Bolivian Debt Is No-Go as Morales Exit Fuels Investors Doubt

(Bloomberg) -- Bolivia’s first change in government in more than 13 years opens the door for a reformist administration that could eventually bolster economic growth. For bond investors, though, it’s far too early to bet on a revival.

That’s the conclusion of analysts at BNP Paribas Asset Management and Aberdeen Asset Management Plc, who expect more instability after a disputed election last month triggered weeks of violence, military intervention and the resignation of President Evo Morales. Absent clear leadership or a date for new elections, Bolivia’s dollar bonds are likely to keep sliding, the analysts said, though they’re leery of predicting exactly how much. Morales has been granted asylum by Mexico, according to that nation’s foreign minister.

“If uncertainty prevails, we may see further selling because the positive that Morales brought was stability, and now any uncertainty may be potentially worrisome,” said Emilia Matei, an emerging-market analyst at Aberdeen in London. “The first hurdle has passed, though, that of political change. It remains to be seen whether the change will be for the better.”

Bolivia’s $1 billion dollar-denominated bonds due in 2028 fell 5 cents since a disputed presidential election on Oct. 20 and were fetching about 92 cents on the dollar last week, yielding 5.715%. That’s in line with Ivory Coast, which shares Bolivia’s Ba3 rating from Moody’s Investors Service, but higher than other peers such as the Dominican Republic, Senegal and Serbia. The 2028 notes fell less than 1 cent to 91.68 cents on the dollar as of 8:50 a.m. on Tuesday in New York, taking the yield to the highest since February.

While the Morales government sought to shore up the economy with public spending, that also sparked an uptick in the nation’s public debt and eroded international reserves. Public debt rose to 53% of gross domestic product from 38% between 2014 and 2019, while reserves shrank to a 10-year low of $7.9 billion in March from about $15 billion, the most recent data show.

Expect more instability in coming days and a rocky political transition, said Jean-Charles Sambor, the London-based deputy head of emerging-market fixed income at BNP Paribas Asset Management. Credit fundamentals have deteriorated in recent years as the fiscal deficit expanded, slowing economic growth and siphoning reserves, he said, adding that Bolivian debt is worth buying only if there are improvements in governance and in curbing deficits.

Granted, the bonds could rebound if a reformist leader emerges from the transition with enough support and credibility to make policy changes. Opposition candidate Carlos Mesa, the runner-up in the election, could be an option, Aberdeen’s Matei said. On Monday, Mesa urged lawmakers from Morales’ MAS party, which dominates the legislature, to attend Congress to ensure a quorum for a session to accept the president’s resignation and appoint a replacement. Bolivia last defaulted on international debt in 1988.

“Elections are highly likely to occur, and when they do, the opposition is set to come out on top,” Eurasia Group analysts Filipe Gruppelli Carvalho in Washington and Risa Grais-Targow in New York wrote in a report. “The outlook for an opposition-led administration is probably more constructive than a fourth Morales term, but the need for significant reforms and the energetic opposition of pro-Morales groups suggest a challenging scenario.”

Prolonged uncertainty would hurt growth and exacerbate the erosion of fiscal and external buffers that are key supporters of Bolivia’s credit profile, according to William Foster, a senior credit officer at Moody’s. The firm rates Bolivia one notch below Brazil.

To contact the reporters on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Andres Guerra Luz in Houston at aluz8@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Justin Carrigan, Alec D.B. McCabe

©2019 Bloomberg L.P.