Photographer: Noah Friedman-Rudovsky/Bloomberg

First Venezuela Lost the Concorde, Now It's Losing to Bolivia

The country's vast oil reserves aren't saving Venezuela from a plunge in growth
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Back in the late 1970s, when Venezuela’s oil wealth fueled the supersonic Concorde’s flights from Paris to Caracas, the idea that a poverty-stricken, landlocked nation known for bowler hats and coca leaves would someday surpass it was unthinkable. How times have changed.

Bolivia, South America’s poorest country on a per-capita GDP basis, leads or is poised to surpass Venezuela in a number of areas. Already plagued with a plunging currency and the world’s fastest inflation rate, Venezuela’s decline is stunning for a country that holds the world’s largest reserves of oil and whose late president, Hugo Chavez, once served as a mentor for Bolivia’s leader, Evo Morales.

While Morales took over Bolivia’s natural gas industry in 2006, his policies were never as radical as Chavez, who once walked through Caracas’s downtown, pointing at various companies and saying "nationalize it." Morales and Finance Minister Luis Arce “understood the importance of having orderly fiscal policy,” said Ben Ramsey, chief economist and head of sovereign debt strategy for the Andean region at JPMorgan Chase & Co. in New York, who follows the two countries. “They have massive reserves vis-à-vis their economy.”

After peaking at more than $40 billion in 2008, Venezuela’s reserves have tumbled to less than $15 billion, much of that in gold. While falling energy prices have also affected Bolivia, its reserves have been on an upward or stable trajectory under Morales, peaking at about $15 billion last year from less than $5 billion when Morales took office in 2006.

GDP

The Morales takeover of Bolivia’s natural gas industry came amid an economic boom in its key trading partners, Brazil and Argentina, swelling government coffers. He also provided political stability in a country that had seen six presidents in as many years. The $34 billion economy responded, expanding an average 4.9 percent from 2004-2014.

In Venezuela, the economy was buffeted by declining oil prices, quickening inflation, multiple exchange rates and increasing uncertainty as Chavez and his successor, Nicolas Maduro, nationalized companies, failed to counter rising crime and marginalized the political opposition. The $510 billion economy, according to World Bank estimates, may contract 10 percent this year, the most of any economy in the world.

faries chart

Bonds

While Bolivia invested in infrastructure and increased social spending, it also built up fiscal and current account surpluses, which allowed it to sell bonds in 2013 for the first time in nearly a century. The country’s 2023 notes now trade at a yield of 5.06 percent.

With Chavez and Maduro trying to sustain social spending even as crude prices collapsed, Venezuela has increasingly turned to partners like China, swapping discounted oil for billions in loans. With investors worried about the country's ability to keep servicing its debt, Venezuelan bonds trades at levels associated with a default. Its 2022 bonds trade at about 49 cents on the dollar, with a yield of more than 31 percent.

With energy prices staying low, Bolivia's economic success is in for a challenge, said JPMorgan's Ramsey. The current account surplus has already disappeared and a fiscal deficit is likely going forward, he said. Still, in a country of 10.6 million people, about one-third of Venezuela's, Bolivia's reserves provide a buffer. Is there good news for Venezuela? Ramsey says he is neutral in terms of bond recommendations, but adds that if you have a “stomach for volatility” and a long time horizon, the notes could look attractive.

And the Concorde? Its Caracas route ended in the early 1980s, during another crash in oil prices. It won't be coming back. 

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