News Column

Fitch Affirms Bolivia's IDRs at 'BB-'; Outlook Revised to Positive

August 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Bolivia's sovereign ratings as follows:

--Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-';

--Senior unsecured foreign and local currency bonds at 'BB-';

--Country Ceiling at 'BB-';

--Short-term foreign currency IDR at 'B'.

The Rating Outlooks for the Long-term IDRs have been revised to Positive from Stable.

KEY RATING DRIVERS

The revision of the Outlooks on Bolivia's sovereign ratings to Positive from Stable reflects the following factors:

Bolivia's economy grew by a record 6.8% in 2013 and could expand by 5.2% in 2014 - 2016, above its estimated potential of 4.5% - 5%, and faster than the expected 'BB' median of 4.4%. Rising natural gas production, which supports government and private consumption, and public investment underpin the positive growth prospects.

In line with the 2009 constitution, the government advanced reforms to the legal frameworks for hydrocarbons, investment, mining and public enterprises in 2013 - 2014. If pragmatically implemented, these laws could reduce regulatory uncertainty, nationalization risks and encourage greater private participation in the economy with the state maintaining its predominant role. Bolivia's domestic investment rate increased to 19% of GDP in 2013, but lagged behind the 'BB' median of 21%.

The prospects of a new hydrocarbons regime could increase investment in exploration and smooth the declining production curve of maturing gas fields. The legislative assembly approved seven new exploration contracts in 2013 - 2014 and is considering eight more association agreements with foreign companies and subsidiaries of the state-owned YPFB. In the absence of new gas reserves developments, Bolivia could face constraints to meet gas requirements from the domestic market and export contracts with Argentina and Brazil in 2017 - 2018.

Bolivia's 'BB-' ratings are underpinned by the following rating factors:

Bolivia's external balance sheet strength supports confidence in the crawling exchange rate regime, which serves as an anchor for macroeconomic stability. International reserves coverage at 13 months of current external payments compares favorably with the 'BB' median of four months, providing ample absorption capacity against commodity price downturns. Dollarization declined rapidly in recent years reducing the vulnerability of the financial system to currency mismatches and deposit runs.

The general government posted a fiscal surplus of 1.4% of GDP in 2013, following a positive outturn of 1.8% in 2012. Fitch forecasts that the budget surplus could shift to a deficit of 1% in 2014 - 2016. Public sector deposits, mostly held by YPFB and local governments, rose to 27% of GDP in 1H14, one of the largest cushions among peer commodity exporters.

General government debt fell to 31% of GDP in 2013 and could stay below the 36% median of the 'BB' category in 2014 - 2016. Contingent liabilities are the main driver of the recent uptick in the debt burden. Outstanding guarantees on central banks loans issued to public enterprises climbed to 2.5% of GDP in 1H14, nearly 17% of total domestic debt. The authorities have paid 1% of GDP in compensation to nine companies for nationalizations since 2006.

Commodity dependence is high relative to peers in the 'BB' category. Hydrocarbons generated 8% of GDP, 57% of tax collection, 54% of exports and 33% of domestic investment in 2013. However, natural gas production is partially hedged by long-term contracts that guarantee the purchase of minimum volumes at prices above international benchmarks.

Tighter monetary policy, administrative measures and price controls contained inflation at 6.5% by end-2013 and 7.3% by 1H14, although higher than the respective central bank's mid-point targets of 4.8% and 5.5%. Higher electoral spending and public investment are the main downside risks to the inflation outlook in 2014 - 2016.

Recently introduced mandatory credit quotas and interest rate controls are likely to adversely affect financial institutions' profitability and capitalization. The recent change in Fitch's Macro Prudential Indicator for Bolivia to '3' from '2', signals an increase in the risk of systemic financial stress in the banking sector, reflecting rapid credit growth and real exchange appreciation. Nevertheless, Fitch expects real credit growth to ease and notes that equity and real estate prices do not indicate the existence of bubbles.

Low governance indicators, political risks and a poor business environment remain key credit constraints. Per capita income tripled since 2005 but is yet to overcome the gap with similarly rated sovereigns. Capacity constraints in local governments and public enterprises weigh on the execution of the government's ambitious public investment and industrialization agenda.

RATING SENSITIVITIES

The Positive Outlook reflects the following risk factors that may, individually or collectively, result in an upgrade:

--Sustained growth momentum that would allow for improvements in GDP per capita with broad macroeconomic stability;

--Implementation of structural reforms that improve the business environment and increase our confidence in investment prospects and the medium-term sustainability of natural gas reserves;

--Strengthening of the budgetary and fiscal frameworks.

The Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:

--Hydrocarbons production shocks or a severe fall in export prices resulting in a material deterioration in external and fiscal solvency ratios;

--Failure to contain inflation pressures and policy changes that affect the stability of the financial system;

--Sustained fiscal slippage and materialization of contingent liabilities leading to adverse debt dynamics and the erosion of fiscal buffers.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions.

--The growth, fiscal and external forecasts assume that Bolivia maintains natural gas production at present levels and is able to meet the gas requirements from the local market and the export contracts with Argentina and Brazil in 2014-2016. International oil prices, a benchmark for Bolivia's energy contracts, will gradually weaken to USD95p/bl in 2016.

--Public spending, political polarization and regional tensions could intensify in the run-up to the October 2014 general and April 2015 local elections but are not likely to jeopardize overall macroeconomic and political stability.

--The risk of ad hoc nationalizations that do not severely impair economic activity and the sovereign's external and fiscal balance sheets are incorporated at the present rating level.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' (Aug. 13, 2012);

--'Country Ceilings' (Aug. 9, 2013).

Applicable Criteria and Related Research:

Sovereign Rating Criteria - Effective from 13 August 2012 - 12 August 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715618

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849294

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Cesar Arias, +1 212-908-0358

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Erich Arispe, +1 212-908-9165

Director

or

Committee Chairperson

Ed Parker, +44 20 3530 1176

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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