Fitch Rating agency downgrades Bolivia’s foreign ​​​​​​​currency credit ratio

Bolivia’s balance of payments has reached a critical situation this year putting the country’s economy under significant pressure. In February the Fitch Rating agency downgraded Bolivia’s foreign currency credit ratio from ‘B-‘ to ‘CCC’ because Fitch believes the country’s foreign currency debt risk has increased significantly.

One of the problems Bolivia faces centres the value of the Boliviano being pegged (fixed) against the US dollar. This has become a problem for the Bolivian central bank because of downward pressure on the Boliviano in recent months which the central bank has had to support by buying Bolivianos using its US dollar reserves. This has led to a drain in Bolivia’s currency reserves and a shortage of US dollars in the wider economy. At the end of 2023, Bolivia’s net foreign currency reserves had fallen to a 20-year low of $1.7 billion.

An important cause of Bolivia’s currency difficulties is the country’s balance of payments problems which stem from its over-reliance on the export of natural gas. Falling gas prices over the last 12 months combined with the country’s dwindling gas reserves have led to a significant fall in the value of its exports. The countries import expenditure has also increased due to rising oil and world food prices.

The chart shows (source: Trading Economics) how Bolivia’s balance of trade has fallen into deficit in 2024 because of falling export revenues and rising import expenditure. The country is also experiencing a declining inflow on its financial account which is putting significant pressure on the whole balance of payments. Fitch’s decision to downgrade Bolivia’s credit rating is only going to make attracting foreign investment into the country even more problematic.

The shortage of US dollars and other foreign currencies in Bolivia is making it difficult for businesses to pay for imported inputs and capital goods. If the Boliviano was allowed to move away from its fixed rate against the US dollar and depreciate this could alleviate the shortage of US dollars but the currency depreciation would a cause significant increase in import price which would trigger cost-push inflation. This could hinder the country's economic growth rate which is already forecast slow in the second half of the year. Rising imports prices would also be particularly difficult for low-income households in Bolivia who depend on imported food.

Possible questions to discuss with with a class

1. Where do you find reserves in a country's balance of payments account?

2. Why is the value of Bolivia's reserves in the balance of payments falling?

3. Where do you find the balance of trade in the balance of payments account?

4. Why is Bolivia experiencing a balance of trade deficit?

5. What does the Boliviano being fixed against the US dollar mean?

6. How does the Boliviano being fixed against the US dollar affect the countries reserves?