A slow decline
Long before the pandemic, we found a clear pattern: Bolivia was showing signs of economic decline. So what exactly did we see?
For a small economy like Bolivia's, five macroeconomic variables told most of the story: the balance of trade, the public deficit, the fixed exchange rate, external debt and international reserves.
The balance of trade showed how foreign currency flowed in and out of the country. International reserves worked as the “thermometer” of the country's foreign-currency savings. The other three showed the direction the country was heading in.
There was another reason to believe nothing would change soon: the government kept growing, which kept the economy growing too, even earning it the nickname “the Bolivian miracle”. Nothing suggested that was about to change.
The balance of payments
2014 was the year Bolivia's international reserves reached their peak. After that, as natural gas export prices fell, the balance of payments turned negative.
In Bolivia, the primary income deficit was always offset by secondary income (such as remittances). That meant the foreign-currency position was being drained by one hidden, large leak: the errors and omissions account.
As a result, once the financial account and the omissions were taken into account, the balance of payments was negative even though the balance of trade was still positive.
Public deficit and external debt
With a national policy of growth and expansion, Bolivia kept its public deficit at around 8% of GDP.
So how was the gap financed? To keep inflation low, most of the excess was financed with debt in foreign currency, used for development projects. The deficit kept being fed mainly by external debt.
The whole economy was growing on borrowed money. Bolivia looked like a growing economy, but from a financial point of view it was unsustainable.
The fixed exchange rate
With a public deficit and a foreign-currency leak, only one element was missing to guarantee the crisis: a fixed exchange rate.
Under a fixed rate, the only things paying the bill were external debt and international reserves. As expected, the first kept rising and the second kept falling, with no brakes.
The thermometer
The Central Bank of Bolivia used to publish a weekly report. In January 2023 it showed that Bolivia held less than 500 million USD in cash.
Final thoughts
For us it was fairly obvious that the Bolivian currency would follow a path similar to Argentina's peso: an unofficial devaluation and the emergence of a parallel exchange market.
We hedged against that scenario, and it worked. Sadly, many small companies did not, and they suffered losses that could have been prevented.
Bartor S.
Founder
