Bolivians queue for dollars as crisis of confidence unfolds

“WeAreAStableCountry,” Bolivia’s central bank said repeatedly on Twitter this month. The long lines of people outside the offices, clamoring to buy dollars, suggest otherwise.

The impoverished South American country’s foreign exchange reserves have been shrinking for years, threatening the Boliviano’s peg to the US dollar. As of February 8, only $372 million in net reserves and $3.5 billion in gross reserves remained — not enough to cover imports for even three months. Since then, the central bank hasn’t released any new figures, and investors are asking how much longer Bolivia can avoid devaluation.

In a sign of the deepening crisis, Fitch downgraded Bolivia’s debt deeper into junk territory on Tuesday, assigning it a B-minus rating with a negative outlook. The rating agency cited “increased uncertainty about the authorities’ ability to manage this situation and its severity given an ongoing delay in the release of international reserves data.”

Bolivia’s 2028 government bond traded at 64 cents in dollars on Wednesday, a level that suggests investors believe there is a significant chance of a default. The price has fallen from 80 cents at the beginning of the year.

Behind the immediate crisis lies a more serious long-term problem: Bolivia’s economic model of the last two decades is broke. The landlocked country of 12 million people has thrived for years by exporting natural gas to its neighbors, but reserves are rapidly declining, and by 2030 Bolivia is likely to become a net importer.

The central bank took the unconventional step this month, offering to sell dollars directly to the public after Bolivians complained about difficulty finding the US currency at banks and bureaux de change. Last Sunday, the central bank announced that it sold $24.1 million of its reserves to the public between March 6 and March 12.

Central Bank Governor Edwin Rojas said dollar buyers had been “victims of a speculative process,” and a press release from the bank claimed it had “satisfied public demand” last week.

However, queues of people trying to buy dollars continued to form outside the central bank’s headquarters in La Paz this week. People also waited outside the branches of Banco Union, a state-controlled bank that received dollar sales from the central bank in the cities of Santa Cruz and Cochabamba.

The crisis of confidence spread to Banco Fassil, a privately held bank with $4.2 billion in assets, on Tuesday. Customers rushed to withdraw savings as the bank denied that Bolivia’s financial regulator would intervene. People waited outside branches to withdraw cash, and some told local media they were not allowed to withdraw more than 10,000 bolivianos ($1,451).

Banco Fassil said in a statement that the crisis was caused by “specific interests designed to create destabilization in the Bolivian financial system”.

The Treasury did not respond to requests for comment and the central bank referred requests to its published statements.

Economists said Bolivia’s economic problems were deep-rooted and called for drastic measures. “Foreign exchange reserves are so depleted that it will be very difficult for Bolivia to avoid a correction in the exchange rate and exchange controls,” said Ramiro Blazquez, research director at BancTrust in neighboring Argentina. “They could raise interest rates to try and stave off devaluation, but eventually they will have to.”

Years of statist policies by Bolivia’s socialist government have scared off investors and prevented new oil and gas exploration. Rudely expensive fuel subsidies have fueled a thriving smuggling trade, with dirt cheap Bolivian diesel being smuggled across the border to be sold in neighboring Peru and Chile. Fuel imports have risen from 11 percent of Bolivia’s total imports in 2015 to 34 percent last year, according to rating agency S&P Global Ratings.

Bolivia’s gold reserves could provide an alternative source of foreign exchange reserves, but they are largely mined by unregistered operators who are estimated to smuggle up to $2 billion of the precious metal out of the country annually. The government is trying to pass legislation that would allow the central bank to buy gold directly from informal miners and use its current reserves more freely, but this is stuck in Congress.

The economic crisis comes amid an increasingly bitter political battle between President Luis Arce and his one-time ally, former President Evo Morales. Arce served as finance minister in Morales’ last government, but the two men have since parted ways in a power struggle that has split the ruling Movement Towards Socialism (MAS).

“The government has very little room for manoeuvre,” said Luis Prato, senior economist at Torino Capital in New York. “You have some short-term opportunities to access liquidity, such as selling IMF SDRs [reserve assets] or accelerating lending by multilateral lenders. . . But the biggest challenge is the budget deficit, which will be 6.5 percent this year.”

Bolivia’s general government debt was about 66 percent of gross domestic product in 2022, but most of it is owed to multilateral lenders. External debt for private bondholders is modest at just $2 billion, with $300 million of debt service due in 2023, according to Fitch.

“Although these are small amounts, the state’s ability and willingness to pay them could be called into question if international reserves continue to dwindle,” the rating agency said.