fiscal and external deficits stemming from a structural terms-of-trade shock and expansionary policy response, involving steady erosion of buffers, and structural weaknesses in terms of low per-capita income and weak indicators of governance and the business climate relative to peers. The Stable Outlook reflects Fitch's view that the authorities will be able to contain the on-going erosion in fiscal and external balance sheets, which should remain strong relative to 'BB' category peers in the forecast period. Moreover, liquidity and solvency metrics have eroded at a pace broadly in line with Fitch's prior expectations incorporated in last year's downgrade from 'BB' to 'BB-'. However, beyond the two-year forecast horizon it is unclear if policies will be implemented that will stabilize the deterioration in the fiscal and external balance sheets. Bolivia's economic growth moderated to 4.3% in 2016 from 4.9% in 2015, below the official and Fitch's own prior forecasts, but marking a continued strong and stable performance. Lower government spending in the face of reduced natural gas revenues implied a somewhat reduced fiscal impulse, but broader monetary, credit and salary policies have remained supportive of growth. Fitch projects continued firm growth of 4% in 2017-2018. Inflation has fallen to low levels (1.8% in the 12 months through June) and monetary policy has remained expansionary. Credit growth remains high as banks have aimed to meet quotas under the Financial Services Law. Indicators of solvency, asset quality and profitability in the banking sector remain sound. Reduced fiscal revenues and execution challenges pose increasing constraints to the state-led growth model and could make medium-term prospects more dependent on private investment trends. Key bottlenecks include a rigid labour market and weak confidence in the legal framework according to surveys, which continue to weigh on the business climate despite government measures to improve it. Private investment at 8% of GDP in 2016 remains low. Ambitious public industrialization projects may result in a more limited economic boost than expected, in Fitch's view. Finished projects are operating below capacity, and others scheduled to open face uncertain timing, profitability and buyer commitments. The key gas sector is facing supply and demand challenges. Production is faltering on declines in mature fields (more than offsetting the boost from the new Incahuasi field) and more volatile Brazilian demand. Argentina fined Bolivia for sending gas below the contractual minimum in 2016. Production after 2019 is unclear in the absence of major discoveries and reserves that have not been certified since 2013, but the authorities aim to ramp up exploration with private companies. Weak gas prices and faltering volumes kept the current account deficit high at 5.5% of GDP in 2016, and foreign direct investment has continued falling. Capital outflows compounded these pressures in 2016, resulting in a USD3 billion fall in foreign reserves to USD10 billion. These FX pressures have persisted in 2017, but reserves have been kept above USD10 billion so far in the year due to one-off boosts from a sovereign bond issuance and changes in commercial bank reserve requirements benefitting the central bank's (BCB) balance sheet. Fitch expects external borrowing and policy actions (e.g. a recent hike in the commission on capital outflows) could ease the pace of reserve declines, but risks persist amid sluggish gas export volumes and prices, and hard-to-predict capital outflows. The sovereign's net foreign creditor position is set to reverse in the forecast period. However, the external liquidity ratio should remain far above the 'BB' median given low external debt service needs and still ample commercial bank and BCB assets. The public sector deficit fell to 6.6% of GDP in 2016 from 6.9% in 2015, balancing a lower general government deficit (3% in 2016, down from 4.5%) with higher deficits among SOEs. This outturn was better than Fitch's prior forecast, as greater-than-expected spending reductions (non-payment of a salary bonus, lower social spending and central and local-government capex) offset a sharp drop in gas revenues. Some payroll and pension obligations normally paid in January had been paid early in December 2015. With this effect eclipsed, the public sector and general government deficits rose to 9.1% and 4.3% of Fitch-estimated GDP, respectively, in the 12 months through March 2017. Fitch expects the fiscal deficit will rise back to higher levels in 2017-2019, reflecting the trend of weak gas revenues seen so far in 2017 and spending pressures that could intensify as 2019 elections approach or if execution of the five-year development plan (PDES) improves. General government debt rose to 32% of GDP in 2016 from 30% in 2015. Fitch projects the debt burden will rise to 38% of GDP by 2019 but remain below the current 'BB median of around 50%. The pace of deposit drawdown has slowed as deficit financing has relied increasingly on borrowing. General government deposits stood at 15% of GDP at end-2016, down from 23% in 2013, but remain relatively high. The indebtedness of public companies has risen considerably in recent years, and debt explicitly guaranteed by the treasury rose to 7.4% of GDP in 2016 from 3.2% in 2014. While this represents a source of contingent liability risk to the sovereign in the context of these companies' broadly weaker profitability, the intra-public sector nature of this debt (namely low-interest central bank loans) is a mitigating factor. Bolivia's public debt profile remains favourable. Refinancing risks are mitigated by low maturities in the coming years averaging 1.6% of GDP, and solid access to multilateral and bilateral lenders (e.g. China), capital markets (evidenced by a successful USD1 billion bond issuance in March), and a captive local market. Interest costs represent just 3.5% of revenues, below a 'BB' median near 9%, reflecting the concessional nature of the bulk of external debt and favourable local interest rates. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Bolivia a score equivalent to a rating of 'BB' on the Long-term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: --Macroeconomic Performance and Policy Management: -1 notch, to reflect maintenance of expansionary policies (fiscal, monetary, salary, quasi-fiscal) and a stable currency in the face of a structural terms-of-trade shock that is supporting growth at the cost of high fiscal and external deficits, eroding buffers and raising economic vulnerability. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The following risk factors individually, or collectively, could trigger a negative rating action: --Greater than expected deterioration of fiscal and external balance sheets (for example, due to a secular deterioration in the gas production profile); --Signs of increased macroeconomic instability or stress in the financial system; --Evidence of external financing constraints. The following risk factors individually, or collectively, could trigger a positive rating action: --Sustained fiscal deficit reduction that improves public debt dynamics; --Reduction in the current account deficit and improvement in external solvency and liquidity metrics; --Evidence of improvement in governance and the business climate that supports stronger investment and growth prospects. KEY ASSUMPTIONS --Fitch expects Brent oil prices to average USD52.5/b in 2017 and USD55/b in 2018, from USD45.1 in 2016, affecting Bolivian gas prices linked to global oil benchmarks. Contact: Primary Analyst Todd Martinez Director +1-212-908-0897 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Arend Kulenkampff Director +1-646-582-4720 Committee Chairperson Shelly Shetty Senior Director +1-212-908-0324 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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