Luis Arce, Bolivia's finance minister

Since president Evo Morales took office in Bolivia in 2006, political stability has gone hand-in-hand with a period of robust economic growth. The country's finance minister shares with The Banker how Bolivia has managed to protect itself from the worst of the global economic crisis and spells out plans for future expansion. Writer Jane Monahan

Since president Evo Morales took office in 2006, landlocked Bolivia in the South American Andes has experienced higher rates of economic growth than at any time in the past 30 years, according to the country's finance minister, Luis Arce.

On a recent visit to the US, during which he addressed Washington think tank the Centre for Economic Policy and Research (CEPR), Mr Arce described how in 2009, when much of the Western world, including the US, was showing negative growth as a result of the worldwide recession, Bolivia managed to record a 3.4% increase in gross domestic product (GDP), the highest rate of growth "from Alaska to Argentina", according to the former Bolivian central bank employee.

One reason for this success, according to international financial institutions, is that Bolivia's banking system, which has only one foreign-owned bank, emerged practically unscathed from the financial crisis because of its limited integration in global capital markets. "With negligible foreign credit lines in banks' balance sheets and a lack of exposure to impaired foreign assets [toxic mortgage-related securities], banks have remained liquid, profitable and well-capitalised," notes the International Monetary Fund's (IMF's) January assessment of Bolivia.

Furthermore, stronger bank supervision under the Morales government has led to a significant decline in the banking system's average non-performing loans (NPL) rate, from 10% in 2006 to 3.4% in March 2010. And through voluntary measures, the government also succeeded in reducing the sector's high level of dollarisation in accordance with an IMF recommendation. In 2009, 50% of the banking system's deposits and loans were in bolivianos, the national currency, compared to 16% of its deposits and just 8% of its loans in 2005.

Fast rebound

Bolivia, which has the second-largest natural gas reserves in South America and is an important mineral exporter, also benefited from rising commodity prices and exports until the recession hit in 2008. Indeed, with the recovery in hydrocarbon exports this year, Bolivia will rebound with "at least a 4.5% growth rate", according to Mr Arce. Meanwhile, the country had current account surpluses averaging 11.8% of GDP from 2006 to 2008; public debt declined to 45.4% of GDP in 2009, from 74.7% in 2005, mainly because of debt-cancellation initiatives by multilateral banks; and Bolivia's international reserves soared to $8.5bn in September 2009, which represents 45% of GDP - more than China's reserves percentage.

But the principal reason for the Andean nation's success - recognised by the IMF, the World Bank and the Inter-American Development Bank - has been very prudent macroeconomic management, combined with effective policy responses to the crisis.

The government's fiscal balance moved from a surplus of more than 5% of GDP in the first quarter of 2008 to a deficit of 0.7% in the first quarter of 2009. "That's a big stimulus. Much bigger than in the US, for example. That, I think, was the main reason why Bolivia was able to keep growing right through the recession. It was a very well-timed and significant expansionary policy," says Mark Weisbrot, an economist and co-director of the CEPR. (Bolivia's budget for the whole of 2009 was in surplus, as it was from 2006 to 2008, in contrast to the consistent budget deficits from 2000 to 2005.)

"We had a president in the past who said, 'export or die'. Well, now we cannot die from a decline in exports [as in 2008 and 2009]. We want to use two engines for growth - external and internal demand," says Mr Arce.

But that policy would not have been possible without greater government control over natural gas production and revenues. Bolivia renationalised hydrocarbons in 2006, which resulted in a $2bn annual increase in government income, says Mr Arce.

The policy is popular with Mr Morales' base: the vast majority of Bolivians, Aymara and Quechua-speaking Indians, who have gained the most from government social programmes targeted at the poorest in the past three years, as well as from higher wages and an increasing level of employment.

In from the cold

Many Bolivians previously outside the monetary system are now participating, according to Mr Arce. He says one sign of this is that while savings accounts represented just 27% of total bank deposits of $3.1bn in 2005, in 2009, when bank deposits had grown to $5.4bn, 37% of these were savings accounts. "This shows more people are saving money. Even some poor people are getting enough money to be able to save a little," says Mr Arce.

Macroeconomic and political stability are going hand-in-hand. Mr Morales won 63% of the vote for a second five-year term as president in December 2009 (compared with 51% of the vote in 2005) and his party, Movement Towards Socialism, or MAS, also won more than the two-thirds majority parliament needed to continue his programme of nationalisation and reforms without obstruction.

Increased government revenues have also led to more investments in infrastructure, which is an important consideration for businessmen when making investment decisions. For instance, the Morales administration is investing in a network of roads to connect the country and also act as a transport hub for other South American countries, taking advantage of Bolivia's position at the centre of the continent.

However, some economists consider the government's policy to be self-defeating. Foreign gas companies that developed gas fields in the country after their discovery in 2000 - notably Petrobras and Repsol - have experienced steep declines in profits, raising doubts about their future investments in the region.

On the other hand, Bolivia has a long tradition, since colonial exploitation of its rich silver mines in the 15th century, of failing to use its wealth to develop its infrastructure and provide education and training for the indigenous population. Additionally, though progress has been made, the poverty rate in Bolivia still stands at 58%. There is also extreme income disparity and almost no industrial base. As Pablo Salòn, Bolivia's ambassador to the UN, was famously quoted as saying: "We even have to import nails."

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Evo-lution: the Bolivian president's widespread popularity has ushered in a period of political stability

Future planning

Mr Arce recently visited the US in an effort to attract foreign investors to support a seven-year industrialisation, infrastructure development and economic diversification plan worth $32bn, almost double the country's $18bn GDP. Before the Washington meeting, Mr Arce addressed the American-Bolivian Chamber of Commerce and the Council of the Americas in New York. "[Government officials] are working hard to attract foreign and private investment under their conditions," a World Bank expert said.

Outlining the Morales government's goals, Mr Arce stressed that Bolivia wants to make a break with the past of being only an exporter of raw materials.

"No foreign investor can come to Bolivia to exploit as a raw material our natural resources. What we ask [foreign investors] is to come to Bolivia and, if they want to invest in mining or gas, then they have to help Bolivia move up the world's technological ladder and add value to the production of minerals and gas."

Part of the $32bn required for the proposed plan will be financed with the country's own savings but the rest, Mr Arce says, will be raised externally, by borrowing from multilateral organisations, such as the World Bank and the Inter-American Development Bank; issuing bonds (the country's first international bond sale in 70 years may be as soon as in 2011); and by foreign direct investment.

With these resources, Mr Arce says, Bolivia would also like to start exporting energy to its neighbours, such as Brazil, now Bolivia's biggest trade partner. The government could try to issue up to $1.2bn in dollar-denominated bonds in international markets to finance the construction of the 800-megawatt Cachuela Esperanza hydroelectric dam near Brazil's north-eastern border.

Additionally, according to Mr Arce, the time has come to recover the pre-eminence the region had in pre-colonial times as a food supplier. Bolivia would like to diversify its economy and become a major food exporter in South America and the world. "We want to produce Western-style food, such as rice, wheat, soy beans and corn, and also traditional Indian food, such as quinoa [a high-protein grain], which Japan is already buying in large quantities," he says.

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