Thursday 29 September 2022

Fitch Downgrades Costa Rica to ‘B’; Outlook Negative

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29 September 2022 - At The Banks - BCCR

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Fitch Ratings has downgraded Costa Rica’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’. The Outlook is Negative.

The downgrade of Costa Rica’s Long-Term Foreign-Currency (LT FC) IDR to ‘B’ reflects increased risks of near-term financing stress due to widening fiscal deficits, a steep amortization schedule and borrowing constraints, against a background of economic contraction caused by the effects of the coronavirus pandemic.

The ongoing health crisis comes at a time when Costa Rica’s fiscal space is limited and rapidly narrowing, raising risks to post-crisis debt sustainability. The interest bill is climbing rapidly, and the debt burden is on a relatively steep upward trajectory.

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Fitch gave Costa Rica’s ratings a negative outlook due to “uncertain prospects” for economic growth and borrowing costs after the outbreak, it said in the report.

This year, Costa Rica will rely on loans from multilateral agencies to finance the budget. Looking ahead, however, the government could face higher funding costs in the international and domestic capital markets, Fitch said.

The rating agency expects GDP in Costa Rica to fall 4% in 2020 as containment measures against the coronavirus outbreak lead to lower demand and higher unemployment.

Domestic demand was already on the decline, thanks to high unemployment and weak private credit growth, but external demand is expected to fall as tourism comes to a halt and exports decrease.

But the economy will likely rebound and grow 2.6% in 2021, although a prolonged downturn in tourism could impact a recovery, Fitch said.

Before the coronavirus outbreak, Costa Rica issued US$1.5 billion in 11-year bonds in November last year to ease financing pressures for the first quarter this year.

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Now the country plans to borrow up to US$3.18 billion from multilateral lenders in 2020, equal to 5.2% of GDP. Other than a US$500 million loan from the South American development bank, the government needs legislative approval to take out loans from the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CABEI) and the IMF, according to Fitch.

“Failure to secure these external loans would lead to a fiscal financing gap, given prohibitive external market borrowing costs and limited domestic market size,” Fitch said.

 

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