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Moody's: Bolivian banking system outlook negative

August 11, 2014

Moody's Investors Service has

changed its outlook on the Bolivian banking system to negative, from

stable, reflecting rising risks from new government policies, says

Moody's in its new report "Banking System Outlook: Bolivia."

Moody's expects Bolivia's economy to expand at a robust 5% pace in 2014

and 2015, fueled by high prices for commodities exports and supported by

prudent macroeconomic policy management. But Bolivia's new government

policies have heightened risks to bank profitability, asset quality and

capital, says the rating agency.

"The new regulations dictate lending caps, direct lending to specific

industries and constrain fee and commission income," says Fernando

Albano, a Moody's analyst and author of the report. "This will reduce

bank earnings, and may lead to a decline in asset quality as investors

seek profitability in higher-risk areas."

Government policies have also created uncertainty over future stability

of deposit funding€”private pension funds are currently 70% of total term

deposits€”if the public social security institution created in 2012

eventually replaces private pension funds, creating the risk of a change

in the system's deposit allocations says Moody's.

However, Moody's says that Bolivia's favorable economic environment has

boosted purchasing power and repayment capacity for consumer credit, and

expanded credit demand; a growth opportunity for the financial system.

In addition, recent positive developments support creditworthiness in

Bolivia's banking system, says Moody's. The rating agency points to

Bolivia's declining dollarization that will limit banks' balance sheet

volatility in the event of currency devaluation. Liquidity remains high,

and banks are well-capitalized with an average 10.7% Tier 1 ratio as of

March 2014.

There is a high probability that Bolivian banks can count on systemic

support, says Moody's. The country's lower financial dollarization will

enhance the effectiveness of monetary policy, and that the relatively

small size of the banking sector relative to the government's available

resources means that authorities have the capacity to support banks if

needed, says the rating agency.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: EMBIN (Emerging Markets Business Information News)

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