FIRST QUARTER 2006 MACROECONOMIC REPORT

UNCLAS LA PAZ 001791 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/AND TREASURY FOR SGOOCH ENERGY FOR CDAY AND SLADISLAW E.O. 12958: N/A TAGS: ECON EINV ELAB EMIN ENRG EPET ETRD BL SUBJECT: FIRST QUARTER 2006 MACROECONOMIC REPORT REF: LA PAZ 1660 ¶1. Summary: Bolivia's positive GDP growth trend continued during the first quarter of 2006 due to high international prices for the country's main exports: hydrocarbons, minerals, and agricultural products. Exports grew by 23 percent in the first quarter compared with the same period in 2005, contributing to an increase in international reserves to record amounts. However, investment prospects are poor due to statist GOB economic policies. Inflation declined during the first quarter, while the boliviano appreciated slightly. The government had a fiscal surplus at the end of March, with a projected 2006 deficit of 3.4 percent. Bank deposits and loan portfolios increased slightly during the first quarter. (Note: deposits decreased by USD 83 million in the second quarter. End note.) Although the short-term picture is positive, several risk factors threaten long-term growth. End summary. Positive Growth Trend Continues -------------- ¶2. Bolivia's GDP continued its positive growth trend from 2005 (4.1 percent) in the first quarter of 2006. This growth was due mainly to high international prices for the nation's principal exports -- hydrocarbons, minerals, and agricultural products -- and an increase in domestic consumption. In 2005, soy prices increased by 13 percent, mineral prices by 21 percent, and gas export prices increased somewhat due to adjustments in Bolivia's contract with Brazil based on oil price increases. The price trends continued during the first quarter of 2006. However, the Latin American Economic Commission (CEPAL) predicts that GDP growth for 2006 will be lower than that of 2005 at 3.3 percent, while the GOB predicts 4.1 percent for the year. Growth prospects are dampened by Bolivia's ongoing high urban unemployment rate of 9.2 percent based on official statistics. (Note: this rate vastly underestimates total unemployment and underemployment. End note.) Exports Increase -------------- ¶3. Bolivia had a trade surplus of USD 391 million in 2005. In the first quarter of 2006, the value of exports increased by 23 percent in comparison with the first quarter of 2005, reaching USD 813 million. Hydrocarbons exports increased by 75 percent to USD 418 million, mineral exports by 76 percent, �0A;and manufacturing and agroindustrial exports grew by 15 percent in the first quarter. Export growth, along with a 64 percent increase in remittances from outside the country in 2005, contributed to the increase in net international reserves held by the Central Bank to USD 2.01 billion at the end of March 2006. But FDI Prospects are Poor -------------- ¶4. Foreign Direct Investment declined by USD 280 million in 2005 and appears to have followed the same trend in the first quarter of 2006. The GOB's policy of nationalizing hydrocarbons and tightening state control over several other strategic sectors has deepened uncertainty and weakened the investment climate. Inflation Declines, Boliviano Appreciates -------------- ¶5. The inflation rate decreased from 4.9 percent at year-end 2005 to 3.7 percent at the end of the first quarter of 2006. The Bolivian Economics Center predicts that inflation will stay fairly low, around 4 percent, for the year if the GOB manages public finances well and the currencies of Bolivia's principle trading partners depreciate. During the first three months of 2006, the Bolivian national currency, the boliviano, appreciated by 0.38 percent. First Quarter Fiscal Surplus, but High Public Debt -------------- -------------- ¶6. The GOB ended 2005 with a low fiscal deficit of 2.3 percent of GDP. During the first quarter of 2006, the GOB had a surplus of USD 221 million, mainly due to a large increase in tax revenue from the hydrocarbons sector. The GOB projects a fiscal deficit of 3.4 percent for the year. Public debt remained high at USD 7 billion (80% of GDP) at the end of March 2006. Foreign debt was USD 4.7 billion, while internal debt decreased somewhat compared to year-end 2005 figures to USD 2.3 billion. World Bank debt relief in July 2006 could potentially decrease Bolivia's foreign debt burden by USD 1.8 billion. Banking System Sound in First Quarter -------------- ¶7. Bank deposits increased marginally during the first quarter of 2006 from USD 2.664 billion to USD 2.665 billion, while loan portfolios grew slightly from USD 2.318 billion to USD 2.331 billion. Loans in default increased by approximately one percentage point during the first quarter. Bank liquidity remained high at USD 1.1 billion. (Note: Bank deposits decreased by USD 83 million between the end of the third quarter and June 19 to USD 2.582 billion. End note.) March 2006 Economic Indicators -------------- -------------- Inflation rate 3.72 percent Local currency appreciation 0.38 percent Bs/USD exchange rate 8.07 Exports 812.9 million USD Net International Reserves 2.014 billion USD Public Sector surplus 220.8 million USD Public Debt 7.002 billion USD Public Debt (pct of 2005 GDP) 80.2 percent Bank deposits 2.66 billion USD Bank loan portfolio 2.33 billion USD Portfolio in default 12.2 percent Bank liquidity 1.11 billion USD Comment: Risks to Growth Projections -------------- ¶8. (SBU) Although macroeconomic conditions remained positive during the first quarter of 2006, many risk factors threaten mid and long-term growth. Bolivia stands to lose its U.S. trade preferences under ATPDEA in December, which implies a decrease in exports and a loss of thousands of manufacturing jobs. The GOB's policies of increasing state control in the hydrocarbons and other key sectors likely mean that private investment will remain low. Also, the GOB's stated intention of designing monetary and fiscal policy that seeks employment generation over macroeconomic stability could negatively impact growth. Finally, the GOB's plans to create a national development bank offering subsidized loans could harm the rest of the banking sector by damaging the national repayment culture and creating an unfair playing field. End comment. GREENLEE