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Viewing cable 06LAPAZ1791, FIRST QUARTER 2006 MACROECONOMIC REPORT

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Reference ID Created Released Classification Origin
06LAPAZ1791 2006-06-29 20:17 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy La Paz
VZCZCXYZ0024
PP RUEHWEB

DE RUEHLP #1791/01 1802017
ZNR UUUUU ZZH
P 292017Z JUN 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 9815
INFO RUEHAC/AMEMBASSY ASUNCION 5970
RUEHBO/AMEMBASSY BOGOTA 3288
RUEHBR/AMEMBASSY BRASILIA 7137
RUEHBU/AMEMBASSY BUENOS AIRES 4394
RUEHCV/AMEMBASSY CARACAS 1677
RUEHPE/AMEMBASSY LIMA 1679
RUEHMN/AMEMBASSY MONTEVIDEO 3891
RUEHQT/AMEMBASSY QUITO 4308
RUEHSG/AMEMBASSY SANTIAGO 8865
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 001791 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EINV ELAB EMIN ENRG EPET ETRD BL
SUBJECT: FIRST QUARTER 2006 MACROECONOMIC REPORT 
 
REF: LA PAZ 1660 
 
1. Summary:  Bolivia's positive GDP growth trend continued 
during the first quarter of 2006 due to high international 
prices for the country's main exports: hydrocarbons, 
minerals, and agricultural products.  Exports grew by 23 
percent in the first quarter compared with the same period in 
2005, contributing to an increase in international reserves 
to record amounts.  However, investment prospects are poor 
due to statist GOB economic policies.  Inflation declined 
during the first quarter, while the boliviano appreciated 
slightly.  The government had a fiscal surplus at the end of 
March, with a projected 2006 deficit of 3.4 percent.  Bank 
deposits and loan portfolios increased slightly during the 
first quarter.  (Note: deposits decreased by USD 83 million 
in the second quarter.  End note.)  Although the short-term 
picture is positive, several risk factors threaten long-term 
growth.  End summary. 
 
Positive Growth Trend Continues 
------------------------------- 
2. Bolivia's GDP continued its positive growth trend from 
2005 (4.1 percent) in the first quarter of 2006.  This growth 
was due mainly to high international prices for the nation's 
principal exports -- hydrocarbons, minerals, and agricultural 
products -- and an increase in domestic consumption.  In 
2005, soy prices increased by 13 percent, mineral prices by 
21 percent, and gas export prices increased somewhat due to 
adjustments in Bolivia's contract with Brazil based on oil 
price increases.  The price trends continued during the first 
quarter of 2006.  However, the Latin American Economic 
Commission (CEPAL) predicts that GDP growth for 2006 will be 
lower than that of 2005 at 3.3 percent, while the GOB 
predicts 4.1 percent for the year.  Growth prospects are 
dampened by Bolivia's ongoing high urban unemployment rate of 
9.2 percent based on official statistics.  (Note: this rate 
vastly underestimates total unemployment and underemployment. 
 End note.) 
 
Exports Increase 
---------------- 
3. Bolivia had a trade surplus of USD 391 million in 2005. 
In the first quarter of 2006, the value of exports increased 
by 23 percent in comparison with the first quarter of 2005, 
reaching USD 813 million.  Hydrocarbons exports increased by 
75 percent to USD 418 million, mineral exports by 76 percent, 
and manufacturing and agroindustrial exports grew by 15 
percent in the first quarter.  Export growth, along with a 64 
percent increase in remittances from outside the country in 
2005, contributed to the increase in net international 
reserves held by the Central Bank to USD 2.01 billion at the 
end of March 2006. 
 
But FDI Prospects are Poor 
-------------------------- 
4. Foreign Direct Investment declined by USD 280 million in 
2005 and appears to have followed the same trend in the first 
quarter of 2006.  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 Declines, Boliviano Appreciates 
----------------------------------------- 
5. The inflation rate decreased from 4.9 percent at year-end 
2005 to 3.7 percent at the end of the first quarter of 2006. 
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 
three months of 2006, the Bolivian national currency, the 
boliviano, appreciated by 0.38 percent. 
 
First Quarter Fiscal Surplus, but High Public Debt 
--------------------------------------------- ----- 
6. The GOB ended 2005 with a low fiscal deficit of 2.3 
percent of GDP.  During the first quarter of 2006, the GOB 
had a surplus of USD 221 million, mainly due to a large 
increase in tax revenue from the hydrocarbons sector.  The 
GOB projects a fiscal deficit of 3.4 percent for the year. 
Public debt remained high at USD 7 billion (80% of GDP) at 
the end of March 2006.  Foreign debt was USD 4.7 billion, 
while internal debt decreased somewhat compared to year-end 
2005 figures to USD 2.3 billion.  World Bank debt relief in 
July 2006 could potentially decrease Bolivia's foreign debt 
burden by USD 1.8 billion. 
 
Banking System Sound in First Quarter 
------------------------------------- 
7. Bank deposits increased marginally during the first 
quarter of 2006 from USD 2.664 billion to USD 2.665 billion, 
while loan portfolios grew slightly from USD 2.318 billion to 
USD 2.331 billion.  Loans in default increased by 
approximately one percentage point during the first quarter. 
Bank liquidity remained high at USD 1.1 billion.  (Note: 
Bank deposits decreased by USD 83 million between the end of 
the third quarter and June 19 to USD 2.582 billion.  End 
note.) 
 
March 2006 Economic Indicators 
--------------------------------------------- ---- 
Inflation rate                  3.72 percent 
Local currency appreciation     0.38 percent 
Bs/USD exchange rate            8.07 
Exports                         812.9 million USD 
Net International Reserves      2.014 billion USD 
Public Sector surplus           220.8 million USD 
Public Debt                     7.002 billion USD 
Public Debt (pct of 2005 GDP)   80.2 percent 
Bank deposits                   2.66 billion USD 
Bank loan portfolio             2.33 billion USD 
Portfolio in default            12.2 percent 
Bank liquidity                  1.11 billion USD 
 
Comment: Risks to Growth Projections 
------------------------------------- 
8. (SBU) Although macroeconomic conditions remained positive 
during the first quarter 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 GOB's stated intention 
of designing monetary and fiscal policy that seeks employment 
generation over macroeconomic stability could negatively 
impact growth.  Finally, the GOB's plans to create a national 
development bank offering subsidized loans could harm the 
rest of the banking sector by damaging the national repayment 
culture and creating an unfair playing field.  End comment. 
 
 
GREENLEE