I will share some of the biggest myths and lies about Evo Morales’ supposed great and successful economic model in Bolivia in a series of 42 tweets.
- Obviously, the primary cause of the economic boom was the extraordinary increase in commodity prices between 2003 and 2014. This allowed Morales to have a budget four times larger than during the “neoliberal” era of the 90s.
- Bolivia never provided a clear explanation for the rise in commodity prices but confused the world by attributing the abundant revenue to the nationalization of oil and gas in 2006, which was merely a renegotiation of contracts. Consequences would follow later.
- Some attribute the increase in commodities to the growing demand from China and India, but I also attribute it, or even more, to the largest monetary and credit expansion in history, mainly by the Fed since the 2001 attack on the Twin Towers.
- This diagnosis is particularly important because Bolivia’s new economic model could have been built on shaky ground, depending on something as volatile and unpredictable as international oil prices, which had never been at such levels before.
- This allowed Morales to increase spending like never before in the country’s history, thereby gaining more authority and control over the economy at the expense of economic freedom and, consequently, market value generation, which would only become evident later.
- The model was not really different from the one applied by other regimes of 21st-century socialism in Latin America. It ended up facing the same structural economic problems as Argentina under the Kirchners, Brazil under Lula and Dilma, or Venezuela under Chávez and Maduro, with some differences.
- The Morales regime was very fortunate because the more they spent, the more the international commodity prices increased. However, the model never had long-term sustainability, but rather an enormous short-term boom.
- Moreover, it was not just public spending, which limited the market value generation of every entrepreneur and favored crony capitalists to make huge profits, that caused the unprecedented boom, although, I insist, an unsustainable one…
- After eliminating the independence of the Central Bank of Bolivia (BCB) and turning it into their lender of first instance, the government nationalized the currency and intervened in the banking and financial system in 2013 to provide abundant artificially cheap credit—the cheapest in the region!
- All of this was an especially explosive combination, and sooner or later, the trigger would come. However, it was not necessary to wait for everything to blow up to finally realize that Bolivia could end up in a disaster comparable to Argentina or Venezuela.
- In 2013, the slowdown arrived, which they denied. In 2014, commodity prices fell, and with it, public revenue also decreased by around 40% in 3 or 4 years. They resorted to rapid external public debt accumulation to compensate for this decline instead of cutting expenses.
- Just like Argentina, Brazil, Venezuela, and Ecuador, which destroyed their economies long before the commodity crash of 2014, Bolivia would be the last to fall; it was simply at a different stage and would eventually collapse in the same way.
- By early 2018, the economy was facing serious problems of public debt, declining reserves, uncontrolled spending, illiquidity in the banking and financial system, increasing defaults, ALL state-owned companies were either running deficits or bankrupt, and so on.
- Amidst all this, the rhetoric and lies were shamelessly directed against the “enemies of the nation”: “We are the economic oasis of the region.” “Regional gold medal in growth.” “The next continental power.” And other nonsense, however…
- Of course, Bolivia did grow, and significantly so, but growing for the sake of growth is never good. What matters is sustainable long-term growth. The model was closed off from the world, and they intended to industrialize the country through absurd leaps in the process, which were never fully realized.
- It wasn’t a boom, but rather a bubble of astronomical proportions. My Argentine friends tell me, “There is no inflation.” There is, and it’s gross, but not in the CPI, which was also manipulated, but rather in long-term durable goods such as houses, lands, apartments, brand-new cars, and so on.
- So, let’s not forget this: the slowdown began in mid-2013, and the commodity crash didn’t occur until mid-2014. The problem lay in the model itself, not even in its dependence on commodities; it couldn’t sustain itself even with oil at $150!
- An economy thrives on its ability to save and allocate capital through market-based mechanisms like the price system, directing it towards the economy, identifying relative scarcity and opportunities to solve problems in exchange for legitimate profit.
- However, the state sought to intervene in every sector of the economy to allocate capital, passing through its porous hands first, of course. The corruption was immense, and the economy was prevented from generating long-term market value, eventually becoming sluggish.
- As a recent anecdote, Luis Arce Catacora, a strong minister under Morales since 2006, said at the end of July: “The economy is on a very good path. The only sector that shows negative figures is hydrocarbons.” This is the same as saying, “The chicken is still alive; the only problem is that it no longer lays eggs.”
- The evidence began to accumulate. Any pretext (even a World Cup) was good for stimulating domestic aggregate demand: the capital destroyed in the form of schools, roads, hospitals, stadiums, public housing complexes rendered unusable is… impressive!
- The same phenomenon of overcapacity and capital destruction in the private sector, fried by monetary nationalization and abundant artificially cheap credit, is equally comparable. Go to Urubó in Santa Cruz, everything significantly overvalued.
- Almost no one (with very few honorable exceptions) dared to diagnose it as a typical bubble phenomenon, not a boom. Conventional opposition economists found it difficult not to make concessions from time to time. Others criticized only by default, some sold out.
- Many unsuspecting individuals fell for the official narrative and manipulated macro data. For example, when the Ministry of Finance talked about tripling the GDP in 13 years, they were referring only to the nominal value, not the real value. Childish, but the argument was enough to invest as if there were no tomorrow.
- So when domestic aggregate demand inevitably started deflating (the amount of credit was considerably higher than the amount of real savings available for investment), everyone began to adjust, except for the government, which kept spending and borrowing at increasingly higher costs.
- They never acknowledged that their problem was excessive spending, not a lack of income. But with the wrong diagnosis, they bet on replacing gas with agriculture and biodiesel and bioethanol. That’s when they set fire to 6 million hectares in Chiquitania and the Amazon.
- [I skipped this tweet.]
- External credit also dried up, even when major central banks around the world returned to the era of zero or negative interest rates, which again stimulated the rise in oil prices. Yet, it was not enough: they resorted to tapping into the reserves of the Central Bank of Bolivia.
- In parallel, in the private sector, delinquency started to increase. No matter how long they artificially kept interest rates low, the public was no longer taking on credit. The undeniable overindebtedness and the unstoppable illiquidity of the system became evident.
- They also sought to tap into the savings of the pension fund system (AFP). In fact, at least two-thirds of the latest issuance of sovereign bonds in foreign markets ($1.000 billion) were purchased with those funds. It is hard to find a greater investment aberration: AFP profitability? 1%!
- At this point, the suggestion for my clients was one of two options:
A. Invest abroad now because it will be more expensive later, and eventually very difficult, if not impossible.
B. The best time to invest as a contrarian is approaching, but no one knows how much margin will be needed. - And the suggestion for my political friends until a month ago was:
C. Let the economy be what brings you down, not democracy. But the times arrived sooner, triggering a truly severe recession for 2020 that they had to face. - Rumor has it that the amount they spent in nearly 14 years was $70 thousand million. I believe it is much more because they only consider income from gas exports and not the countless mechanisms to stimulate domestic aggregate demand. Anyway…
- All of this is illustrated with some general data: Even though it was their friend, ECLAC stated that between 2014 and 2017, Bolivia was the first or second country (with Brazil being the other) where extreme poverty grew the most in the region, from 14.9% to 16.4%.
- – GDP 2019, according to Bloomberg before the fraud: 3.8%
– Fiscal deficit for the sixth consecutive year: 8%, $3,300 million
– Trade deficit: $722 million
– Per capita GDP: $3,841
– Credit rating (Fitch, S&P) before the fraud: negative outlook. - – Gas exports: volume of gas declines more than value
– Exports: $8,965 million, declined 30% between 2014 and 2018
– Diesel and gasoline imports soar to 72% and 67%
– Public debt: 25%, external $10,705 million, internal $5,350 million
– Public spending: 45% of GDP - – Foreign direct investment (FDI): The lowest in the region in 2018, $300 million
– BCB reserves as of Oct 11, 2019 (before the fraud): $7,433 million, lowest since 2008 (decreasing at a rate of $1,200/year) - – Credit grows at a rate of between 20% and 25% annually
– Bank delinquency rate 2% + rescheduling: 4%
– Bank profitability: 18%, the lowest in the region
– Prodem Bank receives sanctions from the United States in 2019
– Credit growth rate surpasses deposits, which in turn decelerate. - Here began the signals of greater short-term risk, Sep 18, 2019: Systemic Risk Committee of the BCB modifies the vault cash protocol in the face of bank runs. The last time it was modified was in 2011 when they implemented the fixed exchange rate with $12,000 of International Net Reserves (RIN).
- I considered this element as one of the clearest signals of the economy’s fragility given the recent history of fraud, but also because the RIN would no longer be sufficient to sustain the exchange rate of Bs. 6.96. If they devalue, it will trigger the burst of the bubble.
- By the way, before moving on to the most recent developments in this lovely story, I forgot to mention the following about external debt (considering it’s “official,” it’s always more): Morales received external public debt at 17% of GDP in 2006, and increased it by… 486%!
- Due to the conditions in which I am certain the economy finds itself, I prefer to withhold the details, but I believe we are already in default; they took everything and set the rest on fire. But I have already (humbly) come up with a plan…
Is there a way to avoid a severe economic crisis? You can take measures to prevent the economy from further decline and to recover it, but not to prevent it from falling. That doesn’t exist. We need to liberalize the economy. It will hurt, but the faster, the better.
This article was originally published in Spanish on November 13, 2019, and was cited by The Wall Street Journal.