Now “post-socialist”, Bolivia returns to the polls awaiting a major economic test

Bolivia’s presidential election on Sunday (18) will mark the end of two decades of socialist government that led the economy to collapse. However, the enthusiasm of voters and investors at the prospect of change will soon give way to the reality of a difficult recovery.

The Andean country’s sovereign bonds returned almost 40% this year, ranking among the best performers in emerging markets globally, with expectations of favorable changes to the market, regardless of who wins the second round between centrist senator Rodrigo Paz and conservative former president Jorge Tuto Quiroga.

Bond spreads have narrowed by nearly eight percentage points, according to data from JP Morgan Chase.

The perception has been undeniably positive for markets since August, when the candidate of the socialist MAS party, current president Luis Arce and leftist leader Evo Morales, came sixth in the first round. But the fundamentals of Bolivia’s ailing economy — rising inflation, a widening budget deficit and a severe shortage of dollars — tell a different story.

The winner “will inherit not just depleted accounts, but a society already strained by shortages and inflation,” wrote Jonathan Fortun, senior economist at the Institute of International Finance, in an Oct. 9 report. He argues that there is “no clean recovery narrative” after the election, but rather a choice between quick, painful spending cuts or slower fiscal reforms.

Almost 8 million Bolivians are eligible to participate in mandatory voting on Sunday.

The US is also watching closely, as both candidates pledge to strengthen ties with the world’s largest economy. After reaffirming his support for Argentina’s struggling libertarian president Javier Milei this week, President Donald Trump singled out Bolivia as one of the leftist-led South American countries he would like to see switch sides.

Presidential elections in Latin America in the coming months, including Chile and Colombia, could also result in new center-right leaders.

Both candidates are expected to have to cut fuel subsidies and allow the local currency, the Bolivian, to devalue — unpopular measures that could spark social unrest. Tackling growing external debt obligations will be another initial test.

A Eurobond due in 2028 has a $333 million payout next March, while the government faces more than $400 million in debt payments over the next two years and another $677 million in 2028.

Bolivia has the world’s largest lithium reserves and for years has been a significant exporter of natural gas.

The latest polls show Quiroga, who was president briefly between 2001 and 2002, leading by about 8 points. But Paz surpassed him in the first round in August with a promise to implement “capitalism for all”.

“The task is enormous”

The once-dominant MAS party split after a bitter conflict between Morales and Arce over who should lead amid the growing economic crisis.

Paz is seen as attractive to some MAS voters, and has the support of his deputy, Edman Lara — a former police captain popular for exposing corruption.

Both candidates present similar economic proposals to control public spending and gradually eliminate fuel subsidies, although they offer different compensatory plans. Both also defend the end of the fixed exchange rate, in force since 2011, and want to attract foreign investment to create jobs.

Paz supports the legalization of imported vehicles and more generous social benefits. Quiroga, in turn, defends an orthodox conservative model, which attracts middle-income voters who are especially suspicious of the MAS.

Both will need to deal with currency collapse, high inflation and shortages of fuel and dollars, according to Ricardo Hausmann, professor and director of the Growth Lab at Harvard University. Consumer prices rose more than 23% in the last year to September.

Economic growth also needs to be restored after a 2.4% contraction in the first half of this year, in addition to rising debt.

“Bolivia’s problem is not the debt itself, but the inability to finance fiscal spending,” said Hausmann.

If the next government seeks a new loan from the IMF, a debt rescheduling will likely be inevitable as the international lender does not want its resources to be used to pay off external debts from private creditors, said Ricardo Penfold, director at Seaport Global. “An IMF program would probably imply a depreciation, and a real depreciation of 50% would increase debt by 13 percentage points of GDP,” he added.

Constitutional reforms will likely be needed to attract private capital to the key energy and mining sectors, as a MAS-backed constitutional rewrite 16 years ago established strong state control over natural resource extraction and discouraged investment.

While Paz and Quiroga have expressed support for changing these policies, their parties in Congress will need to form broader alliances to obtain the necessary votes.

In the weeks leading up to Sunday’s vote, fuel shortages have worsened, with drivers waiting for days in long lines to fill up. Energy Minister Alejandro Gallardo recently acknowledged that diesel stocks are depleted due to a lack of dollars. Farmers and industrial sectors were also affected.

“The task is enormous and must be done in parallel, not in phases. People need to feel that the three immediate problems — inflation, access to dollars and fuel — are being solved,” said Carlos Toranzo, an economist and political analyst based in La Paz.

Polls will open at 8am and close at 4pm, with preliminary results expected around 8pm.

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