Fiscal Deficit, Interest Rates and Poor Management
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.
Wednesday, January 3, 2018
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.
In Costa Rica this premise applies to everyone, except the government. At the end of December, and not for the first time, the Ministry of Finance went to the stock market to raise $339 million to pay the salaries of public employees.With this action, which surprised the market, because it was not announced in advance, strong upward pressure was exerted on interest rates, both in colones and in dollars.
An article by Nacion.com explains that "...The Government obtained $339 million, at a maturity of one and a half years, at a yield of 6.03%; despite the fact that it announced the auction at a rate of 4.03%."
"...In the view of Antonio Pérez, spokesperson for Multifondos de Costa Rica, Thursday's operation reflects the Treasury's 'desperation' to raise funds."The Treasury's action, if maintained, could cause an increase in the passive rates of the entire banking system; and banks would have to lend at much higher rates.'
"...The Costa Rican financial market is too small to meet, without causing a reaction, credit demands as high as those that at this time and in the foreseeable future are expected to come from the Central Government.Given the upward trend in international rates, which indirectly influences domestic rates, as well as the pressure exerted by the Treasury, participants in the domestic market foresee an increase in the cost of credit.What they might not have expected was an increase as significant as that of Thursday, December 21, which was 2 percentage points."
As noted by the Nacion.com editorial, "...The National Treasury needs to betterplan their resource needs and avoid surprising the market with auctions for high amounts, at the last minute, like the one on Thursday 21."
Between today and February 14 the Ministry of Finance in Costa Rica will go to the local market with the goal of issuing $290 million, at a rate of 7% and maturing in 2019.
In its constant search for fresh resources to meet the interest payments on its growing debt as well as its current expenses, during the next few days the Ministry of Finance will return to the market to try to raise $290 million, through the issue of government debt bonds.
Fitch Ratings has changed the outlook from stable to negative, due to "diminished flexibility to finance its rising budget deficits and public debt burden, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance."
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.
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.
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