1) Our expectation that key government debt metrics will continue to be
well-positioned relative Baa rated peers, despite a recent deterioration
in public finances; and
2) A recently tested ability to manage external shocks and to avoid
balance-of-payments crisis. Given Costa Rica's relatively high level of
financial dollarization and a not-so-flexible exchange rate regime, a
balance of payments or financial sector crisis had been one of Moody's
"Costa Rica's debt indicators, both external and public, have improved
significantly over the past few years, a process that reflects a
consolidation in public finances and decreasing government reliance on
external financing ," said Alessandra Alecci, a Moody's Vice President --
Senior Analyst responsible for Costa Rica's ratings. "On the fiscal
front, years of adjustments allowed Costa Rica to pursue counter-cyclical
policies without a meaningful deterioration in public indebtedness," she
The ratio of public debt to GDP fell to around 43% in 2009, from levels
above 60% just a few years ago. A similar improvement has been observed
in other government debt metrics, suggesting a considerably improved
ability to service debt obligations relative to the past and comparable
to that of other Baa-rated countries, particularly in the region. Suggest
adding some language around our expectations at the beginning of the
"An upgrade despite the recent fiscal deterioration -- the fiscal balance
of the central government went from a small surplus to deficits in the
order of 4.0% of GDP -- reflects Moody's confidence that policy consensus
regarding fiscal responsibility will enable the authorities to take the
appropriate corrective actions to ensure a reversal of public debt
metrics to pre-crisis levels," explained Alecci.
Moody's anticipates that over the next couple of years, a reversal of the
recent fiscal deterioration will lead to further debt consolidation.
Given that the expenditure increase observed in recent years has a
permanent component, a tax reform or other revenue-enhancing measures
will be necessary.
On the external front, the accumulation of international reserves coupled
with a government's financing strategy focused on the domestic market
have resulted in lower levels of external debt and decreasing related
vulnerabilities. Foreign-direct investment finances the majority of the
current account deficit, a trend that is expected to continue in light of
expected inflows directed to the telecom sector which Costa Rica has
recently liberalized as a result of its entrance to CAFTA, the free-trade
agreement with the US. Public external debt relative to GDP is expected
to end 2010 below 10%, half the level recorded in 2004. The ratio of
external debt to foreign-exchange reserves is now around 200% compared
with levels of about 400% 10 years ago.
Costa Rica's ability to navigate through the global crisis relatively
unscathed revealed an increased credit resilience. The economy
experienced only a brief and shallow recession in 2009 and is now
recovering. Significant capital outflows and pressure on the currency
during the crisis did not compromise the country's external position. In
Moody's view, the episode was an important stress test given the
relatively high level of financial dollarization and a exchange rate
regime that still operates within bands. Initial indications of a shift
towards single-digit inflation is an encouraging sign that may facilitate
the adoption of a more flexible exchange rate regime, thus eliminating
another source of potential credit risk.
The last rating action affecting of Costa Rica was on August 12, 2008,
when Moody's assigned a positive outlook to Costa Rica's Ba1 government
bond ratings, the Baa3 foreign currency country bond ceiling and the Ba2
foreign currency bank deposit ceiling.
The principal methodology used in rating of Costa Rica was Sovereign Bond
rating methodology published in September 2008. Other methodologies and
factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
This issuer did not participate in the credit rating process. The Rating
Committee was provided, for purposes of the rating, access to the books,
records and other relevant internal documents of the rated entity or
related third party.
MOODY'S adopts all necessary measures so that the information it uses in
assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S is not an auditor and
cannot in every instance independently verify or validate information
received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the
last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a
time before Moody's Investors Service's Credit Ratings were fully
digitized and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it. Please
see the ratings disclosure page on our website www.moodys.com for further
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning of each
rating category and the definition of default and recovery.
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
Improving the sovereign debt rating from B3 to B2 reflects the significant reduction achieved in the fiscal deficit, which fell from 7.9% of GDP in 2013 to 3.1% in 2015.
The main factor which influenced the rating upgrade was consolidation of the fiscal discipline process enacted over the past two years and controls imposed on public institutions to achieve cost containment and improve tax administration.
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