VZCZCXYZ0000
PP RUEHWEB

DE RUEHLP #2638/01 2721857
ZNR UUUUU ZZH
P 291857Z SEP 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0735
INFO RUEHAC/AMEMBASSY ASUNCION 6141
RUEHBO/AMEMBASSY BOGOTA 3458
RUEHBR/AMEMBASSY BRASILIA 7316
RUEHBU/AMEMBASSY BUENOS AIRES 4578
RUEHCV/AMEMBASSY CARACAS 1835
RUEHPE/AMEMBASSY LIMA 1875
RUEHMN/AMEMBASSY MONTEVIDEO 4048
RUEHQT/AMEMBASSY QUITO 4471
RUEHSG/AMEMBASSY SANTIAGO 9045
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 002638 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG EPET ETRD BL
SUBJECT: BOLIVIAN ECONOMY HUMS ALONG DESPITE UNCERTAINTY 
 
REF: LA PAZ 2599 
 
¶1. Summary:  Bolivia's GDP grew by 4.5 percent during the 
first semester of 2006 due to high international prices for 
the country's main exports: hydrocarbons and minerals. 
Exports grew by 52 percent in the first six months compared 
with the same period in 2005, contributing to an increase in 
international reserves to record amounts.  However, 
investment prospects are poor due to legal uncertainty and 
statist GOB economic policies.  Inflation increased slightly 
during the first eight months, while the boliviano 
appreciated marginally.  The government had a fiscal surplus 
in mid-September, with a projected year-end surplus of 1.5 
percent.  Bank deposits and loan portfolios increased 
slightly during the first eight months.  Although the 
short-term picture is positive, several risk factors threaten 
long-term growth.  End summary. 
 
Positive Growth Trend Continues 
------------------------------- 
¶2. Bolivia's GDP grew by 4.5 percent in the first half of 
2006, surpassing projections of 4.1 percent.  (Note: 2005 GDP 
was USD 8.7 billion.  End note.)  This growth was due mainly 
to high international prices for the nation's principal 
exports -- hydrocarbons and minerals -- and an increase in 
domestic consumption of cement and electricity.  During the 
first semester of 2006, the hydrocarbons sector grew by 12.4 
percent, while the mining sector grew by 18.7 percent. 
Silver prices increased by 55 percent, gold by 38 percent, 
zinc by 114 percent, and natural gas by 58 percent in the 
first half of 2006 compared with the same period in 2005. 
Bolivia signed an agreement with Argentina in June that 
increased the price of Bolivian gas exports to its neighbor 
from USD 3.2 per million BTU to USD 5 per million BTU between 
July 15 and year-end 2006. 
 
Exports Increase 
---------------- 
¶3. In the first half of 2006, Bolivia had a USD 498 million 
trade surplus.  During that period, the value of exports 
increased by 52 percent in comparison with the first half of 
2005, reaching USD 1.71 billion.  The value of natural gas 
exports increased by 75 percent, zinc by 145 percent, and 
silver by 109 percent in the first six months.  Gas export 
value increases were due to both higher prices and higher 
volumes resulting from greater demand by Argentina and 
Brazil.  Mineral export value increases were driven mainly by 
rising prices.  Export growth, along with a 67 percent 
increase in remittances from outside the country in the first 
semester of 2006 compared with the same period in 2005, 
contributed to the increase in net international reserves 
held by the Central Bank to USD 2.77 billion at the end of 
August 2006. 
 
But FDI Prospects are Poor 
-------------------------- 
¶4. Net Foreign Direct Investment reached USD 103.5 million in 
the first semester of 2006, compared with negative 23.3 
million during the same period in 2005.  Although the total 
amount of FDI received in the first semester of this year 
(USD 210.5 million) was only a slight increase over 2005 (USD 
206.9 million), the amount of capital flight in the first 
half of 2006 (USD 107 million) was significantly less than 
that of the same period last year (USD 230 million).  The 
mining sector received the largest amount of FDI (USD 118 
million), followed by hydrocarbons (USD 47 million) and 
industry (USD 25 million).  Although the investment picture 
has improved compared with 2005, long-term prospects are not 
rosy.  The GOB's policy of nationalizing hydrocarbons and 
tightening state control over several other strategic sectors 
has deepened uncertainty and weakened the investment climate. 
 
Inflation Increases, Boliviano Appreciates 
------------------------------------------ 
¶5. The inflation rate decreased from 3.7 percent at the end 
 
of first quarter 2006 to 3.5 percent by the end of June, 
within the 3 to 5 percent target range established by the 
Central Bank for inflation at year-end.  However, inflation 
increased to 4.4 percent at the end of August.  The Bolivian 
Economics Center predicts that inflation will stay fairly 
low, around 4 percent, for the year if the GOB manages public 
finances well and the currencies of Bolivia's principle 
trading partners depreciate.  During the first semester of 
2006, the Bolivian national currency, the boliviano, 
appreciated nominally by 0.25 percent.  Money supply (M2) 
increased dramatically during the first six months of 2006, 
growing by 10.2 percent.  Bolivians absorbed the increased 
liquidity, sharply increasing their holdings of bolivianos. 
 
First Semester Fiscal Surplus, Public Debt Reduced 
--------------------------------------------- ----- 
¶6. The GOB had a surplus of USD 437 million during the first 
semester, which reached USD 578 million by mid-September 
2006, according to government sources.  The surplus resulted 
mainly from high prices received for the country's main 
exports and increased tax (including hydrocarbons taxes) and 
customs collections.  Press reports indicate that the 
National Tax Service collected USD 600 million more during 
the first semester of 2006 than in the same period of 2005. 
Treasury contacts told Econoff that Bolivia's fiscal deficit 
will narrow to zero by year-end, while the press quoted the 
Finance Minister on September 27 saying that he projects 
Bolivia to have a fiscal surplus of around 1.5 percent at 
year-end.  Bolivia's original projection of a 3.4 percent 
deficit was revised due to higher than expected tax revenues 
and lack of institutional capacity for executing spending 
plans.  Foreign external debt was reduced significantly by 
IMF and World Bank debt forgiveness during the first seven 
months of 2006 to USD 3.15 billion on July 1, compared with 
USD 4.7 billion at the end of the first quarter.  Internal 
debt increased by 17 percent compared with year-end 2005 to 
USD 2.99 billion as of June 30. 
 
Banking System Sound in First Semester 
-------------------------------------- 
¶7. Total bank deposits remained stable during the second 
quarter of 2006 and increased slightly between June and 
August from USD 3.15 billion to USD 3.26 billion.  Loan 
portfolios grew marginally during the second quarter and 
increased from USD 2.65 billion to USD 2.71 billion between 
June and August.  Loans in default decreased by almost two 
percentage points during the second quarter.  Bank liquidity 
remained high at USD 1.2 billion as of August 31. 
 
Economic Indicators             March 31  June 30  Aug 31 
--------------------------------------------- ------------- 
Inflation rate                  3.72 pct  3.5 pct  4.4 pct 
Local currency appreciation     0.38 pct  0.25 pct 0.12 pct 
Bs/USD exchange rate            8.07      8.06     8.05 
Exports (USD)                   798.2 mn  1.71 bn 
Net International Reserves (USD)2.014 bn  2.47 bn  2.77 bn 
Public Sector surplus (USD)     220.8 mn  437 mn   578 mn 
Public Debt (USD)               7.002 bn  7.66 bn  6.14 bn 
Public Debt (pct of 2005 GDP)   80.2 pct  88 pct   70 pct 
Bank deposits (USD)             3.15 bn   3.15 bn  3.26 bn 
Bank loan portfolio (USD)       2.60 bn   2.65 bn  2.71 bn 
Portfolio in default            12.1 pct  10.4 pct 10.3 pct 
Bank liquidity (USD)            1.20 bn   1.11 bn  1.20 bn 
 
Sources: Bolivian Central Bank, UDAPE, INE 
 
Comment: Risks to Growth Projections 
------------------------------------- 
¶8. (SBU) Although macroeconomic conditions remained positive 
during the first semester of 2006, many risk factors threaten 
mid and long-term growth.  Bolivia stands to lose its U.S. 
trade preferences under ATPDEA in December, which implies a 
decrease in exports and a loss of thousands of manufacturing 
jobs.  The GOB's policies of increasing state control in the 
hydrocarbons and other key sectors likely mean that private 
 
investment will remain low.  Also, the increasing 
politicization of the Central Bank could threaten 
macroeconomic stability (reftel).  End comment. 
GOLDBERG