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AmericasSeptember 4 2005

Bolivia’s ticking time bomb

Despite Bolivia’s political and social upheaval, its financial sector has remained relatively stable. But, as Jaime Dunn De Avila writes from La Paz, the loan system has some fundamental flaws that need addressing.
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Political turmoil and social unrest are nothing new in Bolivia. Widespread poverty, high unemployment, racial discrimination, corruption and a backlash against the neo-liberal economic model implemented in 1985 are the principal causes of continuous crises and instability since 1998.

The Bolivian banking system is small compared with other Latin American countries, a reflection of the size and poverty of the Bolivian economy. In the past few years, the banking sector, made up of 13 banks, has suffered a number of blows that caused capital flight, an increase in the levels of credit defaults and a persistent shrinkage on the level of outstanding loans.

In December 1998, the banking sector had $4.2bn in loans and $3.5bn in bank deposits. In the first week of June 2005, those figures were $2.5bn (-40%) and $2.6bn (-26%) respectively. Since 1998, more than $1bn in bank deposits have been withdrawn, while credit defaults have increased nearly 250%, from 6.5% to 16.3%.

Cut in loans

A good portion of the reduction in outstanding loans has been the result of policies carried out by Citibank NA and Banco Santa Cruz (owned by Banco Santander Central Hispano of Spain since 1998). Since 2000, Banco Santa Cruz has gone from being the largest bank in term of assets, to the fifth largest, while Citibank has reduced its operations to a single branch. Meanwhile, external financing to locally owned banks has shrunk from $917m in 1998 to just $98m today.

At the same time, strict bank reform and regulation have been applied, with a positive impact on the survival of the best banks. Since 1987, all banking regulation and control tasks were passed from the Central Bank of Bolivia (BCB) to the Superintendence of Banks (SB).

More banking regulation is in the pipeline, while newly signed stand-by credits with the International Monetary Fund come with even tougher banking standards, which increase provisions and liquidity levels. One analyst’s response was: “Bolivia is a country with the economy of a poor African nation, a US rate of inflation and Swiss banking regulation.”

Others observe that strict standards are actually the cause of the 40% reduction in outstanding loans since 1998, because under ever increasing requisites, fewer people and corporations qualify for credit. Meanwhile, the loan shark business is booming.

Regular crises

On the political front, after 20 years of Washington consensus-style policies – which have had no effect on the widespread poverty – the country has lurched from crisis to crisis. In the past five years, Bolivia has had five presidents and constant political chaos and social unrest. The most recent political crisis was in June 2005, when President Carlos Mesa resigned to allow a transitional government to call general elections at the end of the year. During this crisis, $110m – or 5% of all bank deposits – were withdrawn.

But the dangers facing the banks are not just political: there is a mismatch between short-term deposits (14 months on average) and long-term loan maturities (up to 25 years). Moreover, close to 88% of all bank deposits and 95% of all loans are denominated in US dollars, while most debtors’ incomes are in bolivianos.

The dollarisation of bank loans is potentially catastrophic in Bolivia because devaluation runs at about 6% annually on average for the past five years. Thus the levels of loan delinquencies are quite high: they have steadily risen in Bolivia from 5.2% in 1997 to 21.5% in 2001, dropping to 13.7% in 2004. Another problem with dollarisation is that the central bank can hardly play the role of lender of last resort for banks since it does not issue US dollars and must always maintain high levels of international reserves. According to the BCB, the high level of dollarisation of the economy forces Bolivian banks to have about twice the normal liquidity of banks.

In response, Bolivian authorities introduced in 2001 the Unidad de Fomento a la Vivienda (UFV), an inflation-adjusted index that allows for loans and deposits in bolivianos to be adjusted for inflation. The success of the UFV has been moderate, but it is increasingly used in the country, especially since some tax relief has been given to transactions in local currency.

Cost reduction

To cope with political uncertainty, the Bolivian banking system had to apply a severe cost reduction strategy, restructure its liabilities and to avoid liquidity problems. Since December 2000, administrative costs have been cut by 28% and staff costs by 33%. At the end of 1998 there were 15 banks in Bolivia with 6,808 employees nationwide. Now there are 13 banks and 4,000 workers. The Bolivian banking system has had a high liquidity level of about 33% for the past five years, invested mainly in short-term government paper, repos and short-term bank deposits in the US. However, the high level of liquidity has affected profitability. On average, return on assets (ROA) has been -0.12% and return on equity (ROE) -1.5% for the last five years.

Rapid adaptation

Alberto Valdez, financial manager at Banco Mercantil, Bolivia’s second largest bank in terms of assets ($546m), says that its business has found stability because its clients are “corporations and small and medium enterprises that adapt very rapidly to good and bad times”. In 2004, Mercantil posted profits of $5.4m on $59m in equity.

The bank has also been able to diversify risk and obtain cheaper financing from international banks.

Mr Valdez says that the reductions in administrative costs, innovation and investments in technology have been fruitful. But the prioritisation of liquidity is still crucial: “Banco Mercantil places its solvency before its profitability,” he says.

Bolivia’s economy has improved lately due to worldwide growth and the government’s success in controlling the fiscal deficit. Real GDP growth has been 3.6% in 2004, up from 2.8% in 2003. In 2005, real GDP growth is expected to be around 4.5%. High international commodity prices and increased export volumes have benefited the country’s external accounts.

For this and other reasons, the banking system has remained solvent. “We have social and political crises, but not financial crises” is the official word of the Bolivian Bank Association (ASOBAN). At the same time, it warns that the challenges for a better banking system are still enormous. Certainly, the mismatch of currency and maturities is a ticking bomb that must be deactivated.

Jaime Dunn De Avila is chief executive officer of NAFIBO Sociedad de Titularización SA.

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Read more about:  Americas , Bolivia