Bolivian Economy: A Look at the International Reserves
MABB ©
In the last few months, I have been placing quite a bit of attention on the Bolivian economy, as you can see in my recent posts. The main reason for this attention is because Bolivia has had an economic model which has attracted international attention simply because it is a country that has defined itself as socialist. The caveat is, as experience (and history) tells us, socialist economies are not the best example for growth and developed economies. However, Bolivia's economy has been developing at a decent rate, compared to its peers. That seeming contradiction prompts casual observers to ask themselves, how can that be?
Indeed, Bolivia has some good statistics to present, as the IMF shows. For one, it has managed to reduce extreme poverty, inflation has been basically a non-issue, it has until a couple of years ago, fiscal and trade surpluses and it has been a leading economy in the region in terms of growth.
So, how has Bolivia managed to do that?
Above all, to answer that question it is important to know that Bolivia's economy is significantly dependent on the export of natural gas, mostly to Brazil and Argentina. From the total gas exported to both countries, between 52 and 53 percent has gone to Brazil in 2017 and 2018, while between 47 and 48 percent has gone to Argentina in the same periods. In dollar terms that would mean a grand total of around 4.9 billion dollars. In terms of total exports, the IBCE reports the numbers for 2017, which show a dependency of between 29 and 34 percent of gas exports and another similar percentage for the exports of minerals. These numbers I cite are estimates because there is a wide array of numbers available, either from the Bolivian government or the international organizations. In short, they are different!
Another way of showing this dependency and not having to rely on the government statistics is by comparing the evolution of the country's GDP by annual growth in percentage terms for the last ten years and the trend in international oil prices in the same period. The figure above shows, the tendency of the Bolivian economy to follow the development of international oil prices, as the price of natural gas is for practical purposes referenced with the price of oil. As the price of oil rises, the price of Bolivian natural gas also rises, the economy receives more financial assets (dollars) and improves its performance. The effect is a faster pace on economic growth. That looks very telling!
Along the decade, that evolution has resulted in the accumulation of international reserves, which has been very positive for the economy. That brings us to a second factor which offers a further answer to the question.
Bolivia's international reserves has motivated praise due to the levels it has reached in the past, about 40 percent of GDP in 2015, and the resulting associations with sizable reserves, namely that of a solvent country with a high quote of savings (if you will). However, in the last year or so, the praise has turned into careful attention, not in an alarming way, but a healthy concern.
The concern has been with the decreasing trend (see below image), which if continued will mean uncertain economic times for the country. But, let us look at this issue with a bit more care.
International reserves vs. foreign exchange reserves
Experts distinguish at least two types of reserves. International reserves includes the amount of foreign 'liquid' assets that a country has at a given time. Normally, when talking about international reserves we are talking about not just foreign currency, but other types of assets such as SDRs (special drawing rights), gold, liquid government securities, and foreign deposits. The actual composition may vary by country, however what I list here is the norm. For its part, foreign exchange reserves are those assets kept to sustain the exchange of national currency for foreign currency.
Now I think, or better yet, it seems to me, Bolivia seems to conflate both terms, calling it Reservas Internacionales Netas (RIN) or Net International Reserves. In it, the central bank includes its holdings of US, Canadian and Australian Dollars, Euro, Renminbi, gold, SDRs and other government securities denominated in US dollars.
But the most important issue here is the trend, actually the decreasing trend, the reserves have been taking since some time. The Bolivian central bank reports for 2018 a total of USD 1,8 billion, that is down from USD 10.2 bn in 2017 and from a high of USD 15.1 bn in 2014. Now, if we look at the image above, which is taken from the IMF's Article IV report on Bolivia for 2018, we can see that Bolivian foreign reserves have been steadily decreasing between 2015 to 2018, and the image further shows projections for 2019 and 2020 are even lower.
What are reserves good for?
International reserves play different roles in different parts of the economy. For instance, countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate. A critical function is to maintain liquidity in case of an economic crisis. For example, to supply foreign currency to pay for imports or when foreign investors or traders withdraw their deposits. Another reason is to provide confidence. The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation. Additionally, keeping reserves are always needed to make sure a country will meet its external obligations. Finally, some countries use their reserves to finance development (industry, infrastructure, etc.)
Adequacy
This down trend throws some questions, namely, what is going to happen if it keeps going down? and more importantly, what is an adequate level of international reserves?
Because the first question's answer is obvious, we jump directly to the second one. The fact that the reserves go down does not necessarily mean the economy is in trouble. In fact, experts on the issue have more or less two rules of thumb to determine the level of adequacy for the international reserves. One rule of thumb says, a country is still in good condition if it has around the equivalent of three months of imports in its reserves. The other rule of thumb says that a country is equally in good condition if it has enough reserves to cover all short term debt obligations to the end of the fiscal year. A third rule of thumbs, albeit not widely used, was to keep the level of reserves to a 10 per cent of GDP.
Bolivia has been maintaining, by international "standards", a good level of international reserves. In terms of GDP, which is what the central bank reports, the country has 22 per cent. That places Bolivia among the first countries in South America. However, when we look at the IMF's estimates, we realize that Bolivia is still in somewhat good situation, but the prospects are not good. While the level of reserves 2018 is estimated to be 21 percent of GDP and 7 months worth of imports, the estimations for the following years, 2019 and 2020 are significantly lower, namely 18 percent and 6.9 months and 16 percent and 6 months respectively.
What is the problem?
The concrete problem with Bolivia's particular situation, being addressed by concerned experts at the national and international levels, has to do with the down trend and the probable difficulties this trend might bring for the country's currency. For this we need to keep in mind what the international reserves are for.
Bolivia has been pegging the value of its currency (the Boliviano or BOB) to the USD. The concern here is, if the down trend in international reserves continues, there will come a time when foreign investors and creditors will ask themselves if Bolivia is still able to keep the value of the BOB pegged to the USD. The reason, because in the international markets, the value of the dollar goes up and down, as does therefore the value of the BOB. To keep the value fixed, the central bank has to (as required) buy or sell currency. If the central bank is forced by the market to defend the BOB, and it some time runs out of reserves... Then there is trouble!
A Bloomberg analyst puts it this way:
The only thing that can help Bolivia regain some stability is a rise in the price of commodities, that is a rise in the price of natural gas. That would bring fresh new currency into the foreign reserves pot and can increase the cushion the country has to weather coming crises.
Sources:
http://www.datos-bo.com/Economia-a-Finanzas/Analisis/Analistas-Baja-de-las-Reservas-puede-afectar-el-tipo-de-cambio
https://www.thebalance.com/foreign-exchange-reserves-3306258
In the last few months, I have been placing quite a bit of attention on the Bolivian economy, as you can see in my recent posts. The main reason for this attention is because Bolivia has had an economic model which has attracted international attention simply because it is a country that has defined itself as socialist. The caveat is, as experience (and history) tells us, socialist economies are not the best example for growth and developed economies. However, Bolivia's economy has been developing at a decent rate, compared to its peers. That seeming contradiction prompts casual observers to ask themselves, how can that be?
Indeed, Bolivia has some good statistics to present, as the IMF shows. For one, it has managed to reduce extreme poverty, inflation has been basically a non-issue, it has until a couple of years ago, fiscal and trade surpluses and it has been a leading economy in the region in terms of growth.
So, how has Bolivia managed to do that?
Above all, to answer that question it is important to know that Bolivia's economy is significantly dependent on the export of natural gas, mostly to Brazil and Argentina. From the total gas exported to both countries, between 52 and 53 percent has gone to Brazil in 2017 and 2018, while between 47 and 48 percent has gone to Argentina in the same periods. In dollar terms that would mean a grand total of around 4.9 billion dollars. In terms of total exports, the IBCE reports the numbers for 2017, which show a dependency of between 29 and 34 percent of gas exports and another similar percentage for the exports of minerals. These numbers I cite are estimates because there is a wide array of numbers available, either from the Bolivian government or the international organizations. In short, they are different!
Another way of showing this dependency and not having to rely on the government statistics is by comparing the evolution of the country's GDP by annual growth in percentage terms for the last ten years and the trend in international oil prices in the same period. The figure above shows, the tendency of the Bolivian economy to follow the development of international oil prices, as the price of natural gas is for practical purposes referenced with the price of oil. As the price of oil rises, the price of Bolivian natural gas also rises, the economy receives more financial assets (dollars) and improves its performance. The effect is a faster pace on economic growth. That looks very telling!
Along the decade, that evolution has resulted in the accumulation of international reserves, which has been very positive for the economy. That brings us to a second factor which offers a further answer to the question.
Bolivia's international reserves has motivated praise due to the levels it has reached in the past, about 40 percent of GDP in 2015, and the resulting associations with sizable reserves, namely that of a solvent country with a high quote of savings (if you will). However, in the last year or so, the praise has turned into careful attention, not in an alarming way, but a healthy concern.
The concern has been with the decreasing trend (see below image), which if continued will mean uncertain economic times for the country. But, let us look at this issue with a bit more care.
International reserves vs. foreign exchange reserves
 |
| IMF, Article IV 2018 Bolivia |
Experts distinguish at least two types of reserves. International reserves includes the amount of foreign 'liquid' assets that a country has at a given time. Normally, when talking about international reserves we are talking about not just foreign currency, but other types of assets such as SDRs (special drawing rights), gold, liquid government securities, and foreign deposits. The actual composition may vary by country, however what I list here is the norm. For its part, foreign exchange reserves are those assets kept to sustain the exchange of national currency for foreign currency.
Now I think, or better yet, it seems to me, Bolivia seems to conflate both terms, calling it Reservas Internacionales Netas (RIN) or Net International Reserves. In it, the central bank includes its holdings of US, Canadian and Australian Dollars, Euro, Renminbi, gold, SDRs and other government securities denominated in US dollars.
But the most important issue here is the trend, actually the decreasing trend, the reserves have been taking since some time. The Bolivian central bank reports for 2018 a total of USD 1,8 billion, that is down from USD 10.2 bn in 2017 and from a high of USD 15.1 bn in 2014. Now, if we look at the image above, which is taken from the IMF's Article IV report on Bolivia for 2018, we can see that Bolivian foreign reserves have been steadily decreasing between 2015 to 2018, and the image further shows projections for 2019 and 2020 are even lower.
What are reserves good for?
International reserves play different roles in different parts of the economy. For instance, countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate. A critical function is to maintain liquidity in case of an economic crisis. For example, to supply foreign currency to pay for imports or when foreign investors or traders withdraw their deposits. Another reason is to provide confidence. The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation. Additionally, keeping reserves are always needed to make sure a country will meet its external obligations. Finally, some countries use their reserves to finance development (industry, infrastructure, etc.)
Adequacy
This down trend throws some questions, namely, what is going to happen if it keeps going down? and more importantly, what is an adequate level of international reserves?
Because the first question's answer is obvious, we jump directly to the second one. The fact that the reserves go down does not necessarily mean the economy is in trouble. In fact, experts on the issue have more or less two rules of thumb to determine the level of adequacy for the international reserves. One rule of thumb says, a country is still in good condition if it has around the equivalent of three months of imports in its reserves. The other rule of thumb says that a country is equally in good condition if it has enough reserves to cover all short term debt obligations to the end of the fiscal year. A third rule of thumbs, albeit not widely used, was to keep the level of reserves to a 10 per cent of GDP.
Bolivia has been maintaining, by international "standards", a good level of international reserves. In terms of GDP, which is what the central bank reports, the country has 22 per cent. That places Bolivia among the first countries in South America. However, when we look at the IMF's estimates, we realize that Bolivia is still in somewhat good situation, but the prospects are not good. While the level of reserves 2018 is estimated to be 21 percent of GDP and 7 months worth of imports, the estimations for the following years, 2019 and 2020 are significantly lower, namely 18 percent and 6.9 months and 16 percent and 6 months respectively.
What is the problem?
The concrete problem with Bolivia's particular situation, being addressed by concerned experts at the national and international levels, has to do with the down trend and the probable difficulties this trend might bring for the country's currency. For this we need to keep in mind what the international reserves are for.
Bolivia has been pegging the value of its currency (the Boliviano or BOB) to the USD. The concern here is, if the down trend in international reserves continues, there will come a time when foreign investors and creditors will ask themselves if Bolivia is still able to keep the value of the BOB pegged to the USD. The reason, because in the international markets, the value of the dollar goes up and down, as does therefore the value of the BOB. To keep the value fixed, the central bank has to (as required) buy or sell currency. If the central bank is forced by the market to defend the BOB, and it some time runs out of reserves... Then there is trouble!
A Bloomberg analyst puts it this way:
A currency plunge is an especially frightening prospect because of Bolivia’s increasing external debt. Though Bolivia hasn’t yet borrowed nearly as much from other countries as it did in the 1980s (relative to the size of its economy), the amount that Bolivia’s government owes in foreign currencies has approximately quintupled since 2007. The country’s total external debt has gone up by about 30 percent.Bolivia might not have the money to pay its debt in the future if the reserves are further depleted. That would be the second problem threatening Bolivia.
The only thing that can help Bolivia regain some stability is a rise in the price of commodities, that is a rise in the price of natural gas. That would bring fresh new currency into the foreign reserves pot and can increase the cushion the country has to weather coming crises.
Sources:
http://www.datos-bo.com/Economia-a-Finanzas/Analisis/Analistas-Baja-de-las-Reservas-puede-afectar-el-tipo-de-cambio
https://www.thebalance.com/foreign-exchange-reserves-3306258
