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Bolivia Gold Law to provide liquidity for August 2023 bond payment; reserve concerns linger

The approval of the “Gold Law” by Bolivia’s (B-/Caa1/B-) House of Representatives is a positive step towards providing liquidity to address a USD 183m August bond payment, two sovereign analysts and an investor said. However, the law is not a long-term solution to the sovereign’s declining reserves, they said.

The House of Representatives approved a law 23 April authorizing the country’s Central Bank to, among other things, conduct financial transactions with gold in order to strengthen international reserves. The law still requires senate approval, the sources said.

Bolivia faces around USD 300m in principal and interest payments through August, including the USD 183m maturity of its 5.95% 2023 bond and around USD 100m in interest payments.

The Central Bank’s stock of foreign exchange reserves dropped significantly to USD 372m as of 8 February, from USD 709m at the end of 2022, as reported.

“It’s something we’ve been waiting for and expecting to pass earlier, but it got caught up in congress and some of these political divisions in the government, but it’s certainly good news for making the August payment if they’re able to sell some of the gold and use this additional liquidity,” the first sovereign analyst said.

Nevertheless, the gold law does not represent a solution to the long-term trend of deterioration of Bolivia’s reserves, the first sovereign analyst said.

“Without a change in policy direction they might just continue burning through the gold reserves now, after burning through all the hard currency,” the first sovereign analyst said.

Passing the gold law is a necessary step, but it is not sufficient to solve the bigger structural problems that exist in the country, the second sovereign analyst said.

“Fundamentally, why this matters is that they need to convert the gold into liquid reserves,” the second sovereign analyst said. “The central bank stopped publishing data in February, but when they last published, it was USD 350m in liquid reserves and presumably much lower now.”

Bolivia has gold valued at around USD 3bn now — plenty to cover future payments at this stage — but equally important is receiving multilateral loan support, the second sovereign analyst said.

Bolivia’s legislature has already approved a EUR 200m (USD 218m) loan from Agence Francaise de Developpement (AFD) that is ready for imminent disbursement, while Bolivian authorities have stated that approximately USD 600m in loans from other institutions are pending legislative approval, Moody’s wrote in its 24 March report. The Ministry of Finance is also in the process of negotiating a contingent credit line from Corporacion Andina de Fomento (CAF).

“That will help with the liquid reserves position,” the second sovereign analyst said. “The bigger issue is the drain on reserves and why reserves are so low. The question is can they move forward a policy solution for the long run that starts to address the drain on reserves. What kind of policies can the government put in place to try to reduce [expected] twin deficits and support a more vibrant growth dynamic to allow for reserves growth? It’s a big open question with no clear answers.”

The gold law, while a good development, doesn’t solve Bolivia’s problem beyond this year, the investor said.

“The sad thing is that they are sitting on a lithium ‘gold mine’ and have to monetize that at some point,” the investor said. “But they nationalized lithium. So, they have never really exploited it, and now their exports are falling while the government is putting their opposition in jail. I see the Bolivia government continuing to run out of foreign exchange reserves.”

Bolivia’s USD 1bn 4.5% 2028 bond traded at 62 on 24 April, increasing from 60 on 21 April, according to MarketAxess.

“The Gold law is positive, but I think Bolivia is too high to buy in right now because of the Bolivian government’s instability and future fiscal projections,” an asset manager said. “However, if the sovereign bonds were to go lower, around the 30s-40s, or so it could be worth it.”

A representative from the Bolivian Finance Ministry did not respond to a request for comment.