Without reserves: Bolivia faces an economic crisis

[MUSIC PLAYING] Hello and welcome to the Intelligence from the Economist. I'm Aure Oganbi. And I'm Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world. [MUSIC PLAYING] Tensions between China and the West are at an all-time high, well politically at least. But thanks to Louis Vuitton Trunks, Birkin Bags and semi-conductors, the business relationship between both poles paints a starkly different picture. And the modern game of football is really quite a lot about the game of financing. But in Italy's top league, a not very rich team looks set to take the league title this weekend. We ask how it got there on the cheap and what that says about the sport. First up, though. Recently, I traveled to La Passe, the administrative capital of Bolivia. Anna Lankez writes about Latin America for the Economist. I was there to speak with money changers, the people who buy and sell currencies, mostly the Bolivian currency, the Boliviano, and the US dollar. And their job has become quite a bit more difficult, because Bolivia is running out of dollars. One money changer told me he couldn't get his hands on enough dollars to sell to customers. And people who are willing to sell him dollars are demanding a higher rate than the official exchange rate. There has been a peg of six Bolivianos and 96 cents to the dollar for more than a decade. But the sudden demand for dollars signals a deeper problem in the country. In February, the central bank stopped publishing data on its foreign currency reserves. And in March, the bank started selling dollars directly to the public after exchange houses said that they were running out. That spooked investors. So government bonds maturing in 2028 by early April had lost almost half their value since January. Though in the past week, they've regained some value. But overall, the picture is still pretty grim. So Anna, tell us, why is Bolivia's economy so troubled? There's a couple of reasons. So when the Federal Reserve, which is America's central bank, started raising interest rates last year, it became harder for countries like Bolivia to take on foreign debt. The war on Ukraine has made imports of fuel much more expensive. So the government started dipping into its reserves to prop up both the currency, which, as I've mentioned, has been pegged for around a decade and to subsidize fuel. But it's a longer term issue. Bolivia has an economic model that is no longer sustainable. And why is that? Tell us more about this economic model. So for two decades, Bolivia's economic model has been based on natural gas exports. There was a gas boom from the early 2000s and Bolivia started exporting loads of natural gas and the economy grew a lot. There was a leftist president called Evo Morales, who was elected in 2005. And he got very lucky when he came to power multilateral institutions, wrote off huge debts for Bolivia and other poor countries and gas prices hit record highs. Both of these things allowed Bolivia to accumulate the largest foreign reserves in its history. And real GDP per person has grown by half since 2005. So in 2011, they pegged the Bolivian on to the dollar because the government had reserves to back that peg up. For a while, things looked good in Bolivia. Still today, it has among the lowest inflation, not just in the region, but in the world. And people said that Bolivia was going through an economic miracle, but in reality, the model wasn't sustainable. Why not? Why did it all come crashing down? It hasn't quite crashed yet, but the model is clearly not sustainable. The government spent too much of the cash from natural gas on fuel subsidies, inefficient state firms, and on propping up the exchange rate. So fuel prices have been frozen since 2005, a liter of fuel costs around $0.54 US dollars compared to around $1.31 in the rest of the world. Then in 2006, the president, Evo Morales, nationalized the country's gas fields. And so private companies had to sign new contracts with the state firm and hand over a majority control. That means that Bolivia takes a bigger share of revenue from oil and gas companies than any other country in Latin America except Mexico. That has really put off investment. And the tipping point came in 2014. What happened in 2014? Well, Bolivia's finance has started to deteriorate, mainly because there was a big fall in gas production. But the government didn't scale back its policies. Instead, it piled on debts and used its reserves as well to fund things like its subsidies or to pay for its pay. So public debt has doubled since 2014. It's now around 80% of GDP, which is very high for a lower middle-income country. Now it's been almost 10 years since then, and Bolivia has been running persistent and large deficits for most of that time. So in the past year, actually Bolivia became a net importer of hydrocarbons, when usually it exported loads of hydrocarbons. And you went to Bolivia, how are the people there responding to this? Many people are pulling their savings out of banks and buying dollars. But because dollars have become more scarce, many people have started buying euros or Chilean pesos or the Brazilian real or Peruvian soles. So I spoke to a money changer who told me exactly this, that people are desperate to get their hands on anything that's not the Boliviano. Almost, almost with Boliviano. So we buy something from no soles, to say it and it's the same. I talked to several people who told me that in recent weeks, different banks have been setting limits on how many dollars customers can take out. So for example, you might not be able to take out more than $500 a day or $1,000 a week depending on your bank. And that has really frightened people. But the government has been very slow to acknowledge that there's a problem. The current president, Luis Arce, said there's no need to devalue the Boliviano or remove subsidies. His growth projections are twice as high as those of the IMF for this year. And do you think there's any hope for a change in Bolivia's fortunes? Well, there is some short term good news. There's a law that looks likely to be approved in Bolivia's Congress that would allow the central bank to sell up to half of its gold reserves. Also, the Bolivian government is in advance talks to get loans from several international financial institutions. Both moves will allow the government to get more foreign currency. And that has reassured investors somewhat. So recently Bolivian bonds have rebounded a little bit. And that sounds like it could finally end the crisis. Only in the short term, I think, because long term, Bolivia's economic model was based on natural gas and because production has fallen, that's going to be a real problem for the economy and for the government. However, there are other kind of cushions against a complete meltdown. One of those is that Bolivia has a giant informal economy. Over two-thirds of Bolivian's work in the informal sector, which is one of the highest shares in the world. And this includes smuggling subsidized Bolivian fuel and selling it abroad at much higher prices. So there are dollars circulating in the Bolivian economy. They're just not necessarily in government coffers. The final long-term hope for the government is lithium, which is used for things like batteries and smartphones and electric vehicles. Bolivia has the world's largest lithium-brine resources, but it hasn't yet been able to sell any lithium at a commercial scale. And Bolivia's populist policies have turned off much needed investment. So there are these kinds of flashes of hope and Bolivia might have a savior in lithium, but it has very serious structural issues that it has built up over the last 20 years and those aren't going away any time soon. And thank you so much for coming on the show. Thank you. Earlier this month, France's president Emmanuel Macron made what many, including the economist, considered a diplomatic blunder. He suggested that France and Europe shouldn't get involved in any conflict between China and America over Taiwan. Mr. Macron made the comment during a visit to see his counterpart in China Xi Jinping. It was a trip on which he was joined by more than 50 French business executives from an economic stance at least. France has good reason to try and maintain a healthy relationship with China, regardless of its allies' security concerns. So France's stock market is extremely exposed to Chinese demand. Mike Bird is our Asia Business and Finance Editor and co-hosts our sister podcast MoneyTalks. The week after President Macron's visit to China, France's stock market hit a record high. It's hit record highs again since then. And strong Chinese demand is the most obvious cause of this. France has a huge number of very, very valuable luxury goods companies and the end of zero COVID in China has been great for them. It not only means more people in China able to go out and buy their products, but it means people are able to leave China, travel to France and other parts of Europe and buy the products that these luxury goods companies sell and they're a huge part of the market. And how huge, how important is the luxury sector to France's economy? Well, to give you one statistic, LVMH, that's the luxury company behind Louis Vuitton, Moën, Hennessy, is France's largest listed company by quite some distance. The CEO is the richest man in the world. It's done incredibly well so far this year. It reported a 17% jump in year-on-year sales in the first quarter, but it's not alone. You've got amazed international caring, perner, record, other luxury brands that make up another sort of 8% to 10% of the French stock market. So when you look at it like that, this is a really, really big proportion of the French equity market. And Mike, tell us, is France alone in relying so heavily on Chinese demand? Well, France, I think, is a particularly good example, but no, it's not really alone at all. If you look at valuations in rich world stock markets, you would basically not know that China and the West had any sort of relationship strains at all. It's very, very difficult to actually find something in financial markets that tells us this. Look at the companies in the West with particularly high Chinese revenues, particularly high share of their sales happening in China or from Chinese consumers in general, those stocks are up about 7% this year. That's considerably better than a lot of financial markets are doing. Basically you would not know from any of this that there was a problem, any sort of difficulties between the West and China. You would certainly not know that relations are at a sort of 50-year low, especially between the US and China. Okay, so it sounds like this is something that goes beyond luxury. Are you saying that rising tensions haven't affected business between China and the West at all? Yes, I think that's right. So in the grand scheme of things, even when we've seen difficulties with US businesses, for example, operating in China for Western businesses, operating in China, of course, for Chinese companies like Huawei trying to operate in the West. Even where we've seen that, it seemingly hasn't affected Western investors' perception of these companies' futures, their prospects, all that much. Whatever happens to diplomatic relations, I think most people believe that rich Chinese consumers are unlikely to stop buying handbags in Paris as long as they can get there. You look at mining companies like BHP Group and Rio Tinto. There's been some difficulties there. Political disputes like the Chinese government blocking some purchases of Australian commodities. But basically, these companies are doing actually quite well. Okay, but what about America? America's been locked in a trade war with China for years and Washington's increasingly cracking down on Chinese technology. So I think this is where it gets most interesting. If you look at the three biggest companies in that index, I mentioned earlier, Western companies with a huge amount of Chinese exposure. The companies are Qualcomm, Texas Instruments and Broadcom. These are all three American semiconductor companies. They make between one third and two thirds of their revenue in China. So this is absolutely enormous exposure. If that was to drop, that would be a huge business impact. If that was to disappear at something that's a third to two thirds of your revenue, you're talking about a potentially sort of fatal event to a business model. These companies are operating precisely where the worst disputes over advanced technology are between the US and China. Their stock prices have seen double-digit percentage increases this year. More broadly, US China trade hit a record level last year. So while you can see in every sort of political and general news headline, all this tension between the US and China, it's really, really difficult even with the most exposed companies to see it coming through and really affecting financial markets. Could this change if things escalate? Yeah, definitely. And I think what's being displayed in what's happening in markets at the moment is basically a lack of belief that these things will escalate. But it certainly could last month even use Texas Instruments doubled down on a commitment to invest more in China, Qualcomm, another one of those US semiconductor companies has partnerships with China mobile. It's a big Chinese telecommunications company, a range of Chinese phone manufacturers. So basically these companies aren't acting as if this is something they're going to have to move on very quickly. It's not as if they're behaving like they're going to have to massively cut down their exposure to an investment in China. They're still pretty much full steam ahead. So in some, politically, China and America's relationship is as tense as ever, but then business wise, it's the opposite. Mike, do you think these two approaches can coexist? Basically no. One of these views has to be wrong pretty much by definition. This sort of surprisingly strong performance of Western firms really heavily exposed to China suggests two things to me. First is that even with the threat of conflict foreign companies at Chinese exposure, I still clearly a much better way of sort of trying to benefit from massive Chinese economic growth that's been over the last decades or whether we're talking about what's to come, then the domestic Chinese stock market has been, which has had sort of terrible returns for decades and decades. It's got loads and loads of state-owned firms, heavily indebted property developers. It's been a really rubbish way of betting on China. The second thing that this suggests is that there's this massive gap between foreign policy and security sort of people, the hawks in this people who are really worried about the US-China relationship or really concerned about China's foreign policy, for example, and global investors who are essentially betting that the business relationships between the two countries won't break down much more than they have already. They're clearly the sort of peace lovers in this scenario. investors really don't seem to believe or want to believe that businesses with massive exposures to China and the West will face serious problems because of it. So basically yes, only one of these two views can be correct. It's either the increasingly bleak view of diplomats or investors, somewhat more optimistic view. But one of these basically has to be wrong. Mike, thank you so much for coming on the show. All right, thank you very much. In England's premier league, bookmakers reckon the top team this year will be Manchester City, the richest club in Europe, led by superstar striker, Erling Holland. The wealthiest team in France, Paris, Saint-Germain, are comfortably top of their league, and Barcelona, the second richest team in Spain have a healthy lead in theirs. But in Italy, a minor miracle awaits, proving that sometimes football greatness isn't just about the money. Syria, the Italian football championship is set to be won this year by Napoli, who are the sixth richest club in the league, which is a club that has been in the doldrums for decades following the glory days of Diego Maradona. Mike J. Kimin writes about sport for the economist. They do not have the financial cloud of many of their rivals, but with only eight games to play, they have a commanding lead, and it's almost inconceivable now they don't go on to win the championship, which would be a major upset from what we expected at the start of the season. So what's behind the turnaround then? I think this is a combination of several factors all falling into place at exactly the right time. For any football club to be successful, even if you have the most amount of money in the world, you need to play the transfer market well. You need to have a squad that's well balanced across age profiles and depth, and Napoli did a series of moves last summer, all of which have come off. They managed to get rid of several long-staying players who were good, but were getting older, they were over 30, they were on big wages, and they bought in three or four very capable squad players, but they've also bought in a guy called Kavitsha, Kavaratskaliya, who is a young Georgian forward, who is not really on the radar of many other clubs, and Kavaratskaliya he has absolutely lit up, Syria, this year. E' il suo fermatore questo rimpallo, si menzi a cieneda da l'altra parte a Cuvara Schélia che diceve. Cuvara Schélia uno contro uno, va sul destro. Sterta! Risterta! E' cuncia! Sotto la traverso! Innevitably, il suo cuore Cuvara Donna. È un po' un po' che è molto facile perché è molto facile, ha una ricetta di tritzato. E' il suo cuore ha also fatto il più forte di Napoli's Other, il suo cuore che è un stricolo che è called Victor Oseman, che era unasty nice o presentным? Tant'è però, wing con unaäusna propiti app darle dallacompanca di un ciò scritto a una supreadurola questa trezione ar convinced. V nenhuma c'è il troppo grande adaptations di se�ure e con il overcolo lo escrivi. E questo место qué ecco questo storia di coaching nero việcmente galle ecol 17 a続 trecia dal tel pacone fisicano, per creare allora il talento dell'olmodernizzazione che è un'italia in Italia, in charge di molti ai club. E spiletti sculsano il piatto di fare lo che ha appena. Per esempio, il suo charge di ultima, quando si ha un'altra, il tempo di farlo inizio a scuodere, ha fatto le lece che sono stile e ha fatto, e ha preso in scelione e molti di altri, che sono nuove più attacqui, più di energia e spiletti, quindi non sono sceletti, e mi sono riuscire ad essere successo. Però io penso che ha una faccia di un altro fatto di dire, e questo è l'olusio. E' che l'olusio ha pensato? Sì, la Cidia ha probabilmente non essere il più competitivee di questo scelto. La gionità di italiania e football che ha avuto iniziato a tutta la tutta. Juventus ha una scelta iniziato a la scelta e poi era compaute per essere in un scandalo accuuntico, e sono no in questo corso di scelto. Le campioni di scelto, AC Milan, sono un talento team, ma sono anche una scuodia, e ho fatto un'interno di ingiore. Intamalan, i miei ragazzi, ho avuto un'interno e spolettore, e ho avuto iniziato a tutta la tutta la scelta. È un po' di un napa che ho avuto un po' di scegliere, è non molto importante, ma le cose sono iniziato a passare a un'interno, e ho avuto questo fatto. È una scelta iniziata a come passare e potete avversare la campione di questo scelto. E' un'interno di scelto e spolettore, ma questo è un'interno di scelto e spolettore, ma questo è un'interno di scelto. E' un'interno di scelto e spolettore, ma questo è un'interno di scelto e spolettore, ma questo è un'interno di scelto e spolettore, ma questo è un'interno di scelto e spolettore, in questo modo che è un'interno di scelto e spolettore, ma in questo modo è un'interno di scelto e spolettore, Che preso la Muchzana di un Sé di Carone? Ma che immettere questo club d - che si staichero perdendo le 51 persone di.* Che cicolato la Noe tranceso sulla cittadetta daistologie, che il Read By from Saxos. Vai di questa Cela teme svalu con i grandi tagli del shakene', che è un'interno di più dei club di Sambra. È la decisione di un club, è che non si faccia il money, e non si ricorda di repartire la sua parte con questo team, o che non si possono sostenere, e si chiamano a altri club, e provare a comprare una legazione. È una storia più grande, ma il money ancora si faccia il sportgo. Non ho il mio libro, ma non ho il mio libro. È il mio libro, ma in Germany, che sono molto scopre e sono fanno il mio libro, ma, alla resta, il mio libro è molto dominato per Bye and Munich, che è uno dei Bundesliga per ieri per ieri teneri. Italy, per contraste, per Napoli, è il mio libro, è il mio libro di un campiono di 4 anni, che è una ricetta più competitivea, ma, da la stessa volta, il club ha also scopre un'altra ricetta più grande, e il mio libro ha le tue le tue dei maggiori scadnelli che noi hanno in il mio libro 20 anni. E' il mio libro, premio, che è più grande di tutto, ma sono dei problemi di compessore di valore, perché è una città in cui è più grande, che, per farvi, le ricette di club sono in sua forma di avversare il 5° Championship in 6 anni. E' perhaps il mio libro di Bye and Munich, quindi è molto clear che il mio libro è molto loud in football. E per se, come vado a vedere, Napoli è il mio libro, e anche se questo è il mio libro di romantica, il mio libro, e è il mio libro di che se hai le tue dei maggiori e le tue dei maggiori, che è molto difficile di fare un mio libro di un club in la 1°. E' un libro che è molto difficile di fare un mio libro di romantica e è il mio libro di un mio libro di romantica. Con extra produzione ha questa week, con Maggi Kedifa. Vi vedete allo stesso tempo.