June 16, 2012

Bolivia's Economic Performance

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How reliable is the IMF in impartially observing the economies of countries in development? Some criticize the IMF controls rather than monitors the economies. However, the real question is whether the data, assessments and judgements are unbiased and therefore worth the ink they are printed on. Personally, I tend to rely on the data generated by the IMF for two reasons: a) the data is more or less current (at least in the case of Bolivia), with the caveat that most of the data is generated by the Bolivian government; and b) the IMF has an interest to generate the best data and judgements possible because it is its money it has to safeguard.

In any case, the IMF conducts what it calls Article IV consultations with debtor countries and this year Bolivia and the IMF held such consultations in La Paz and Santa Cruz during March 19-30, 2012. The results of that process can be seen in the IMF's Bolivia Article IV Consultation report. Once again, I think the report is worth a look.

Here is the verdict of the IMF regarding the Bolivian economic development:

Real GDP growth is projected at 5 percent in 2012 thanks to external tailwinds, strong gas export volumes, and mildly expansionary policies, which are supporting domestic demand growth. The external current account and the fiscal position are projected to show small surpluses. Downside risks in the short term are mitigated by strong buffers. With the output gap estimated to have closed and domestic demand strong, there is a risk of overheating.

Basically, in macroeconomic terms, Bolivia's economy is doing relatively well. There are a couple of reason for that.

Bolivia's GDP has been performing satisfactorily indicating a positive rate of growth, albeit with some slowing down in 2009 and 2010. Now, as you can see from the graph left, growth has been mainly driven by consumption, that is domestic demand. One reason for that is the fact that the Morales government has been "pumping" the economy by implementing different types of social transfers such as the Juancito Pinto (US$ 30/mo), Juana Azurduy (pre-natal US$50/mo and post-natal US$225/mo over two year period), and the Renta Dignidad (US$30/mo) bonuses as well as subsidizing fuel and electricity prices.

To do all these transfers, the government heavily relies on the revenue from the sell of natural gas (above all) and mineral products. To see this we observe in the following graph that the blue line, i.e. gas exports represents a large percentage of GDP and is consistently above all other components.

Not even mineral exports, which used to be the economic sector with most influence in the Bolivian economy reach the level of natural gas exports. Also, an important element which was becoming even more important for the Bolivian economy, that is remittances, has began to decrease in importance.

What does this graph represent? I think, the graph shows how dependent the Bolivian economy is from the export of natural gas. An even worst, how dependent the country is from a handful of countries such as Brazil and Argentina, which is where most of the natural gras heads to.

Just for comparison, if we take a look at world spot prices of natural gas in the major financial markets:

US Energy Information Administration
From 2007 to the current time, the price of natural gas has had a positive tendency. The demand for natural gas in the major markets has been an important factor for a more or less sustainable rise in prices. Moreover, looking at the consumption of natural gas in Brazil:

US Energy Information Administration
It is possible to see that Brazil's consumption has been growing at what I would consider exponential rate up until 2008, which shows a sharp decrease and I take it, it had to do with the world financial troubles. From 2008 on the demand grew steeply once again. The demand and consumption of Bolivian natural gas in Brazil has been a major factor in the positive situation of the Bolivian national coffer. Bolivian authorities have been trying to increase the volume of natural gas exports to Brazil since 2008.

If Bolivia has been profiting with the rise in international prices of natural gas and the elevated demand, especially of Brazil, then the government has had a favorable macroeconomic environment to pursue its national policies.

The other side of the coin is that these expansionist policies the Bolivian government has been implementing, have the potential (and there is already evidence that they are) to trigger not so favorable developments. For example, the increase in domestic demand has began to have an effect on the level of general prices. In fact, the Morales government has been fighting against creeping inflation since the beginning of its term in 2006. The increase in demand raises the general level of prices and this has detrimental effects in the economy at medium to long term times of frame.

For the short term, the Bolivian economy is in good standing. It has sufficient foreign reserves to tackle any adversity and, of course, the natural gas exports are still strong. The problem would be in the medium term when the price of natural gas and gasoline begin to fall and the intake for the Bolivian government is not as strong as it is right now. The question is, can the Bolivian government keep its transfer policies in the case that the demand for natural gas dwindles or even breaks down?

Of course, the report has a much better and more complete analysis and, as I said, it is worth a look.


Carolyn Juhne said...

Dear Miguel,

I read your recent article on Bolivia's Economic Performance (June 2012) and would love your perspective on some follow-up questions that I have. If you're open to this, is there an email address at which I can best reach you?



Miguel A. Buitrago said...

Dear Carolyn,
feel free to post your questions here. That's why I have this blog for. Thanks for your interest.

George Rogers said...

Dear Miguel,

With the trend of nationalizations in natural resources and energy gaining new momentum this year as Morales responds to populist demands, is Bolivia at risk of becoming isolated from foriegn capital like Argentina? The government announced its plans to enter the foreign debt market by issuing government bonds to foreigners this summer, which would lay the ground work for access to foreign currency, but has yet to do so. Separately, while public debt has decreased in the country what do private debt levels say about the state of the economy?

If you have a perspective on any of these questions, I would greatly appreciate your insight.

Thank you,

Miguel A. Buitrago said...

Dear George,
thanks for visiting. This first issue has been, for a short time, a puzzle to me. In spite of Morales' actions of nationalizing important parts of the economy, foreign investors are still staying put and willing. It is now clear to me that international businesses have the experience and the willingness to make money/invest adapting themselves to the local conditions. So, in this respect, I would argue that Bolivia will not become completely isolated from foreign capital. There are enough financial hawks out there to want to get involved because they "seem" to understand the risks very well. Of course, investors in the financial markets and multi-lateral organizations will be much more reserved. In that respect, I would agree with your statement that Bolivia has already been isolated.

Miguel A. Buitrago said...

George, to the second question, Bolivia has been experiencing a favorable environment in terms of international prices of raw materials. Thus, it has been able to build up a significant level of reserves. This is important because it gives the economy a certain level of stability through liquidity. Based on that, the Bolivian Government has been implementing a "bolivianization" of the economy policy. This strategy is basically reducing foreign currency denominated transactions and financial activities. The government and the private financial institutions have been issuing debt in Bolivianos which has been met with an adequate level of demand. This is a situation, I think, particular to this favorable moment Bolivia is experiencing. So, to answer your question, the levels of private debt (which I do not know exactly right now) seem to be adequate with the level of productivity and growth of the economy. They are one factor of growth, I would say. The banking system seems to be operating the way it is supposed to, for the time being. For the moment, the health of the economy, however unconsolidated, seems to be good.

hbpublic said...

Hi Miguel,

do you know more or less independent sources about the current status (or launched projects) concerning petrochemical production in Bolivia? I heared, that most products are still imported from Venezuela. I heared as well, that Evo Morales expressed the wish to establish it but I can't find details about the progress of implementation.


Miguel A. Buitrago said...

Dear Hermann, I would suggest that instead of looking for independent sources you take a look at many sources (including those of the government) and make up your own mind. That is why I am listing here three of the ones I know:
How independent these are, probably not very, but all three can give you a pretty good idea of the whole.