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AmericasDecember 2 2019

Will new president bring positive change for Bolivia’s banks?

Bolivia’s political upheaval means changes ahead for the country’s banking sector, which will be hoping for a review of its high taxes. Lucien Chauvin reports from La Paz.
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Bolivia banks

Bolivia’s economy, including its financial system, will undergo changes in 2020, regardless of who takes over the resource-rich country after the resignation of long-serving president Evo Morales. 

Mr Morales resigned November 10, 2019 after calling a new vote and an overhaul of the election agency – three weeks after the original election in which he won a highly disputed fourth term with 47% of the vote, which his opponents claimed was fraudulent. The vice-president and leaders of the two chambers of Congress, all members of the Movement for Socialism party, resigned alongside the president. 

A new broom

Opposition-led protests, some violent, had gripped the country since the original vote. Political leaders argued that a new vote, without the president, was the only option to stop protests, ensure democratic order and keep the economy from faltering. 

The International Monetary Fund (IMF) predicts Bolivia will see Latin America's biggest economic expansion in 2019, at 3.9%, but this growth has been slowing and the recent political mess could act as a downward pull. 

Whoever takes office in early 2020 will be under pressure to move fast to adopt changes that will maintain the economy's wellbeing, even if at a slower pace, and continue to expand the financial sector, which has spent 13 years operating under a model that has depended on revenue from natural resources to fuel public investment as the motor of growth.   

“Everyone is aware that the model has run its course. The challenge today is growth based on production. This is going to take time and it is not going to be easy,” says Rubén Ferrufino, chief economist at the Confederation of Private Entrepreneurs of Bolivia (CEPB) and a former deputy finance minister.

Banking hopes  

A key component of this change is expected to occur in the country’s banking sector. According to Bolivia’s private banking association, Asoban, the total loan portfolio of the country’s banks is about $24bn in an economy that is just shy of $42bn, one of the highest banking sector-to-gross domestic product (GDP) ratios in the region.

The system has flipped from being dollar dominated to boliviano dominated. According to banking regulator Asfi, 15% of deposits and 7% of loans were in bolivianos at the start of 2006, but today 98.6% of deposits and 87% of loans are in the local currency.    

The number of savings accounts in the system has increased substantially since 2005, going from 3.5 million to 12 million, according Asfi. Non-performing loans (NPLs) were 2% in August, slightly higher than previous years, but still a strong position, according to rating agency Moody’s. Bolivia is on par with neighbouring Chile with the lowest NPL levels in the region. 

Marcelo Trigo, head of Asoban and CEO of Banco de Crédito de Bolivia, says the banking system is solid, but modifications are needed for it to continue to expand. “In general terms, the system has achieved solid growth. We have been an important component of Bolivia’s expansion in the past decade, but it is time to start talking about changes to keep growing,” he says.

Challenges ahead

Bolivia’s banks have been working to comply with substantial modifications introduced in a new financial sector law approved in 2013. The legislation requires banks to provide 60% of loans to productive sectors and for housing, and the rates on those loans are fixed at 6%. Banks had to comply with the new rules by 2018, which they did. The legislation also required banks to provide national coverage either through branches, ATMs or service points, which they have also done.

The banking regulator reported in September that 93% of the Bolivian population has easy access to financial services. This has helped Bolivia maintain its position as a reference point internationally for loans to micro-enterprises and small businesses. Loans to micro-enterprises accounted for the largest percentage of overall loans in August, according to Asfi. And Marcelo De Gruttola, Moody’s lead analyst for Bolivian banks, says: “Bolivia remains very strong with micro-finances. It is an example for other countries.” 

The government also decided banks were earning too much during the years of economic boom – the economy expanded by nearly 7% in 2013 – so it created a 25% tax on revenue in addition to the 25% corporate taxes. When other fees and smaller taxes are factored in, banks are now paying just over 60% in taxes. 

Mr Trigo says that balance sheets have grown, but the changes have affected profitability, which has fallen from about 20% annually in 2013 to 11% today. “We have told authorities that they cannot look at what banks earn in absolute terms, but in terms of return on equity. If you look at the return on equity in Bolivian banking, it is one of the lowest in Latin America because of the combination of taxes and fixed interest rates,” he says. 

Mr De Gruttola adds that the increased regulations for banks have coincided with the economic slowdown and a flat growth rate in deposits over the past year while loans have grown, piling even more pressure on the sector. “Deposits did not grow during the past year, which is another pressure on liquidity and affects profitability,” he says.   

The CEPB’s Mr Ferrufino believes the financial services law needs to be reviewed so that banks can become more liquid. He adds that while the sector is solid, it is still vulnerable if consumers were to lose confidence as a result of a prolonged internal crisis or a major international downturn. “The goal has to be to make banks liquid so that they can face any challenge," says Mr Ferrufino. "Portfolios need to grow not because banks are required to lend money to specific sectors, but because they have good projects to finance. Right now it the opposite. It is like the tail wagging the dog.”   

Economic performance 

Growth in the banking sector will not only require changes to the financial services law, but also address issues of monetary and financial stability. Candidates who ran against Mr Morales in the original October elections promised reorganisation but without touching subsidies or devaluing the currency, policies that have affected countries in the region – most recently Ecuador, when its government attempted to eliminate fuel subsidies. (Bolivia’s exchange rate has remained steady at just under 7 bolivianos per $1 for the past 10 years.)

José Antonio Quiroga, national coordinator of the principal opposition coalition, Citizen Community, says an immediate task should the coalition take power would be to deal with the fiscal deficit, which is approaching 8% of GDP, and stop taking on more debt. Citizen Community is led by former president Carlos Mesa. He took office in 2003, when his predecessor resigned, but stepped down in 2005 before finishing his term; Mr Morales was elected to replace him. 

Mr Quiroga says one of the major pressures is public investment, which is close to 15% of GDP and the key driver of growth. He adds that while this might have been acceptable when revenue from natural gas exports was high, production and income from gas have dropped yearly since 2013 and the Morales government has made up for this by adding debt and using foreign reserves. (Bolivia exports natural gas to neighbouring Argentina and Brazil). “We will not continue incurring more debt, which has been used to continue with high public investment. This provides a false sense of sustained economic growth,” says Mr Quiroga.

In deficit

The IMF, in a July 2019 report on Bolivia, said the fiscal surplus in 2013 became a deficit of 7.8% of GDP in 2017, while the current account deficit was 6.3% of GDP in 2017, a change from a 1.7% surplus in 2014. Foreign reserves, which peaked at nearly $15bn in 2017, are now down to half that and falling. Mr Ferrufino says reserves would be down to about $4bn if the current policy continues. Net public debt was close to 54% in 2018, up from 37% in 2013.

Mr Quiroga says another change would be central bank reform – specifically for the bank to make loans to public enterprises, including state oil and gas company YPFB and electric company Endes. But Mr Trigo of the banking association says this is not a priority for the sector at this point. “The traditional role [of the central bank] is not as a lender. I think there would be concern if the projects receiving loans were questionable, but there is no evidence of this so far,” he says. 

Mr Ferrufino believes the next government needs to stop obsessing about high growth rates and focus instead of sustainable growth, as well as switching from public sector-fuelled growth to expansion led by the private sector. “The reality is that we need to think about more modest growth for the near future to provide macroeconomic stability. We could grow faster, but would create risks to the financial system,” he says.

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