Tuesday, October 13, 2009

Bolivia....An Island of Economic Stability

(digitalwarriormedia) Three and a half years after the ascension of the Movement Toward Socialism party (MAS) and the election of President Evo Morales, state participation in the national economy has increased and the central government’s influence in private enterprises continues to rise.

According to Vice President Alvaro Garcia Linera the state's participation in the national economy has grown three-fold.

"In 2005… the state {was} involved with 8 or 9% of the country's wealth. Today, in 2009, the Bolivian state, participates…with about 27% to 28% of the country's economy," Garcia Linera said in an interview with the Patria Nueva radio network on Sunday.

There are domestic and foreign business interests who caution that Bolivia’s economic approach is scaring off foreign investment. Private investment as a share of Gross Domestic Product (GDP) remains among the lowest in Latin America.

However Bolivia’s economic and fiscal policies - including greater state intervention - are shielding Bolivia’s economy during the global economic downturn.

Bolivia’s Economic Outlook

It is among the least developed countries in Latin America and poorest in per capita GDP, but under pressure of the current world credit crisis, Bolivia’s economy is faring better than other nations, even with inflation reaching almost 12% and a national unemployment rate at 7.5%.

Its economy grew over 6% last year and is likely to be among the few countries in the region to register positive growth in 2009, according to Moody's Investor Service. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) forecasts 3% growth for Bolivia this year, with the International Monetary Fund predicting a more conservative 2.2% increase.

With $7.8 billion in foreign reserves - now close to 50% of GDP - and government savings that surpass 10% of GDP, Bolivia is “well-positioned to manage any foreseeable economic or financial challenges in the near future," said Gabriel Torres, a Moody's vice president and sovereign analyst for Bolivia.

One of the most significant policies impacting the health of government coffers was the passage of legislation that nationalized Bolivia’s hydrocarbon industry in May 2006. This mandated a renegotiation of oil and gas contracts which drew higher royalties and taxes from multinational energy companies operating in Bolivia.

A boom in commodity prices, which brought higher revenues for hydrocarbon and mining exports, also drove the national current account balance into a financial surplus over the past three years, after years of substantial deficits. Last year, Bolivia’s exports reached a record $6.2 billion – with the caveat that this number was driven by high prices, not necessarily greater productivity.

Fiscal accounts are expected to deteriorate for 2009, as extensive drops in commodity prices continue this year. Bolivia’s economy is heavily dependent upon export of its commodities from its energy, mining and agriculture sectors. Almost 70%of Bolivian exports in 2008 were either natural gas or minerals (zinc, tin and silver).

There is also the significant drop in remittances from Bolivians working overseas. That number is expected to contract 50% from $1 billion in 2008 to around $500 million this year.

But there are still good economic indicators going into the 4th quarter of 2009.

In September Bolivia received a boost when Spain agreed to write off $80 million in debt. Spanish Prime Minister Zapatero said 60% will be cancelled outright and the remaining 40% deposited into a fund for education projects.

While in Madrid, President Morales met with executives of Spanish oil giant Repsol. And despite ongoing claims that Bolivia is scaring off private investment Repsol has indicated plans to boost its investments in Bolivia.

Also last month, both Moody’s and Fitch Ratings announced that Bolivia’s bond rating was being raised as debt levels remain low and political tension within the country has eased.

On Monday, Jindal Steel and Power began mining iron ore in Bolivia’s El Mutun mine, after initially securing rights in 2006. With reserves of 40 billion tons, El Mutun is one of the world’s biggest iron ore mines. Although small quantities will be exported for the next 4-5 years to neighboring countries such as Paraguay and Argentina, Jindal has committed $2.1 billion investment over the next 8 years to mine up to 20 billion tons and build a steel making facility.

With some of the greatest reserves of natural gas, iron ore and lithium in the world, Bolivians are well aware of the vast natural resources that fall within their national borders.

Over the weekend, President Morales pledged his resolve to continue the process of change taking place in Bolivia – driven largely by the country’s reclamation of its resources and a redistribution of national wealth into social programs.

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