OREANDA-NEWS. Fitch Ratings has upgraded Bolivia's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-'. Fitch also upgraded the issue ratings on Bolivia's senior unsecured foreign and local currency bonds to 'BB' from 'BB-'. The Rating Outlooks on the long-term IDRs have been revised to Stable from Positive. In addition, Fitch has upgraded the Country Ceiling to 'BB' from 'BB-' and affirmed the short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS

Bolivia has improved the sustainability of its hydrocarbons production, the largest source of exports, fiscal revenue and domestic investment. In the absence of new discoveries, official forecasts indicate that deep drilling and developments around existing fields could provide the marginal output increase to sustain gas production and meet local demand and export contracts with Argentina and Brazil at least until 2019. Smoothing the declining curve of production beyond this date would depend on the capacity to overcome political, technical and financing challenges to the execution of a USD7 billion (20% of GDP) five-year upstream investment plan, primarily focused on exploration.

Regulatory uncertainty and nationalization risks have eased. Government and businesses agreed on reforms to the investment regime that facilitate private participation in sectors that are not subject to state control and recognize independent conciliation and arbitration for contractual disputes. The authorities ceased nationalizations in 2013 and have paid USD690 million (2% of GDP) in compensation to multinational companies. Sustained improvements in rule of law and the business environment are key to lift the country's domestic investment rate, which at an estimated 20% of GDP in 2015, continues to lag behind the 'BB' median of 22%.

Bolivia's robust external buffers and ample fiscal policy space render its economy better-placed to absorb adverse shocks and adopt counter-cyclical policies than other commodity exporters in the 'BB' category. Fitch expects that the correction in oil prices and a public investment impulse could swing the budget and current account to deficits of up to 4% of GDP in 2015-2017. A low public debt starting point (30% of GDP), ample public sector deposits (23% of GDP), large foreign reserves (46% of GDP), resilient foreign direct investment and access to multilaterals and global bond markets reduce sustainability and financing risks.

Five-year average economic growth rose to 5.4% in 2014, exceeding the 'BB' median of 4.1%. Faster growth has supported the reduction of Bolivia's large per capita income gap, which remains 23% below the median of rating peers. Fitch forecasts that economic activity could keep pace at an average 4.4% in 2015-2017, driven by robust public investment in diversification and industrialization projects and eased domestic liquidity conditions. Further weakening in oil prices, execution bottlenecks and delays represent downside risks to the growth outlook.

Higher inflation rates than trading partners have led the Boliviano to strengthen a cumulative 25% in real terms since 2009, the largest appreciation in the 'BB' category. Recent currency depreciations in neighbouring Argentina, Brazil, and Peru are affecting the competitiveness of the local industry and increasing incentives for imports. Exchange rate adjustments are unlikely unless the ongoing oil price correction is sharper and more prolonged. Monetary authorities use the nominal exchange rate as a nominal anchor to preserve purchasing power, control inflation expectations and deepen financial de-dollarisation. Fitch forecasts that inflation could moderate to 5% in 2015-2017 from 5.8% in 2014.

Fitch revised its Macro Prudential Indicator for Bolivia to '3' from '2' in June 2014, signalling that the potential for financial systemic risks is high due to the combination of rapid credit growth and real exchange appreciation since 2012. The agency recognizes that available real estate and equity market data is less conclusive about the existence of potential bubbles.

The implementation of the new banking law is having mixed results on the financial system. Larger banks are better placed to increase lending volumes to mitigate the negative impact of interest rate controls on profitability and capitalization. Microfinance entities have greater difficulties to meet mandatory credit quotas for housing and productive loans due to their large exposure to commercial lending and high dependence on interest margins. The strength of the new deposit insurance and resolution schemes will be important to guarantee financial stability in event that increased competition results in greater consolidation in the system.

Bolivia's 'BB' ratings and Stable Outlook balance its stronger sovereign fiscal and external balance sheet than peers, sustained economic growth and record of macroeconomic stability against structural constraints such as low GDP per capita, weak institutional quality and a poor business environment relative to 'BB'-rated sovereigns. High export commodity dependence, at over 70% of current external receipts, is higher than the 'BB' median of 17% and exposes the country's credit metrics to terms of trade shocks and gas supply shortages.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:

--Improvements in the business environment and governance indicators that enhance investment rates and boost natural gas production prospects;
--Higher economic growth allowing for faster per capita income convergence without increasing macroeconomic imbalances.

Negative:

--Hydrocarbons production shocks or further fall in export prices that impair the sovereign's fiscal and external solvency ratios;
--Fiscal slippage and materialization of contingent liabilities leading to faster-than-expected worsening of debt dynamics and erosion of public sector deposits;
--Policy mismanagement or regulatory changes that affect macroeconomic stability or the health of the financial system.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

--Fitch's growth, fiscal and external forecasts assume that Bolivia maintains natural gas production at present levels (0.7 trillion cubic feet per year) and is able to meet the gas requirements from the local market and export contracts with Argentina and Brazil in 2015-2017. International Brent oil prices, a benchmark for Bolivia's energy contracts, are expected to average at USD65 per barrel in 2015 and recover to USD80 by 2017.

--Fitch assumes continuation of the government policies that have ceased nationalizations in 2013 and accelerated the settlement of international arbitration disputes since then.