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Fitch downgrades Bolivia on gas price dip, higher fiscal deficits

Fitch Ratings on July 13 downgraded Bolivia's ratings as thecountry is battered by declining gas price prospects and rising fiscal deficits.

The rating agency lowered the country's long-term foreign andlocal currency issuer default ratings,  aswell as its senior unsecured foreign and local currency bond ratings, to BB- fromBB. The country ceiling was also downgraded to BB- from BB while the short-termforeign currency issuer default rating was affirmed at B. The ratings outlook isstable.

The weaker gas price outlook and the accompanying policy responsefrom the government have resulted in large "twin deficits" in Bolivia,Fitch said. While large fiscal and external buffers offer policy flexibility toaccommodate the external shock, Fitch sees them likely to remain declining at arapid pace.

"An ambitious state-led development plan focusing on sustaininggrowth and diversifying the economy unveiled this year envisions fiscal and externaldeficits rising further," the rating agency noted.

"The nonfinancial public sector deficit jumped to 6.9% ofGDP in 2015 from 3.4% in 2014, above the official mid-year forecast of 4.1%,"Fitch said. Meanwhile, the general government deficit rose to 4.5% of GDP in 2015,above Fitch's past estimates. The rating agency sees deficits being "financedin part by drawdown of sizeable deposit holdings, as observed in 2015, but projectshigher borrowing needs will lift general government debt from 35% of GDP in 2015to 46% of GDP by 2018."

While the state-led growth model sustained firm growth of 4.8%in 2015 that was above peers, it has not initiated crowding-in of private investment,which fell in nominal terms in 2015, Fitch noted.

"Expansive policies (fiscal, monetary and quasi-fiscal centralbank lending to SOEs) and the stable exchange-rate regime could become more difficultto sustain given the current pace of erosion of buffers," the rating agencyfurther stated. Political incentives to use buffers in support of growth could increase,however, if a second referendum allowing President Evo Morales to seek re-electionhappens.

Finally, the stable outlook balances the country's strong fiscaland external balance sheets as well as favorable and stable growth rates with lowGDP per capita, Fitch said, while Bolivia's weak institutional quality and a poorbusiness environment are relative to BB- rated sovereigns.