NEW YORK--(BUSINESS WIRE)--Bolivia and Paraguay, two of the largest natural resource exporters in Fitch Ratings' 'BB' category, are well positioned to weather the ongoing downturn in commodity prices mainly due to relatively strong fiscal and external balance sheets, Fitch Ratings says.
Rating upgrades of both these countries in 2015 were in contrast to the negative rating actions the other peer commodity exporters experienced. Fitch upgraded Bolivia to 'BB'/Stable in July 2015 and Paraguay to 'BB'/Stable in January. By comparison, Fitch revised the Rating Outlook of Nigeria's and Angola's 'BB-' ratings to Negative in March and April, respectively, and downgraded Gabon to 'B+' in May.
Bolivia has partially offset commodity price declines by raising its natural gas production and maintaining long-term export contracts to neighboring markets. Paraguay's increasingly diversified export base and productivity enhancements in the agriculture sector have also improved its ability to manage the decline in prices. Both countries maintained a record of dynamic growth and single-digit inflation and prudently built fiscal and external buffers during the commodity boom.
A sharper and more prolonged fall in commodity prices, in the absence of policy adjustments and structural reforms, could apply rating pressure. Fitch expects that declines in exports and public investment stimulus funding will shift both countries' budgets and current account surpluses to moderate deficits in 2015-2017. We recently cut Bolivia's 2015 growth forecast to 4.3% and Paraguay's to 4%, as economic contraction and sharp currency depreciation in Argentina and Brazil, which are key trading partners, have begun to make Bolivia and Paraguay's products less competitive.
Both forecasts remain above the medians of other 'BB' sovereigns and Latin American peers.
Bolivia's upgrade reflected improvements in the sustainability of its gas production and the reduction in regulatory uncertainty and nationalization risks. Official projections indicate that deep drilling and developments around existing fields could yield sufficient gas output to meet local demand and export contracts with Argentina and Brazil at least until 2019. Bolivia demonstrates low public debt (30% of GDP), large foreign reserves (46% of GDP), ample public sector deposits (23% of GDP) and access to multilateral financing and global bond markets. With these factors in place, the Bolivian economy could absorb adverse shocks and adopt more counter-cyclical policies than other commodity exporters in the 'BB' category.
Unlike most oil-dependent producers in the 'BB' category, Paraguay's export receipts are generated by three industries that are relatively uncorrelated: soy, beef and hydroelectric power sales to Argentina and Brazil. The industrialization of soybean production, genetic and sanitary improvements in cattle farming and an emerging manufacturing industry are cushioning the decline in international food prices and supporting a transition toward the production and sale of higher value-added goods. Paraguay's growth was the highest of its peers at a five-year average of 7% in 2014. This moved the country's per capita income to the 'BB' median.
Both countries face the challenges of overcoming structural factors weighing down investment rates, governance and corruption issues, social development needs and capacity constraints at public sector entities. Fitch maintains a Macro-Prudential Indicator of '3' for both countries, as the potential for financial systemic risks is high due to the combination of rapid credit growth and real currency appreciation. We do not believe the current data indicates bubbles in either country. However, the current situation in both countries highlights the importance of reforms that must further strengthen macroeconomic policy management and institutionalize fiscal prudence.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
2015 Mid-Year Sovereign Review and Outlook