In brief

The ruling left-wing Movimiento al Socialismo (MAS) has effectively split between supporters of the pragmatic president, Luis Arce, and followers of the radical party leader, Evo Morales (president in 2006-19). Although Mr Arce appears to have the upper hand following an end-December court ruling that made Mr Morales ineligible to run for president ever again, the fight is not yet over. Mr Morales and his followers will instigate protests, raising the risk that social unrest will disrupt business operations. In addition, the former president will probably choose an ally to represent him in the 2025 presidential election and challenge Mr Arce, who is currently the leading presumptive nominee for Bolivia's largest party. The rift also means that no group—neither of the MAS factions nor the centrist and right-wing opposition—has enough votes in either house of Congress to pass legislation, keeping governability risks high.

To make matters worse, foreign reserves have deteriorated to dangerously low levels, threatening the boliviano's peg to the US dollar and raising risks of a currency or balance-of-payments crisis. The Arce administration has taken bold action by adopting some business-friendly measures, which we believe will help the government to sustain the currency peg until the 2025 general election. However, Mr Morales and his supporters in Congress will try to undermine Mr Arce's efforts. In the meantime, risks of a collapse in confidence or an uncontrolled devaluation will remain very high, threatening banking sector health. Economic growth will be muted in the short term, owing to currency jitters. Bolivia's recent accession to Mercosur will support trade, but a decline in natural gas exports will overshadow the gains. Heavy foreign investment in Bolivia's nascent lithium mining industry could help to generate receipts in the medium term, but these are unlikely to compensate for lost gas revenue.