Monday 20 March 2023

Selling of the INS, BICSA and BCR would be an ‘drop in the bucket’ for the debt

Paying the bills


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18 March 2023 - At The Banks - BCCR

Paying the bills


QCOSTARICA (Semanario Universidad) Selling the Banco Internacional de Costa Rica (BICSA) and the Banco de Costa Rica (BCR), as well as 49% of the State insurer, the Instituto Nacional de Seguros (INS), does not seem to have many proven benefits, at least they have not been given made known by the government of President Rodrigo Chaves, who assured that this would be a way out to pay the country’s debt.

In his 100-day report, Chaves said that he will present legislative bills to sell these assets, but the president did not say how this process would be carried out, nor what his plan would entail.

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In his speech, Chaves indicated that “a key action is the sale of assets such as BICSA and the BCR, which will give us fresh resources of approximately 2.8% of GDP. The sale of 49% of the INS can give the Government ¢593 billion colones, equivalent to about 1.2% of GDP)”.

Read more: Costa Rica looking to sell BCR and BICSA

In this sense, an article developed by Julio César Espinoza Rodríguez, Master in Development Economics from the Universidad Nacional (UNA), in the specialized magazine Economía y Sociedad (Economy and Society) of July 2021, analyzed the maximum effect on the fiscal deficit that the sale of assets can generate announced.

The expert described that there are four ways to determine the value of public companies: one based on the balance sheet; the one that considers the results accounts; those that are linked to the value of the assets and the profitability of the company; and, finally, those that include cash flow discounts over time.

Espinoza indicated that the equity of BICSA as of 2019 was US$237 million, the BCR US$980 million and the INS US$1.829 billion.

Therefore, if 100% of BICSA were sold, the impact on debt reduction would be 0.82%. With the total sale of the BCR, the compensation of the debt would reach 3.39% and with 60% of the INS (which the Government proposes 49%) 3.80% would be covered, but it is probable that reductions will have to be made.

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If that were the real amount of debt adjustment, it might sound tempting, but it is appropriate to try to estimate what the direct effect on the fiscal deficit would be. To make this calculation, the specialist supposes, it would be necessary to assume that all companies are sold at the same time and under the same price discount.

“Assuming that the listed companies were sold at 100% of their value, the maximum that the deficit could be reduced would be 1.25% of GDP. However, assuming that is unrealistic, given the financial situation of these institutions and that it has worsened due to the “COVID effect”, for which it could be inferred that the effect would not exceed 1% of GDP,” the article explains.

These data show that, to promote an initiative of this nature, a detailed analysis and study of the gains it would generate, in terms of debt reduction and in contrast to the losses that selling these assets would mean for the country, would be required.

On this matter, UNIVERSIDAD spoke with three economists to find out their position regarding the announcement by President Chaves and, in the midst of the nuances, the consensus conclusion states that it is early to give opinions on a proposal without specific studies (unless they know), without having a clear plan of how it will be carried out and how the solidarity contributions that both the BCR and the INS provide to the country will be solved and that the contribution to the debt would be negligible.

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“The question that one would have to ask any politician who intends to sell, privatize, give away or change a public good is: what is your opinion on the purpose that this institution fulfills and the analysis of whether it fulfills or not? For example, if the BCR fulfilled its purpose, how are we going to replace the work of this bank? What other institutions will do it? Or how are we going to guarantee the citizen that this social value will continue to be fulfilled?”, questioned economist Leiner Vargas.

For Vargas, the president’s message is incomplete, because it does not say how, when and for what purpose the sales will be carried out, in addition, he described that it is a foolish action, since it causes stress in the financial system and could cause many people to run to change their entity business.

“In short, the contribution that the sale of these assets would have would be very small for the enormous debt that we have, let’s say that it would remove 3 or 4 percentage points in the best of cases, ‘it is a drop in the bucket,'” said the expert.

For their part, economists Fernando Rodríguez and Welmer Ramos agreed that the impact of the sales would be minimal on the debt balance and, on the contrary, it generates an environment of uncertainty and concern in the economy.

Rodríguez pointed out that a more efficient formula would be to boost the country with growth rates of 5% per year, which would allow reaching a debt reduction in a few years, that is, taking actions to boost the economy with other types of initiatives.

“The return generated by these institutions is higher than the interest that the Government must pay year after year. It’s like if you have a business that gives you 10% profit and you sell it to put the money in an investment that gives you 6%, it’s a bad deal,” added Ramos.

Read the original article in Spanish from Semanario Universidad here

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