Bloomberg — One social media post from former President Evo Morales has put Bolivia back in the cross-hairs of bond investors.
The Latin American country’s bonds due in 2028 have lost 10 cents on the dollar since the left-wing indigenous leader on Sept. 24 announced that he planned to run for the presidency in 2025, one of the worst performances for sovereign debt markets worldwide over that period.
The surprise comeback bid by Morales, who ran the nation for nearly 14 years, adds a new level of political risk to a country already buckling under an economic crisis that has seen dollar reserves drain away from the central bank. That’s threatening a currency peg that has lasted more than a decade, and whose end would make it harder to meet payments on $2.36 billion of dollar debt.
Evo Morales, Bolivia’s ex president, speaks during a campaign rally in El Alto, Bolivia, on Wednesday, Oct. 16, 2019.
“We’re entering a period of political instability in the middle of deteriorating balance of payment dynamics,” said Nathalie Marshik, a managing director for Latin America fixed income at BNP Paribas SA. “There is no support for the bonds.”
In a taste of the infighting to come, the political committee of Bolivia’s ruling party ratified Morales as its leader and candidate for the 2025 election at a congress Wednesday, while declaring that current President Luis Arce was expelled, according to a local media report. Arce has vowed to retain the support of the party.
The country’s most-liquid notes, due in 2028, dropped further on Wednesday to around 49 cents on the dollar, the lowest since mid-April, when the central bank imposed strict capital controls to prevent the purchase of dollars.
The extra yield investors demand to hold the nation’s bonds over similar US Treasuries has soared more than 9 percentage points to about 15 points this year, according to JPMorgan Chase & Co. data. That is well into distressed territory, indicating that many are expecting a default.
Long-Time Coming
Bolivia’s crisis had been years in the making. Falling natural gas exports have sent the current account into a steep deficit, draining central bank reserves in each of the last eight years as the fixed exchange rate keeps a lid on other exports.
The last data available on the bank’s website, dated from April, shows net reserves of $3.16 billion dollars, of which $2.76 billion was held in gold. Since then, the bank said in a quarterly report that it sold $1 billion of gold, leaving it with about 26 tons.
Representatives for the bank didn’t reply to messages seeking comment.
Earlier this year, people were queuing in a line stretching three blocks to buy dollars at the central bank’s counters amid growing fears the nation’s dwindling cash reserves would force a devaluation of the boliviano currency. Now anyone wanting to buy dollars must make an appointment weeks, if not months, ahead.
On the black market, meanwhile, the bolivar is trading at 7.5 to the dollar compared with about 6.9 at the official exchange rate.
Rising oil prices are also increasing the cost of subsidies, creating a further drain on fiscal balances and adding to pressure on authorities to print more money, according to Marshik.
“It is hard to justify going long in Bolivia,” she said.
Risk-off Sentiment
A broad-based selloff across emerging markets is also damping demand for Bolivian debt, according to Oren Barack, managing director of fixed income at New York-based Alliance Global Partners.
“Combination of ‘higher for longer’ by the US Fed and acrimony in Congress is creating a risk-off environment,” Barack said. “Bolivia is a higher beta EM sovereign and is feeling the pain.”
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But some say the slump may have gone too far. Elections are a long way off and Bolivia doesn’t have to make any principal payments on its dollar debt until 2026. Before then, the central bank just needs to find $108.8 million for interest payments in both 2024 and 2025, according to data compiled by Bloomberg.
“It’s a long way away from the election in 2025, so they can get there just muddling through by more capital controls and using whatever reserves they have,” said Ricardo Penfold, managing director at Seaport Global Holdings LLC. “Their solution would just be go to the IMF, get multilateral funding and they wouldn’t need to restructure their external debt. It’s an easy fix on paper, but politically it’s costly.”
So costly, it may not happen, leaving the bonds that are already illiquid to potentially fall still further.
“There is some value at these levels,” Barack said. “But we are likely to see further pressure on bonds with US yields moving higher and I expect the lows are still a bit further from here.”
It’s a view echoed by EMFI Group Ltd, which recently changed its “hold” recommendation on the country’s sovereign bonds to “sell.”
“Crises do not always create opportunities,” according to the EMFI report. “While we don’t expect a default in the short term, the government continues refusing to address the key macro imbalances or resort to an IMF program, which means there are more headwinds than potential positive triggers in the horizon.”
--With assistance from Sergio Mendoza.
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