Costa Rica: Public Spending Cut is Not Enough

According to Moody's, the plan to reduce expenses announced by President Solís will not be enough to solve the illiquidity problem being faced, nor to avoid a rise in local interest rates.

Thursday, August 10, 2017

The plan to cut costs that are not mandatory in the budget, such as the suspension of public purchases that have not yet started to be implemented, will not be enough to avoid the impact of the fiscal deficit on local interest rates. This is the opinion of the rating agency Moody's, regarding the cost cutting plan announced by President Solis to address the fiscal problem that is affecting the country.

See "Costa Rica: Free Lunch Today, Tomorrow ..."

Gabriel Torres, senior analyst at Moody's, told that "... "The proposals do not seem to deal with the fiscal problem, what has been announced will have no effect on reducing spending, much of it is already fixed."

"... He added that the country will not be able to reduce its fiscal deficit with the announced plan, because a tax reform is necessary for effective measures.  "The government will sooner or later be in trouble and we are seeing the first indications with the increase of interest rates and liquidity difficulties because the local market will become more cautious of so much debt issued by the Government."

The option to finance debt issuance abroad is not well viewed by Moody's.  Torres said that " ... Returning to the international market is very dangerous because it depends on foreigners again and increases the exchange risk on government finances due to strong movements in rates or a devaluation.

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