Thursday 25 February 2021

Moody’s, Fitch and S&P distrust political support for plan with IMF

Rating agencies believe that the legislative process is the greatest risk. Agreement with the IMF, by itself, does not improve Costa Rica's credit score, but it is the last letter to resolve the country's financial crisis, the three agencies highlight

QCOSTARICA – The international risk rating agencies Moody’s, Fitch Ratings and Standard and Poor’s (S&P) consider that the main threat to Costa Rica solving its fiscal crisis is to obtain political support to approve the agreement with the International Monetary Fund (IMF).

Rating agencies believe that the legislative process is the greatest risk. Agreement with the IMF, by itself, does not improve Costa Rica’s credit score, but it is the last letter to resolve the country’s financial crisis, the three agencies highligh.

The US agencies did not hide their doubts of the Carlos Alvarado Administration obtaining the necessary support from the 57 legislators for the approval of the bills sent to the Legislative Assembly.

- Advertisement -

This is the opinion of three analysts in charge of rating for Costa Rica, pointing out recent incidents such as the rejection by legislators of the US$250 million dollar loan the Inter-American Development Bank (IDB) credit under soft conditions.

Their doubts are also based on antecedents such as that the country took more than a decade of discussions to achieve, in 2018, the approval of the tax reform law, the Ley de Fortalecimiento de las Finanzas Públicas and now, two years later, it is entering a new discussion process via the same political route.

‘The risk of a shock is very great’

“The IMF is the last chance Costa Rica has before the big crisis and possibly the default. If this is not approved (the plan), the market is going to freak out,” expressed Gabriel Torres, Moody’s Senior Analyst.

“The country still has a long way to go to stabilize the trend of public debt and reduce the fiscal deficit. The risk of a shock is very great, in the debt and in the exchange rate. The Fund is the last chance Costa Rica has before the big crisis and possibly the default. If this is not approved (the plan), the market will freak out,” Torres warned.

- Advertisement -

Lisa Schineller S&P Analyst, stated, “Any IMF program will require the initial approval of Congress (…) This is where more political uncertainties and pressure can arise, as the government needs to build and maintain formal political support”.

Schineller recalled that the country is in the early stages of the approval and execution process.

For his part, Carlos Morales Director of Sovereign Analysis Fitch Ratings was clear, “The Legislative Assembly rejected the IDB loan, which continues to indicate a tense political relationship between the Assembly and the Executive Power (…)”.

“Any IMF program will require initial congressional approval (…) This is where more political uncertainties and pressure can arise, as the government needs to build and maintain formal political support,” said Lisa Schineller, an analyst at S&P.

All three stressed that the objective of the agreement is to give confidence to international investors, since IMF financing, for US$1.75 billion, is insufficient for the country’s needs.

“We do not know if this government is going to approve the plan. Nor do we know if the next government is going to maintain it and in what way,” Torres said.

- Advertisement -

Meanwhile, Morales highlighted that political tension continues to be one of the main risks since it may delay or prevent measures necessary to improve the government’s fiscal position.

“The Legislative Assembly rejected the IDB loan, which continues to indicate a tense political relationship between the Assembly and the Executive Power (…) By preventing access to these loans, the Government must resort to borrowing in the local market at higher costs and shorter deadlines,” highlighted Morales.

Six bills on the agenda

The Government and the IMF announced, on Friday, January 22, a pact that implies achieving a primary surplus of 1% of gross domestic product (GDP), in 2023.

Likewise, it was agreed to reduce public debt to 50% of production in 2035. Last year it closed at 67.5% of GDP.

However, the agreement must go through the approval of the Legislative Assembly at a time when the political parties are at the gates of the start of a presidential campaing for the February 6, 2022 elections.

In the next five months, according to the deadline set by the IMF, the deputies would have to approve the Ley de Empleo Público (Law on Public Employment), Renta global (Global Income), a new tax on Lottery prizes, the elimination of tax exemptions, raise the tax on luxury homes and establish a temporary contribution of 30% of the profits of public institutions (ie ICE, INS, Recope and others) to the Government.

The three agencies downgraded Costa Rica’s risk score last year, in part due to a greater fiscal deterioration generated by the covid-19 pandemic.

Moody’s was the first to do so as. In February 2020, it downgraded it to B2 from B1. In June of the same year, it maintained its rating at B2, but changed it to a negative perspective.

For its part, Fitch Ratings agreed, in May 2020, to lower the country’s long-term rating from B+ to B with a negative outlook.

Meanwhile, in June, S&P downgraded the country’s note to B, from B+, and placed it in a negative perspective.

The risk ratings are taken into account by investors to demand a higher yield on the debt issues placed by the countries.

Facts, not promises

The agencies confirmed that the measures agreed with the IMF, by themselves, do not improve the country’s credit score. But they did highlight that they are a positive step.

For the rating agencies, what is truly relevant will be that the measures are first approved in Congress, they begin to be implemented and, in the execution stage, they achieve the proposed goals.

They also recognized that the IMF’s support is a positive aspect for Costa Rica, as it opens the door to financing with other multilateral organizations and the international market, through the placement of Eurobonds.

In fact, the mere announcement of the agreement with the IMF had the effect of an improvement in the prices of Costa Rican foreign debt.

“The perceived risk of international markets may increase if the pact with the IMF does not contribute significantly to improving the fiscal position, which would result in an increase in financing costs abroad,” the Fitch analyst warned.

But Morales recognized that the approval of the measures would significantly slow down the increase in public debt.

For his part, the Moody’s specialist said that even if the changes are approved, public debt will continue to rise, given financing needs of up to US$10 billion a year.

“The next government will see its debt increase practically every year, even in the best circumstances. We do understand that it will be the accommodation process, but it can have a credit impact. The mere fact of reaching the agreement is not a reason not to lower the rating,” said Torres.

Meanwhile, Schineller said that funding uncertainties pose a downward risk to Costa Rica’s rating.

“Most relevant to the rating is a plan to correct fiscal imbalances, support growth, and have broad political support, a plan that can be approved and then executed,” she said.

The S&P spokeswoman did highlight the government’s commitment to advance discussions with the IMF, despite the political and social complications of last year.

Translated and adapted from La Nacion’s “Moody’s, Fitch y S&P desconfían del apoyo político a plan con el FMI”

- Advertisement -

FACT CHECK:
We strive for accuracy in its reports. But if you see something that doesn’t look right, send us an email. The Q reviews and updates its content regularly to ensure it’s accuracy.

Ricohttp://www.theqmedia.com
"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

Related Articles

Legislative Assembly officially inaugurated new building amid protests and disorder

QCOSTARICA - Costa Rica's Legislative Assembly officially inaugurated its new building...

Costa Rica, Chile and Brazil have administered the highest number of doses per capita to date.

QCOSTARICA - Widespread vaccination is the key to overcoming the COVID-19...

MOST READ

Almost a million people over 58 must be vaccinated against covid-19

QCOSTARICA - Almost a million people aged 58 and over, throughout the country, are targeted by the Caja's health centers to be vaccinated against...

Covid-19 contagion rate in Costa Rica rises slightly, but new cases continue to decline

QCOSTARICA - The contagion rate of covid-19 in Costa Rica rose slightly in the last week according to the most recent analysis by the...

How Chile became an unlikely winner in the COVID-19 vaccine race

At first glance, it may seem that the race to acquire COVID-19 vaccines has been won by western nations. But alongside the UK, Canada,...

Can you pay your bills by playing baccarat online?

Casino and baccarat is a term of love. Gambling is known to bring a lot of happiness provided your luck supports you, but how...

Costa Rica received the largest batch of covid-19 vaccines on Tuesday: 92,430 doses

QCOSTARICA - A new batch of vaccines of 92,430 doses, and the largest received since December against covid-19, arrived Tuesday, as part of the...

Assaults and robberies fell 62% in the San Jose during start of 2021

QCOSTARICA - In the first 44 days of 2021, the Ministerio de Seguridad Pública (MSP) - Ministry of Public Security - reports a 62%...

El Salvador gets its first batch of covid-19 vaccines

Q24N - On Wednesday, El Salvador, received its first batch - 20,000 doses - of the AstraZeneca vaccines, allowing the country to begin immunizing...

Costa Rica will authorize the arrival of Chinese tourists without the need for a visa, starting in March

QCOSTARICA - The Costa Rica Tourism Board (ICT) announced Wednesday that as of March,  Chinese tourists from the cities of Beijing and Shanghai will...

Drop in covid-19 cases is not only occurring in Costa Rica

QCOSTARICA - In recent weeks, Costa Rica has experienced a reduction both in the number of reported new cases of covid-19 and in its...

WANT TO STAY UP TO DATE WITH THE LATEST!

Get our daily newsletter with the latest posts directly in your mailbox. Click on the subscribe and fill out the form. It's that simple!

Log In

Forgot password?

Forgot password?

Enter your account data and we will send you a link to reset your password.

Your password reset link appears to be invalid or expired.

Log in

Privacy Policy

Add to Collection

No Collections

Here you'll find all collections you've created before.