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Bolivia's country risk--should it change credit terms?

On May 1, 2006, Bolivian President Evo Morales seized control of foreign oil and gas company assets. This is the kind of dramatic political event that credit professionals, who sell to companies overseas, must monitor and try to anticipate. Under the category of factors known as country risk, asset seizures, as well as political, economic and natural world events add an extra dimension of risk to overseas sales. Those interested in the relationship between country risk and credit terms may want to closely watch recent and ongoing events in Bolivia, even if they do not sell products or services to the region. Although the country's level of international trade is on a small scale, it could serve as a big example of how political events in a country can impact export credit terms and international trade.

Certainly, anyone contemplating selling goods or services into Bolivia cannot ignore the recent nationalization of oil and gas reserves by Morales. Nor can those who sell goods and services into Latin American overlook what impact Morales' political actions may have on other countries in the region. Richard Clark, CICE, Director of Global Credit, Industrial Technologies, Ingersoll-Rand Co. said that even though he does not have much personal experience or commercial activity in Bolivia, he is "concerned about the impact on other regional countries that are also major commodity providers."

As well, the apparent political coalition of Morales and leftist Venezuelan President Hugo Chavez may well have implications for other countries in Latin America. Many monitors of country risk will likely be closely watching upcoming elections in other countries in the region, to see if other politicians advocating the political style of governing used by Morales and Chavez, often referred to as populism, win these elections. For example, an election was held in Mexico on July 2, which included a populist presidential candidate who lost in a narrow, and battle after a recount. Paulo Menezes, Senior Risk Manager, Sojitz Corporation of America, said, "I expect countries that are governed by populist presidents to be somewhat affected by the perception that similar interventions (like that in Bolivia) could occur in those countries."

David Atkinson, Country Risk Manager for Euler Hermes ACI, said that in Latin America, "the turn toward populist leaders is of some concern." However, he added, "I think it would be wrong to extrapolate what is going in Bolivia and Venezuela to the entire region." He pointed to other countries with elections this year, and said, "There are different kinds of populists and different kinds of leftist leaders. A lot of the leaders may be left of center, but a lot of them are pragmatists." His reasoning underscores the nuanced political analysis that must be considered when evaluating country risk and trying to anticipate a government's actions in terms of their economic impacts countrywide and on specific industries.

As well, government officials from countries with more market-driven economies are monitoring the situation. At a summit meeting of world leaders from Europe and Latin America, held in Vienna in May 2006, British Prime Minister Tony Blair sounded a cautionary note about the situation. A May 12 article by Reuters quoted Blair as saying, "What countries do in their energy policy when they are energy producers like Bolivia and Venezuela matters enormously to us. My only plea is that people exercise the power they have got in this regard responsibly, for the whole of the international community." The same article quoted United Nations Secretary General Kofi Annan as saying investors needed guarantees of long-term stability to avoid disrupting all economic activities.

Often, by following the longterm actions and rhetoric of a government leader, either in their past roles in office or while campaigning, their actions can be anticipated. In the case of Bolivia, Atkinson noted that the announcement of Morales' intention to nationalize the country's natural resources, which could also include timber, silver and water, did not affect his country rating of Bolivia because he anticipated Morales' actions when he came to power. As far as his rating of Bolivia's country risk, Atkinson said, "We changed the grade towards the end of last year from a "C" rating to a "D." He said the "D" rating is the worst--but it doesn't mean his company will not provide coverage for sales into that country. Those concerned with country risk will be watching future actions of Morales to see how far he takes his intentions to nationalize certain industries. Atkinson said that extending state control in other areas, such as the use of land, "unnerves investors generally."

The nationalization plan of Morales over gas and oil calls for all private gas and oil producers to sell 100 percent of their output to Yacimientos Petroliferos Fiscales Bolivianos (YPFB), a government-owned enterprise which will determine the payment to these companies on a case-by-case basis. Companies operating in large fields that produce more than 100 million cubic feet per day will incur a tax rate increase from 50 percent to 82 percent. This affects primarily six foreign companies: Brazil's state-run energy company Petrobas, Repsol of Spain, Total SA of France, Tecpetrol S.A and Pan American Energy L.L.C. of Argentina, and U.K.-based BG Energy Holdings. John Murphy, V.P. International Affairs for the U.S. Chamber of Commerce said this arrangement might benefit Bolivia now due to high commodity prices. However, such a strategy is risky in the boom and bust cycle of commodities. "Exploiting energy resources is a high-risk business," Murphy said. Turning to the situation in Venezuela, he said, "Chavez really turned the screws to foreign oil companies. That's a real disincentive to invest."

Eddy Sumar, CCE, CICE, International Trade Financing Manager, Rain Bird International, Inc., said it is important not to over-react or to act too quickly to political developments in other countries, adding that it's important to first acquire as much information as possible before deciding on whether or not to change credit terms on sales into that country. "I would never over-react," Sumar said. "When there is something extraordinary, I contact my customer and talk to them openly. Sometimes reports in the media are not entirely accurate." Sumar said other sources of information would be a credit insurer and a banker. Even amidst bad circumstances, a customer's ability to pay may not deteriorate. Reducing credit terms to a customer could result in lost business to other competitors.

Morales's actions have had some immediate negative impacts on credit terms to Bolivia. Walter Rebello is Finance Manager, Latin America, for Muehlstein, a maker of petrochemical products that sells in 76 countries. Shortly after the news broke on Bolivia, Rebello, after having monitored the situation and giving it careful consideration said, "We are withdrawing open terms to Bolivia. We are changing them to letters of credit or cash." It's not only the action that Morales has taken--but also what he might do next, that worries Rebello. "In the same way they nationalized the oil wells, they can nationalize other things such as the banks." The fact that Bolivia changed the rules for its energy sector will probably make those in other industries more cautious. "The other sectors will all look to Bolivia as a country that can change the rules from one day to another." Country risk trumps the financial status of a company, he added: "The political risk goes before the commercial risk."

The situation in Bolivia is evolving, as it is in some other Latin American countries because of several important elections. The actions by Morales in Bolivia, alone or in conjunction with those of Chavez, may adversely affect markets and the business credit environment of other countries in the region. The situation in Bolivia should make those who need to monitor the political risk of countries take a closer look at the entire region. The trend toward populism may intensify with elections still to come this year in Peru, Colombia, Brazil, Nicaragua and Venezuela. However, despite whatever the political trends may be, those selling into the region need to balance the desire to change credit terms because of increased political risk with the need to stay competitive in those markets. Evaluating the variables that affect levels of political risk involve a certain degree of subjectivity and experience in the arena. Political risk is just one of the important considerations that credit professionals involved in international sales must consider. It demonstrates that, as in other aspects of business credit, it is part scientific analysis and part subjective judgment honed from experience.

Tom Diana may be reached via e-mail at
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Title Annotation:INTERNATIONAL
Author:Diana, Tom
Publication:Business Credit
Geographic Code:3BOLI
Date:Jul 1, 2006
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