What next for Bolivia?

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On Sunday, February 21, Bolivians went to the polls to decide in a nationwide referendum whether they would authorize a constitutional amendment to allow the president a second consecutive re-election or cap Evo Morales’ tenure as president at the end of his current term in 2019. As of close of business on Monday the results are too close to call. It could take a couple of days to count each and every ballot. But regardless of the result, Bolivia is entering a new era of lower energy prices and tougher political choices.

Evo Morales was first elected president in 2006. Since then, Morales has presided over what has perhaps been Bolivia’s best decade in modern history, marked by political stability, economic growth and social inclusion. Morales was greatly assisted by high energy prices, which he managed with better discipline than most of his neighbors. According to The Economist the economy grew at a 5.1% average rate in 2006-2014, extreme poverty fell from 38% to 17%, and foreign-exchange reserves (as a share of GDP) are the largest in the region.

But now the prices that allowed much of that to happen are down and the president will have to face new challenges in the four years that remain in his current term. Bolivia’s economy is entirely dependent on the export of natural gas, mainly to its neighbors, Brazil and Argentina, which are demanding less of it as their economies have slowed down. The government has been seeking to diversify its energy sector downstream by constructing a natural gas liquids separation plant, an ammonia and urea plant, and has projects to produce plastics in the near future. The government has also announced plans to build gas-fueled electricity generating plants to sell power, rather than unprocessed fuel, to its neighbors.

These investments may payoff for Bolivia by increasing value added to its exports and reducing vulnerability to commodity price volatility. But they need to be financed, and income from hydrocarbons has been dropping significantly. Moreover, since the nationalization in 2006, which returned control over hydrocarbon resources to the state and reduced the take of private companies that partner with YPFB, the government has been less successful in maintaining exploration efforts and adequate reserves. The government has been subsidizing the domestic price of oil above international prices, but in the present context it has not done much to attract new investment.

More so than yesterday’s referendum, the ultimate test for Evo Morales will be governing over the down cycle in the remainder of his current term. Winning the referendum would provide a tailwind but make it difficult to downsize spending plans. Losing the referendum could inflict some real damage and require that he devote attention and resources to fending off the opposition and planning for a political transition within his own party.

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