Global Insight Perspective

Significance

The head of state has reiterated that the renationalisation initiative will extend to the mining and forestry sectors alongside water resources, which were the focus of pivotal unrest in 2000 and 2005. The latest statements undermined reassurances from the Bolivian government that mines owned by U.S.-based Apex Silver and Coeur d'Alene would not be transferred to state hands.

Implications

Mining companies appear to be joining Brazil's state-owned Petrobras in suspending future investments in Bolivia while the nationalisation policy unfolds.

Outlook

President Evo Morales's rhetoric and symbolic action have so far proved more radical than his actual policy implementation. Sending in troops to assert ownership of the energy fields has not translated into expropriation; the move appears to be an attempt to force foreign companies into signing - rather than negotiating - new contracts and aims to win back popular support.

Bolivia's Balancing Act

Weeks of social unrest were beginning to paint a familiar picture in Bolivia, with the electorate losing faith in its government shortly into its term. Incumbent Bolivian President Evo Morales had further to fall. He was hailed as the country's first indigenous president and champion of the poor and the coca movement, and there were short-lived hopes that he spelt a sea-change in Bolivian politics. During his international tour prior to taking office, he did enough to reassure radicals as to where his loyalties lay, paying a visit to Fidel Castro's Cuba and Hugo Chávez's Venezuela and subsequently assuaging investor concerns in Spain and Brazil. However, his message of moderation caused restlessness in more radical poor communities, while a perceived failure to promote business interests sufficiently - particularly mining - resulted in demonstrations in the wealthy and politically active Santa Cruz province (see Bolivia: 27 April 2006: Powerful Province Announces General Strike in Bolivia).

On 1 May, the symbolically selected date of international Labour Day, President Morales appeared to make a choice of loyalties by sending in troops to demonstrate national ownership of its energy resources. The event was accompanied by parallel pledges from President Morales to claim other resources as state property (see Bolivia: 3 May 2006: Energy Renationalisation Strains Bolivia’s Bilateral Relations). On 7 May, the head of state named mining, forestry and water resources during an address to agricultural groups in Pucarani, close to the capital La Paz. He also stated that the task of returning natural resources to state ownership will fall to the Constituent Assembly, due to be confirmed by national vote on 2 July, if he fails to complete the process before that date.

Corporate Confusion

U.S.-owned silver mining companies Apex Silver and Coeur d'Alene, operating in the Andean Potosí department, were apparently off the hook, according to a pledge from the Morales government that 'at no time' were they considered for inclusion in the renationalisation process. Apex Silver was in a vulnerable position, having already invested in a new mining project due to start next year at San Cristóbal, which contains the largest-known silver deposits in Bolivia. Further uncertainty comes from a proposed amendment of the mining code to stamp higher taxes on the sector. Both Chile and Peru have introduced royalty taxes on mining companies, but the stronger leftist stance of the Bolivian administration threatens to have a harsher effect. Bolivia has already passed legislation - under former interim president Carlos Mesa - to take a larger slice of revenues from the hydrocarbons sector.

Mining companies and corporate groups in the Santa Cruz province have also expressed concern over the president's slowness in issuing a decree to grant formal permission to a private company to exploit iron-ore resources in the massive El Mutún project. Concurrently, the recent expulsion of Brazil's EBX has created tensions between the central government and the department of Santa Cruz. Confusion remains, since Morales previously declared his openness to private investment in the mining industry provided that 'the state, the regions and Bolivia' benefit alongside investors (see Bolivia: 29 December 2005: President-Elect Woos Hostile Bolivian Province).

Outlook and Implications

Bolivia's government has named 31 May as the day for launching its National Development Plan, which would ideally shed more light on the future situation for investors in extractive industries. Populist moves such as the shock sending in of troops last week are damaging and tend to overshadow more muted statements to assuage investor concerns. When questioned about the future environment for mining companies, Planning Minister Carlos Villegas gave reassurances on what future policy would actually mean in practice.

He asserted that the consideration of future mining taxes 'is not to say that we are going to alter the juridical security of the businesses that are operating within the current legal framework', in statements to Spain's EFE newswire. Soon after soldiers began to patrol oil and gas fields, President Morales gave a televised interview restating previous pledges that nationalisation would not mean the 'confiscation or expropriation of oil company assets' (see Bolivia: 4 May 2006: Venezuelan President's Visit Heightens Tensions in Bolivia). His words were metaphorically drowned out by the arrival of Venezuela's revolutionary leader for talks with his Bolivian counterpart, sending out a conflictive message to investors.

In this climate of uncertainty, key foreign mining companies are expected to mull investments elsewhere. These include Canada's Barrick Gold - the world's largest gold miner - whose Chairman Peter Munk informed shareholders last week that Pakistan may be a preferable alternative to South American nations edging or sprinting towards the left. Although the reality for investors is unlikely to be as bad as it appears on the surface, many may be reluctant to take the risk.

Raul Dary

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raul.dary@globalinsight.com

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