Saturday 21 May 2022

It seems we haven’t hit bottom yet

Risk of investing in Costa Rica increases due to weak public finances, according to Moody’s international rating agency

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21 May 2022 - At The Banks - BCCR

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QCOSTARICA – Employment would be affected by low investment levels, sales of goods and services would be weak, and a highly indebted government would need to spend more money than ever on debt repayment, this as interest rates rise in Costa Rica.

Investment and employment, as well as government debt, would worsen after expectations of an increase in interest rates

Meanwhile, current holders of the country’s bonds, as well as anyone who in the next few years becomes a pensioner, would see a decrease in the value of the payments they receive.

A rate hike is likely to be modest, as lending money to the Costa Rican government and local banks would remain an option for international markets, which have high levels of cash to invest.

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But even a small increase in rates would mean that the worst is not yet over for a Costa Rican economy – characterized by historically high levels of debt in government finances.

Not much missing to hit bottom

An increase in interest rates is the likely result of an increase in the risk of investing in Costa Rica, evaluated earlier this month by Moody’s international rating agency.

Investors

  • Investors would be reluctant to start new businesses or expand existing ones, as the cost of money would increase.

Existing businesses

  • Existing businesses would experience slow growth, as consumers cannot pay high interest costs to buy the goods and services.

Employees

  • The economy would create few new jobs when investment growth is slow.

Government

  • The capacity would decrease for the government to provide public services or make investments, as it would have to pay more for the money borrowed, either in the local market or for Eurobonds.
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Private borrowers

  • Borrowers would pay more for loans.
  • Some people would not have access to loans, as they are considered bad credit risks by lenders in a high interest rate scenario

Current bond holders

  • A holder of the Costa Rican bonds would make less money than a buyer of new bonds, which offer a higher interest rate.
  • Or, you will lose a portion of the face value of your bond by having to sell it, since the interest it generates is less than that of a new bond.

Pensioners

  • Pressure would increase on the Disability, Old Age and Death regime to pay pensions, as taxpayers would have fewer resources in an economy with low income and employment.
  • Private pension schemes would have less money to pay for pensions, as the bonds would be worth less, once rates go up.

Government Lenders

  • Lenders would get a higher return on money loaned to the Government, while they run a greater risk of losing value through inflation (for loans in colones) or default (for loans in dollars), if the Government is unable to repay its debts.
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Reduction

  • The risk of investing in Costa Rican bonds has reached its lowest level (dropping to a B2 from B1) in modern history, according to the rating agency Moody’s Corporation; the lower the initial letter of the ranking – starting with “A” -, as well as the larger the figure – starting with “1”, the higher the perceived risk.

Source: La Republica

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