Bolivia’s credit rating downgraded by Moody’s Ratings due to weak governance

Investing.com -- Moody’s Ratings has downgraded the Government of Bolivia’s long-term local and foreign currency issuer and senior unsecured debt ratings to Ca from Caa3 while maintaining a stable outlook. This downgrade, announced on April 17, 2025, is due to very weak governance leading to an increased risk of a balance of payments crisis and sovereign default.

The government is now faced with the tough decision of allocating limited foreign exchange resources to either make interest payments on external debt or pay for necessary imports, including fuel, while maintaining the boliviano’s fixed exchange rate. Political instability, driven by deep divisions within Bolivia’s ruling Movimiento al Socialismo (MAS) party, has significantly weakened the government’s policy effectiveness and constrained its ability to stabilize very low foreign-exchange reserves and stem the ongoing deterioration of economic and financial conditions.

The stable outlook reflects Moody’s view that at the Ca rating level, upside and downside risks to Bolivia’s credit profile remain balanced. Potential for incoming hard currency loan disbursements from multilateral development institutions combined with the relatively favorable structure of Bolivia’s external debt obligations, which have a high portion of concessional multilateral loans, will help mitigate some of the current near-term credit pressures. However, Moody’s expects significant credit challenges to remain, including sustained very low foreign-exchange reserve levels, weak production levels in the hydrocarbon sector, and very high domestic political risk.

Bolivia’s local and foreign currency country ceilings were lowered to Caa2 and Caa3 from Caa1 and Caa2, respectively. The two notch gap between the local-currency ceiling and the sovereign rating reflects political risks, weak institutions and a significant government footprint in the economy. The one-notch gap between the foreign currency and local currency ceiling reflects material transfer and convertibility risks given persistent balance of payment pressures, risks of capital flight, and very low policy effectiveness.

The downgrade of Bolivia’s ratings to Ca from Caa3 reflects Moody’s assessment that external liquidity pressures have reached acute levels, driven by the ongoing sharp decline in liquid foreign-exchange reserves, threatening a balance of payments crisis. As of end-December 2024, liquid foreign-exchange reserves declined very sharply to around $50 million (under 1% of GDP) from $316 million in May 2024 and $13.2 billion (40% of GDP) at the end of 2014.

Persistent fiscal and current account deficits, which have averaged around 7.3% of GDP and 2.6% of GDP, respectively, over the past decade (2015-2024), have nearly exhausted Bolivia’s once ample foreign-exchange reserves buffer. The drain on reserves reflects very weak governance which has manifested in part in a structural decline in hydrocarbon exports, which have effectively been depleted, with continued government subsidization of fuel imports that has weighed on both fiscal deficits and foreign exchange reserves.

Inflation has surged in 2025, driven by scarcity of hard currency in the economy that has weighed on the boliviano’s unofficial exchange rate. As of March 2025, annual inflation reached a rate of 14.6% from about 3.5% in April 2024.

Political turmoil, driven by deep divisions within Bolivia’s ruling MAS party, has significantly weakened the government’s policy effectiveness and constrained its ability to stabilize the decline in foreign-exchange reserves and ongoing deterioration of economic and financial conditions. Confrontations within MAS between supporters of President Arce and backers of Former President Morales have materially escalated since Moody’s last rating action, significantly undermining governance and policy effectiveness.

The disbursement of pending multilateral development loans, which as of April 2025 amounted to around $1.7 billion including from the Inter-American Development Bank (Aaa stable) and Corporacion Andina de Fomento (CAF, Aa3 stable), would eventually provide much-needed access to hard currency that would help support Bolivia’s foreign-exchange reserves.

Despite these potential mitigating factors, Moody’s expects significant credit challenges to remain, including sustained very low foreign-exchange reserve levels, weak hydrocarbon sector productivity, and elevated domestic political risk. The authorities’ decision to maintain Bolivia’s exchange rate peg to the US dollar, combined with structurally lower export earnings from declining production levels in the hydrocarbon sector and maturing external debt payments, will continue to pressure foreign-exchange reserves.

Bolivia’s ESG Credit Impact Score is CIS-5, indicating that the sovereign rating is lower than it would have been if ESG risk exposures did not exist and that the negative impact is more pronounced than for issuers scored CIS-4. For Bolivia, this reflects its very weak governance profile which significantly weighs on the rating.

The ratings could be upgraded if policymakers are able to implement policy measures that foster a sustained increase in liquid foreign-exchange reserves and prove effective in substantially reducing external and fiscal imbalances. Alternatively, the ratings would be downgraded if the authorities were unable to prevent further significant declines in foreign-exchange reserves and deterioration of external and government liquidity pressures, which in turn increased the likelihood of a default or debt restructuring that would result in losses in excess of 65%.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.