Junk-Bond Darling Bolivia Is in Moody’s Crosshairs Amid Deficit

  • Moody’s cut Bolivia’s rating outlook to negative on June 10
  • Country’s bond premium has increased by most since March 2015

Bond traders are turning away from longtime favorite Bolivia after Moody’s Investors Service threatened to lower its credit rating.

Moody’s reduced the outlook on its Ba3 junk grade to negative on June 10, citing the government’s unwillingness to cut spending in the face of plunging tax revenue. That derailed a six-month advance in Bolivia’s $1 billion of bonds. The extra yield that investors demand to buy the debt instead of U.S. Treasuries has swelled 0.6 percentage point in June, the most since March 2015.

President Evo Morales has refused to trim government spending even as prices for natural gas, which account for 75 percent of its exports, have tumbled. Revenue has dropped $6 billion in the past two years while the International Monetary Fund predicts budget deficit will surge to a 13-year high in 2016.

Despite Morales’ socialist rhetoric, traders had given Bolivia the benefit of the doubt compared with Ecuador and Venezuela, whose presidents share similar political views. That’s beginning to change as Bolivia becomes more indebted.

“Those bonds trade at what seems to us a low yield and you look at bonds of other countries with leftist leaders, they’re usually much higher,” said Joe Kogan, head of emerging-markets strategy at Scotia Capital Markets Inc. “Part of the investment proposition was that they didn’t have a lot of debt.” 

Bolivia’s net government debt will soar to 37 percent of its gross domestic product this year, more than double the level in 2014, according to the IMF.

The jump in borrowing costs may also be coming at a bad time. Bolivia is planning to sell $1 billion of bonds abroad to finance construction of new hospitals, Economy minister Luis Arce said June 9, according to IFR

The Economy Ministry didn’t respond to telephone calls and e-mails on Bolivia’s plan to issue debt overseas.

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