A Disappointing Economy

The deterioration of public finances and the inability of the Alvarado administration to end the blockades set up by trade unionists are again drawing the attention of rating agencies and the international market, who foresee a complicated economic future for Costa Rica.

Friday, September 21, 2018

According to the risk rating agency Moody's, the demonstrations by public sector unions are increasingly complicating the path towards a much-needed reform of public finances, which would take its first steps with the approval of the bill that is being discussed in the Legislative Assembly.

In relation to possible alternatives to the strike, Moody's explained that " ...Although the meeting (between government and unions) is a positive first step towards resolving the dispute, the current social discontent is negative for Costa Rica because it further complicates the government's efforts to achieve fiscal consolidation." 

In the view of the rating agency, Costa Rica's fiscal profile has deteriorated substantially since 2008, since according to the report released yesterday the large fiscal imbalances in the country " ... have led the debt in a maximum of two decades close to 50% of GDP, in 2017, up from 24% in 2008. For the year 2019, we expect the debt to reach 57% of GDP."

In relation to this same topic, the English bank Barclays reported that " ...initial expectations that the new government of Carlos Alvarado in Costa Rica could get its fiscal reform approved in October of this year are fading. Furthermore, there are increasing risks that the government could conform to a watered down version that could deliver up to 0.5 pp of GDP less than initially expected. Such efforts would be insufficient to resolve the urgent fiscal situation.

With the argument that in the coming months the political landscape in El Salvador will become clearer, especially after the presidential elections scheduled for February 2019, the English bank suggests investors move their positions in Costa Rican bonds, which mature in 2023 and 2025, to Salvadoran titles, which mature in 2025 and 2027.

See Barclay's statement and the article in Spanish: "Moody's: Strike puts approval of Costa Rica's fiscal reform at risk". 

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Risk Rating Downgrade Approaching

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Moody's downgraded the long-term issuer ratings and the Costa Rican government's unsecured bonds.

Yesterday the risk rating agency reported that expectations of a continued decline in fiscal indicators and evidence of increased financing needs are some of the reasons behind the decision to revise the country's debt rating.

Complicated Economic Scenario for 2018

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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.

Moody's Downgrades Costa Rica's Debt Rating

February 2017

In line with warnings from other ratings agencies regarding the serious fiscal problem and the lack of political will to solve it, Moody's has downgraded its rating from Ba1 to Ba2 with a negative outlook.

New York, February 09, 2017 -- Moody's Investors Service has today downgraded Costa Rica's government bond rating by one notch to Ba2 from Ba1, and maintained the negative outlook on the rating.

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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