Costa Rica: The Hidden Threat of the Fiscal Deficit

Like an invisible cancer, the fiscal deficit is severely limiting the government’s ability to take action, despite that fact that it has not yet produced the worst symptoms, like increased interest rates and inflation.

Monday, November 14, 2011

The negative effects of the rising fiscal deficit have still not really been felt by the population.

The prevailing level of liquidity in the financial system, due to the stability of the dollar, low international interest rates and the stability in the demand for credit has allowed domestic interest rates to remain relatively stable.

In this context, the Costa Rican government's need to resort to asking the local market to finance its deficit has not generated upward pressure on interest rates, and therefore is not affecting prices, so consumers are not feeling the effect of the fiscal deficit.
However, the situation may now change. In recent months there has been a growth in demand for credit by the private sector, which could put upward pressure on interest rates in the short term.
An article on Nacion.com reads: "Several economists have outlined reasons that have contributed to the aftermath of the deficit not having been felt so far.

‘The Costa Rican economy has had a high level of liquidity and a subsequent surge in credit, which made banks finance part of the deficit. In addition, Costa Ricans have been repatriating capital in dollars (...) And public institutions have also been financing the deficit’, said William Calvo."

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More on this topic

Costa Rica: More Warnings Over Fiscal Deficit

February 2018

Lack of fiscal reform continues to erode Costa Rica's public finances, constraining its long-term growth prospects and highlighting its vulnerability to external shocks.

From a press release by Standard & Poor's.

Complicated Economic Scenario for 2018

February 2018

In Costa Rica the Central Bank projects a 3.6% economic growth, but warns that without fiscal reforms, the deficit of the central government could reach 7.1% of GDP in 2018, and almost 8% in 2019.

The 2018-2019 macroeconomic program presented by the Central Bank reflects the complicated panorama that the Costa Rican economy will face this year. In a context of high fiscal deficit, and with a ministry of finance constantly resorting to the local market in search of resources to finance itself, it is expected that interest rates will rise, especially in the absence of fiscal measures to contain public spending.

Fiscal Deficit, Interest Rates and Poor Management

January 2018

The difficulties the government faces while trying to solve the serious fiscal problem that affects Costa Rica is already generating strong upward pressure on interest rates, both in local currency and in dollars.

EDITORIAL 

If a private company faces liquidity problems for several months, does it borrow every month to pay salaries and other current expenses? The answer is no. It adjusts its operating expenses, reduces its return and tries to operate as efficiently as possible, trying to generate the highest income with the lowest possible expense structure.

El Salvador: Moody's Downgrades Rating to B1

August 2016

The government's inability to stop the growth of debt in the context of low economic growth and a high fiscal deficit is the reason for the reduction in the rating.

From a press release by Moodys:

New York, August 11, 2016 -- Moody's Investors Service has today downgraded El Salvador's issuer and debt ratings to B1 from Ba3 and placed the ratings on review for further downgrade.

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