Dollar Peg Can and Must Be Defended, Says Bolivia Candidate

(Bloomberg) -- Bolivia can't afford to risk financial chaos by tampering with its 12-year currency peg, said Carlos Mesa, one of the main candidates to be the nation's next president.

Mesa pledged to defend the boliviano's value and said the central bank still has enough reserves to prevent a devaluation from its current level of around seven per dollar, where it has been fixed since 2008.

“At a time when we are going through a complex health and economic crisis, any decision to modify the exchange rate would be irresponsible,” Mesa said in an interview. “Our reserve levels aren't ideal, but neither are they disastrous.”

The central bank has burned through more than half its reserve pile over the last five years to prevent the currency from weakening, leading some analysts to predict a day of reckoning after the next government takes office in December.

Mesa, who was president from 2003 to 2005, says this doesn't have to happen. With reserves having stabilized at around $6.5 billion in recent months, the Andean nation has enough fire power to support the currency at its current level, he said.

Mesa came second to socialist incumbent Evo Morales in last October's election, but the opposition alleged fraud, and Morales fled the country amid violent protests after losing the support of the military. Bolivia has been without an elected leader since then, and the vote to replace Morales has been postponed twice due to the coronavirus pandemic.

The first round of voting for president and congress is now scheduled for Oct. 18, with a possible runoff on Nov. 29. A poll published by Pagina Siete newspaper last month showed Mesa with 20% support, compared to 24% for Morales' former finance minister, Luis Arce. President Jeanine Anez, a senator who took power after Morales resigned, was in third place.

Read More: Socialist Frontrunner Seeks Debt Relief for Crisis-Hit Bolivia

Mesa said that if he wins he'll try to form a ruling alliance in congress with other groups who had opposed Morales during his 14 years in power.

Both Morales and Anez put off the politically difficult decision of adjusting the currency, but the next government will probably need to bite the bullet as pressure grows on the peg, according to Eurasia Group analyst Risa Grais-Targow.

Bolivia's reserves “no longer provide ample protection for the currency peg in the face of shocks” Fitch Ratings analyst Todd Martinez said last week, in reply to written questions. This means that “substantial external borrowing or FX restrictions could also be needed,” he said.

Foreign Capital

The 66-year-old Mesa, a former journalist who studied literature in Madrid, said he wants to attract foreign capital to Bolivia's energy and mining sectors. Nonetheless, the nation is in no position to change its royalties system, he added, since this is in the constitution, and some regions of the country depend on the income these generate. But the government can overhaul the legal system to make it more investor-friendly, he said.

“We have to generate legal certainty, change the judicial system, we have to clean up the totally corrupt, partisan judicial system,” he said.

Mesa said Anez's transition government is failing to publish “adequate and transparent” information about how much it is spending on its response to the Covid-19 crisis, and how it's financing this. Mesa said that Bolivians live in an “information black hole” and that he fears he could take office and find a situation different than the one currently indicated by the data.

The country of 11 million has had more than 80,000 confirmed cases of the disease, including Anez herself.

Bolivia, one of the poorest countries in the Americas, is on course for its deepest slump since 1980s this year. Even so, neighbors such as Brazil, Peru and Chile are forecast to do even worse than Bolivia's 2.9% contraction, according to forecasts by the International Monetary Fund.

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