(The following statement was released by the rating agency -NEW YORK/LONDON, April 07 (Fitch) Building political support for comprehensive fiscal reform could be challenging for the next Costa Rican government due to a high degree of political fragmentation, Fitch Ratings says.
High structural fiscal deficits remain the key weakness in Costa Rica’s sovereign credit profile, and it is still not entirely clear what fiscal approach the new administration of Luis Guillermo Solis will take.
Fiscal deterioration poses challenges for stabilizing the government debt burden and the authorities’ capacity to respond to adverse shocks and future spending demands, and this may eventually erode business and consumer confidence.
Solis’s victory in Sunday’s run-off presidential elections was widely expected after the incumbent party’s candidate ceased campaigning when opinion polls gave Solis, of the opposition Partido Accion Ciudadana party, a substantial lead.
However, February’s general elections resulted in the greatest fragmentation in the country’s history, with nine parties represented in the 57-member legislative assembly. No party has a simple majority, and legislative rules in Costa Rica give obstructive powers to minority parties.
The new administration may benefit from greater public and political awareness of fiscal challenges, following attempts by the outgoing government to highlight the importance of fiscal problems in Costa Rica.
In a recent document it outlined a possible roadmap to reduce the deficit by 3.5% of GDP over five years in order to stabilize the debt burden. This could provide the basis for discussion on the new administration’s fiscal consolidation strategy, although no formal announcements to this effect have been made. The new administration will be inaugurated on 8 May. Costa Rica’s low revenue base and rigid expenditure profile produces high structural fiscal deficits. The deficit reached 5.4% of GDP in 2013.
Fiscal imbalances became more prominent in 2012 and heavy public financing needs pushed up local interest rates, forcing the sovereign to tap the international bond markets with issuance of US$1 billion dolalrs. Fitch affirmed Costa Rica’s ‘BB+’/Stable sovereign rating in January. Greater political consensus on addressing structural fiscal imbalances, leading to material fiscal consolidation and favourable debt dynamics, would be rating positive.
Failure to address fiscal deterioration would put pressure on the rating.
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