COSTA RICA NEWS (Bloomberg) — Moody’s Investor Service has cut Costa Rica’s credit rating to junk as the country once lauded by economists for luring foreign investors struggles to rein in a widening deficit.
Moody’s lowered the credit rating to Ba1 from Baa3, putting the US$50 billion economy in the same high-yield, high-risk category as Morocco and Portugal. Costa Rica’s debt burden will climb toward 40 percent of gross domestic product this year from 25 percent in 2008, Moody’s said. The nation is already rated junk by Standard & Poor’s and Fitch Ratings.
After his predecessor was unable to win congressional support to narrow the deficit, President Luis Guillermo Solís took office in May vowing to reduce the gap by fighting tax evasion, freezing new hires and, beginning in 2016, raising some levies. Moody’s said that several years of failed efforts to win political consensus for tax changes was a factor in its decision.
“We expect continued political obstacles to comprehensive fiscal reform during the Solis administration,” Moody’s said in a statement today. “As a consequence of inaction, we expect the current large fiscal deficits and increasing debt burden are likely to continue for the next few years.”
Bond Performance
The yield on Costa Rica’s dollar bonds due in 2023 has climbed 56 basis points, or 0.56 percentage point, to 5.49 percent this month. The country’s currency has fallen 7.1 percent against the U.S. dollar this year, the worst performance among Latin American and Caribbean tenders after the Argentine, Chilean and Uruguayan pesos.
Finance Minister and Vice President Helio Fallas said the downgrade resulted from failures by previous administrations and that Moody’s didn’t take into account measures that will go into effect later this year.
“The current government responsibly recognizes the situation, for which the fiscal measures that have been taken in the short term and which will be implemented in the coming months have as their goal the strengthening of public finances,” Fallas said in an e-mailed statement.
The downgrade may prompt congress to speed up efforts to address the deficit, Ottón Solís, the head of the finance committee, said.
2015 Budget
“There are some in the Legislature enthusiastic about reducing the deficit,” legislator Solis, who isn’t related to the president, said in a phone interview. “Legislators had accepted the plan to discuss fiscal reform through the middle of 2016 and I think this could create the climate to accelerate that.”
Today’s decision came after President Solís sent the Legislative Assembly a US$14.7 billion budget that included a deficit of 6.6 percent of GDP for next year, up from a 6 percent forecast for this year. The projections in that budget hurt investor confidence in Solis’s plans to address the deficit, said Adriana Rodriguez, director of strategy at San José-based brokerage Aldesa.
“Moody’s gave the government an opportunity to present a budget in line with the country’s situation, and they presented a budget that included a 19 percent increase in spending,” Rodriguez said in a phone interview. “Costa Rica’s other indicators — unemployment, inflation, FDI — are in good shape, but the alarming problem is the fiscal deficit.”
President Solís said in a June 11 interview with Bloomberg News that he would boost economic growth from a forecast 3.5 percent this year. Unemployment fell to 9 percent in the second quarter, down from 10.5 percent a year earlier.
Grow the Economy
“I’m not willing to leave behind a significant part of the population of Costa Rica that has not had access to the benefits of the open economy,” President Solís said at the time. “I want to reduce poverty rates. The only way to do that is to make the economy larger.”
The credit downgrade is the latest blow this year to a country that had positioned itself as a hub with a highly educated workforce and access to U.S., Asian and European markets.
In May Intel Corp., which accounted for 21 percent of exports, announced cutting its manufacturing division, resulting in the layoff of 1.500, half of Intel’s total work force in the country. In June, following a visit by President Solís to Intel headquarters in California, the company announced it would move its Mega Lab division to Costa Rica, with 1.200 jobs.
On the same day in May of the Intel announcement, Bank of America Corp. announced they layoffs 1.500 workers.
Last month Cartex Manufactura, which makes clothing for Hanesbrands Inc., said it was laying off 1,250 workers and move its operations to Vietnam.
Costa Rica remains home to international operations such as Dole Food Co., Procter & Gamble Co., Amazon.com Inc. and Hewlett-Packard (HP)
Source: Bloomberg, with editing from Qcostarica
