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Cablegate: Central Bank Outlook Positive

VZCZCXYZ0001
PP RUEHWEB

DE RUEHLP #2112/01 2161901
ZNR UUUUU ZZH
P 041901Z AUG 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 0150
INFO RUEHAC/AMEMBASSY ASUNCION 6029
RUEHBO/AMEMBASSY BOGOTA 3348
RUEHBR/AMEMBASSY BRASILIA 7198
RUEHBU/AMEMBASSY BUENOS AIRES 4461
RUEHCV/AMEMBASSY CARACAS 1736
RUEHPE/AMEMBASSY LIMA 1751
RUEHMN/AMEMBASSY MONTEVIDEO 3947
RUEHQT/AMEMBASSY QUITO 4367
RUEHSG/AMEMBASSY SANTIAGO 8931
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 002112

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: ECON EFIN ETRD BL
SUBJECT: CENTRAL BANK OUTLOOK POSITIVE

REF: LA PAZ 1791

1. (SBU) Summary: According to a Central Bank official,
Bolivia's macroeconomic situation is positive overall, with
first semester GDP growth of 4.3 percent, strong fiscal
revenue inflows, low deficit projections, moderate inflation,
high international reserves, and a sound banking system.
However, uncertainty in the hydrocarbons sector could dampen
future growth, while a mismatch in central and regional
government income and spending responsibilities could reduce
the effectiveness of public expenditure. End summary.

Strong GDP Growth, Low Deficit Projection
-----------------------------------------
2. (SBU) Central Bank Economic Policy Advisor Armando Pinell
told Econoff on August 2 that the Bolivian economy was
performing well overall, despite uncertainty in the
hydrocarbons sector due to the GOB's nationalization policy.
Gross domestic product (GDP) grew by 4.3 percent in the first
half of 2006 and strong revenue inflows (2.5 billion
bolivianos or USD 312 million during first semester 2006)
from hydrocarbons taxes, other business taxes, and customs
have produced a fiscal surplus. Pinell predicts a combined
public sector deficit at near zero for 2006, compared to 3
percent of GDP projected in the budget, because the
government will not immediately spend higher than anticipated
hydrocarbons revenue. The Central Bank will publish a new
monetary policy paper around the end of September, Pinell
said.

Central Government Financing Gap
--------------------------------
3. (SBU) Despite overall near zero deficit projections, the
central government will likely face a serious shortfall in
available funds by year-end if regional income is not
transferred to central government accounts, Pinell said.
Currently, regional governments have large surpluses that
they are not investing, because significant income is
transferred to them by the central government, while major
fiscal responsibilities are not. Pinell suggested that the
contentious issue of revenue sharing, particularly of
hydrocarbons taxes, would be discussed at the Constituent
Assembly.

Inflation Concerns and Revaluation
----------------------------------
4. (SBU) Although the Central Bank aims to control inflation,
which is currently around 4.5 percent and is projected to be
the same at year-end, it is unlikely to significantly revalue
the boliviano to do so. A slight revaluation is probable,
but Pinell said that the Bank would not implement a large
increase in local currency value, because it must consider
the impact on exporters and local producers who benefit from
a cheap boliviano. Pinell explained that because of strong
appreciation of the Brazilian real last year, Bolivia is
importing inflation from its neighbor. Although increasing
prices cause concern, local producers benefit because their
cheaper goods are now more competitive vis-a-vis Brazilian
imports.

Bolivianization Increasing, Reserves High
-----------------------------------------
5. (SBU) Central Bank policies of encouraging local currency
use instead of dollars have been fairly successful in
increasing boliviano use, with approximately 20 percent of
deposits and 10 percent of loans now held in local currency.
Partially due to large export earnings and partially because
of the public shift away from dollar use, the Central Bank
has record high international reserves (USD 2.67 billion).

Banking System Stable, Exchange Controls Unlikely
--------------------------------------------- ----
6. (SBU) Pinell said that the financial system is sound
overall. Although bank deposits decreased slightly during
the first half of the year, he explained that deposits
actually increased in every month except May. He attributed
the dip in May to false rumors of GOB-imposed exchange and
deposit withdrawal controls. Loan portfolios increased
during the first semester. Pinell explained that the idea of
implementing currency exchange controls was "in fashion when
the Venezuelans were here", but fortunately has fallen by the
wayside. He did not think the GOB would seek to implement
such controls in the foreseeable future.

7. (SBU) Comment: Although Bolivia's short-term
macroeconomic outlook is positive, several risk factors could
impede mid and long-term growth (reftel). Private investment
is likely to remain low due to the GOB's policies of
increasing state control in the hydrocarbons and other key
sectors. Export revenues have already begun to decrease in
anticipation of Bolivia's likely loss of U.S. trade
preferences in December. Although the Central Bank has thus
far continued the monetary policies of the previous
administration, the Bank's new directors seem amenable to
changing the Bank's prior conservative policies in order to
support GOB goals, such as employment generation, possibly to
the detriment of macroeconomic stability. End comment.
GREENLEE

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