Crisis in Bolivia: socialist regime runs out of reserves to intervene in the dollar, and country risk doubled 

Bolivia’s economy is increasingly affected by the run against the domestic currency, the Government’s lack of credibility, and the sidereal imbalance in the public accounts.

The relative stability perceived in the last few years could end, marking a new failure for the “socialism of the 21st century”.

Hundreds of thousands are joining the long lines at banks and financial institutions to exchange their funds in pesos for dollars.

The country is facing the deepest run of the last two decades.

Most of the population anticipates that the exchange rate system cannot be sustained indefinitely and that a chaotic devaluation is approaching.

The exchange rate regime currently operating in Bolivia was established in 2008, conceived as a fixed exchange rate scheme with a parity of approximately 6.93 pesos per dollar (slightly fluctuating between 6.98 and 6.77).

A stabilization plan per se was not adopted.

Still, the Central Bank was instructed to defend a pre-set exchange rate in an attempt to lower inflationary expectations in the medium and long term.

The program allowed inflation to attenuate from 14.5% in September 2008 to an average of 3.55% between 2009 and 2022.

However, in the absence of fiscal and monetary responsibility (it was decided to monetize a large part of the public sector imbalances), the demand for pesos sponsored by the exchange rate regime failed to offset the expansion of the money supply.

And the remaining inflation (even if it had been attenuated) systematically deteriorated the real value of the exchange rate.

The real exchange rate appreciated by 62% between 2008 and 2023, remaining practically fixed in nominal terms against the dollar but suffering the effect of monthly inflation averaging 0.3%.

This corrosive impact gradually encouraged cheaper imports and more expensive exports.

The exchange rate appreciation unbalanced supply and demand in the foreign exchange market.

This gap had to be assumed by the Central Bank, which lost up to US$13 billion of its reserves to intervene in the market and keep the nominal parity stable.

Bolivia’s monetary authority retains less than US$400 million in its reserves, losing up to 97% of its holdings in 2015.

Without sufficient foreign exchange to continue intervening in the exchange rate, the Government was forced to either allow a devaluation (with its due impact on expectations and prices) or introduce exchange controls like those implemented in Argentina and Venezuela (steering economic activity into recession).

The exchange rate tension and possible devaluation raised doubts about the Bolivian governmenGovernment’sto to pay its foreign (and dollar) obligations.

The country’s sovereign bonds plummeted to 10.3% last month, and the Country Risk index doubled, climbing above 1,000 basis points.

US risk rating agency Moody‘s referred to Bolivia’s economic situation as follows:

“The decision to downgrade reflects Moody’s assessment that several factors related to fragile governance have contributed to diminished hard currency availability and elevated external liquidity pressures to the point that threatens macroeconomic stability.”

Moody’s warned of the “unsustainable defense” of the exchange rate and the dramatic economic implications for stability due to years of fiscal and monetary irresponsibility.

With information from La Derecha Diario