Courtesy of STRATFOR (subscription required), an detailed analysis of Bolivia’s economic prospects:

After nearly a decade in power, Bolivian President Evo Morales seems poised to extend his rule even further. On Sept. 26, Bolivia’s National Congress accepted Morales’ petition to hold a national referendum in February 2016 on his ability to seek a fourth term in office. Given Morales’ popularity and current lack of political challengers, he stands a good chance of succeeding in his bid to govern Bolivia until 2025.

Despite the widespread support for Bolivia’s longtime leader, the country’s economic growth will likely begin to slow over the next few years. As it does, Morales will be forced to temper his traditionally populist policies and encourage growth in Bolivia’s non-extractive industries if he hopes to keep the economy on track. 

Analysis

Bolivia is a resource-rich country that boasts substantial reserves of zinc, silver and lithium. More important, though, are its hydrocarbons: In 2014, oil and natural gas exports accounted for 54 percent of Bolivia’s total export revenues and 8 percent of the country’s GDP. Natural gas, Bolivia’s most strategic resource, made up the bulk of these revenues.

Much of Bolivia’s natural gas resources and infrastructure are located in the eastern lowlands, the country’s agricultural and economic core. Largely populated by Bolivia’s Spanish-speaking mestizo citizens, the eastern lowlands contain two of the country’s most important economic hubs: the Santa Cruz and Beni departments. The lowlands also house many of Bolivia’s natural gas pipelines and most of its arable land; as a result, the region contributes more than 80 percent of the country’s agricultural production. 

By comparison, Bolivia’s western highlands are disproportionately less important to the Bolivian economy. Historically rich in minerals such as silver and zinc, which account for less than 3 percent of Bolivia’s GDP, the western highlands are home to the Aymara and Quechua indigenous groups that live in the Andean mountain range. Morales, an Aymara, hails from this region.

Given the geographic divide between east and west, whoever controls Bolivia’s lowlands also controls the country’s primary profit center. Over the past decade or so, governors belonging to Bolivia’s right-wing opposition have dominated the Santa Cruz and Beni lowlands, while Morales’ Movement Toward Socialism has ruled the highlands. But in recent years Morales has become so popular that the opposition’s political power at the national level remains limited, and he has largely succeeded in consolidating power in Bolivia’s strategic eastern region.

Natural Gas: The Driver of Bolivia’s Economy

In the past decade, Morales’ ability to dominate Bolivia’s east — and by extension, its natural gas resources — has enabled him to pursue his populist-driven agenda of nationalizing the country’s energy and mining industries. Since 2006, Bolivia has managed to sell its natural gas to its primary consumers, Brazil and Argentina, for increasingly high prices. Morales reinvested some of those energy revenues into social packages that benefited his political constituents, gaining enough backing to win both the 2009 and 2014 presidential elections.

But Bolivia’s natural gas-driven boom has begun to slow, which will limit Morales’ options in the coming years. Over the past decade, Bolivia ramped up its natural gas production to meet growing demand in Brazil and Argentina. However, the global decline in commodity prices, due in part to China’s dwindling demand amid its own economic slowdown, has put pressure on the Brazilian and Argentine economies and cut back on their demand for Bolivian natural gas. As a result, Bolivia’s natural gas exports amounted to just $2.1 billion between January and June, a drop of more than $1 billion compared with the same period in 2014.

Despite its ongoing recession, Brazil has been able to increase its own natural gas production thanks to previous investments in its energy sector, which has further diminished the country’s demand for Bolivian supplies. Between 2004 and 2014, Brazil’s natural gas output rose from 8.5 billion cubic meters (0.3 trillion cubic feet) to nearly 34 billion cubic meters. With 471 billion cubic meters of proven natural gas reserves, this figure will likely grow even more in the coming years, a prospect that bodes ill for Bolivia since roughly 50 percent of its natural gas goes to Brazilian consumers. Indeed, in the past five years, Brazil’s intake of Bolivian natural gas has already dropped by 10 percent.

Argentina, for its part, poses its own risk to Bolivia’s long-term natural gas prospects. Although Argentina’s natural gas output has declined by roughly 20 percent since the mid-2000s, its general elections on Oct. 25 may usher in new leadership that could succeed where others have failed in attempts to restructure and revive the Argentine natural gas sector within the decade. With the world’s second-largest shale gas reserves lying in its Vaca Muerta basin, Argentina’s priority in the long run will be to attract foreign investment into its energy sector and hike up its own natural gas output. In the meantime, though, Argentina will remain preoccupied with more immediate economic problems, including declining Brazilian demand for Argentine goods, restricted access to international markets and dwindling foreign reserves.

Changing Tactics

If Morales succeeds in seeking a fourth term, he will be forced to adjust his populist policies in response to Bolivia’s changing natural gas prospects. With fewer energy-related revenues to rely upon in the future, the Bolivian president has every incentive to try to diversify his country’s economy in the hope of reducing its vulnerability to fluctuations in natural gas prices.

But diversifying Bolivia’s economy is easier said than done. About 80 percent of Bolivian employment is informal, meaning that it cannot be easily taxed, and the private sector reinvests funds totaling less than 10 percent of Bolivia’s gross domestic product. As a result, the Bolivian government relies on the formal economy — the most important component of which is the natural gas sector — for its tax revenues.  For this to change, sectors other than oil and natural gas will need to play a bigger role in Bolivia’s economy in the coming years. However, Bolivia is a landlocked nation with limited transport routes to foreign markets, a relatively unskilled labor force and a small domestic market. Therefore, its progress in attracting investment into non-extractive industries will probably be slow for the foreseeable future.