Wednesday 23 June 2021

Costa Rica needs to work harder on its fiscal deficit

Moody’s: “We’re not thinking about making an immediate decision, but the signs are negative”

International rating agencies Fitch Ratings and Moody’s Investors Service will not make a decision in the short term on their assessment of economic risk in Costa Rica.

Both Fitch and Moody’s warn of risks due to the high government deficit, which would be 6.4% of GDP in 2019. Image from Shutterstock

They are, however, worried about the size of the deficit, despite the implementation of tye Plan Fiscal (Fiiscal Reform) which they reckon is heading in the right direction, reports La Republica, in Spanish.

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The Central Government’s financial deficit will be 6.4% of GDP in 2019, above the amount that would help level the debt, according to the national budget projections presented last week.

According to Gabriel Torres, an analyst at Moody’s, the problem is that a deficit above 3% of GDP will continue to push the debt up, and Costa Rica already has a very high debt,

“The trend is clearly negative in Costa Rica and to be clear, it is already approaching a decade. These problems began in 2010 and as time goes by, the possible impact is worse, because the debt is getting higher,” said Torres.

Although Fitch Ratings does not want to give policy guidelines, analyst Carlos Morales says there are still significant risks due to the high fiscal deficits and the limited capacity to reduce them significantly, as well as financing risks given the polarization of the (unicameral) congress.

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“We see risks that the adjustment necessary to stabilize the debt could be greater if the costs of indebtedness remain high,” according to Morales.

The aim of the Fiscal Reform is to increase revenues and control spending, but with a slow adjustment process, and it would not be until 2023 that the debt is stabilized, explained Rocío Aguilar, Minister of Finance, when presenting the budget last week.

Other reforms to public employment, limits to strikes, the bill on exemptions and a constitutional fiscal rule that allows the protection of spending limits would be necessary to expedite the path to sustainability.

Fitch Ratings and Moody’s are two of the “Big Three” credit rating agencies that analyze the credit of both sovereign debtors such as Costa Rica and large companies worldwide.

The third, S&P Global Ratings, has not made any public comment as of yet.

Ratings

The last cuts between December 2018 and January 2019, Costa Rica’s rating was about four steps below the investment grade.

  • Fitch B+ with negative outlook (January 2019)
  • Moody’s B1 with negative outlook (December 2018)
  • S&P B+ with negative outlook (December 2018
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