Reading the Warning Signs: How We Anticipated Bolivia's Currency Crisis

Currency crises rarely arrive without warning. The signals are usually in the public data for years, but they are easy to dismiss while the economy is still growing. In Bolivia, growth was strong enough to earn the country the nickname of "the Bolivian miracle", and very few companies prepared for what the numbers were already saying.

Five indicators that told the story

For a small, open economy, five variables explain most of the risk: the balance of trade, the public deficit, the exchange rate regime, external debt and international reserves. The balance of trade shows how foreign currency enters and leaves; reserves are the thermometer of the country's foreign-currency savings; the other three show where it is heading.

Signal one: the balance of payments turned negative

International reserves peaked in 2014. As natural gas export prices fell, the balance of payments turned negative, even while the balance of trade remained positive. The primary income deficit was offset by remittances, so the leak was elsewhere: a large and persistent outflow recorded as errors and omissions.

Signal two: growth financed with foreign debt

With a policy of public investment and expansion, the fiscal deficit stayed at around 8% of GDP. To keep inflation low, most of the gap was financed with debt in foreign currency. The economy looked healthy, but it was growing on borrowed dollars, and that is not sustainable for a country whose dollar income is falling.

Signal three: a fixed exchange rate with no brakes

With a fiscal deficit and a foreign-currency leak, a fixed exchange rate made the outcome close to certain. Under a fixed rate only two things pay the bill: more external debt and fewer reserves. As expected, the first kept rising and the second kept falling.

The thermometer

The Central Bank of Bolivia published a weekly report. In January 2023 it showed that the country held less than 500 million USD in cash.

What it meant for companies

For us, the likely path was clear: something similar to Argentina's experience, with an unofficial devaluation and a parallel exchange market. We hedged against that scenario, and it worked. Many small companies did not, and suffered losses that could have been prevented.