QCOSTARICA – Moody’s Investors Service has changed the outlook on Costa Rica’s ratings from negative to stable. Concurrently, Moody’s has affirmed Costa Rica’s B2 long-term issuer and senior unsecured bond ratings.
The change to a stable outlook reflects:
- Gradual deficit reduction and lower funding needs resulting from a recovering economy
- Expectations that the current International Monetary Fund (IMF) program will support structural policy changes by the next administration
The affirmation of Costa Rica’s B2 ratings considers the country’s relative wealth levels and a dynamic economy balanced by the decade-long rise in the government’s main debt metrics.
Costa Rica’s local and foreign currency country ceilings remain unchanged. The Ba1 LC ceiling, four notches higher than the sovereign rating, reflects limited government intervention in the economy and a history of respect for the rule of law. The Ba3 FC ceiling, two notches below the LC ceiling, reflects the risk of potential transfer and convertibility controls in the event of a default given the high level of domestic dollarization.
Ratings Rationale
Moody’s forecasts that Costa Rica’s fiscal deficit this year will be 5.8% of GDP, a large number albeit lower than both last year’s result (8.1% of GDP) and that we forecasted in early 2021 (7% of GDP). The lower deficits are the result of faster economic growth and increased revenues. These trends have supported a reduction in overall government funding needs easing refinancing pressures.
Real GDP growth will be 5% this year and Moody’s forecasts 4% growth in 2022, as the economy recovers from the 2020 Covid induced recession. Costa Rica has a long history of adapting to economic shocks and last year’s recession was only the third in over 50 years. Moody’s expects that Costa Rica will return to a 3% average growth after 2023.
In March of this year, the IMF’s board approved a three-year $1.77 billion (2.8% of GDP) arrangement under the Extended Fund Facility (EFF), a program targeted to countries seeking to correct structural imbalances over an extended period. The EFF program was approved in July by Costa Rica’s unicameral Legislative Assembly. Approval by the Assembly was an important signal of political support, with 44 of the Assembly’s 57 members voting for implementation.
Costa Rica’s next presidential elections are due in February 2022 with a new administration assuming office in May 2022. The next government will inherit an existing IMF program, requiring it to meet existing fiscal targets. Regardless of political orientation, Moody’s expects that the EFF program will be followed through by the incoming authorities.
In its rationale for affirming the B2 ratings, Moody’s says Costa Rica reflects the balance of a relatively wealthy and dynamic economy and relatively strong institutions with the large increase in the country’s main debt metrics since 2010.
The country’s long term economic outlook remains strong as the economy continues to transition from simple agricultural exports to tourism, light manufacturing, and more recently business outsourcing and medical technology exports.
Costa Rica also compares favorably to other countries in the region on measures such as government effectiveness, rule of law and control of corruption. Costa Rica’s democracy is the oldest in the region.
Costa Rica’s B2 ratings also reflect the political difficulties in the last decade to reign in high deficits, which increased debt from 28% of GDP in 2010 to a forecast 70% this year. Costa Rica’s debt burden, measured both against GDP and government revenues, is among the highest of all rated peers. And the country’s debt affordability is particularly weak, with interest payments representing over 30% of all government revenues, one of the highest levels among rated sovereigns.
The high interest burden increases funding risks for the country in the event of a sudden or sharp rise in interest rates.
