Fitch Upgrades Ccsta Rica to 'BB+'

Fitch upgraded Foreign currency IDR to 'BB+' from 'BB'; Country ceiling to 'BBB-' from 'BB+'; Local currency IDR affirmed at 'BB+'; and Short-term IDR affirmed at 'B'. The Rating Outlook is Stable.

Friday, March 4, 2011

From the Fitch Report:

"The upgrade reflects Costa Rica's better than expected economic resilience during the global credit crisis, steadily improving macroeconomic stability underpinned by lower inflation and higher international liquidity as well as the country's relatively modest external indebtedness.

Costa Rica's ratings are also supported by its comparatively high per capita GDP, favorable social indicators, political stability and strong governance indicators relative to peers and higher-rated sovereigns.

'Costa Rica has been able to manage balance of payments pressures despite its vulnerability to high commodity prices, structural current account deficit and limited exchange rate flexibility, reflecting its improved shock-absorption capacity,' said Director Erich Arispe. 'Moreover, continued accumulation of international reserves, lower dollarization and close relations with multilateral institutions reduce Costa Rica's external vulnerabilities.'

Costa Rica's macroeconomic performance has improved as the country has continued to stage an economic recovery since late-2009 and growth could remain over 4% during the forecast period. In a break from the past double-digit inflation rates, inflation has been in single-digits in the last two years and is expected to remain so during the forecast period barring a significant increase in commodity prices.

Fiscal deficits have worsened since 2009, with Costa Rica's central government debt burden rising to an estimated 30% of GDP at the end of 2010. Nevertheless, this level remains below the 'BBB/'BB' medians at 35% and 40%, respectively. In Fitch's view, fiscal consolidation and a sustained reduction in government indebtedness in the pre-2008 period provided some space to relax the fiscal stance in response to the global credit crisis without undermining investor confidence. Moreover, the steady development of local markets and improvement in currency composition of government debt supports Costa Rica's fiscal financing flexibility.

Nevertheless, 'reforms designed to improve the flexibility of public finances by increasing the government's narrow revenue base will be necessary for medium-term fiscal sustainability,' said Arispe.

In this regard, Fitch notes that a critical part of the government's fiscal strategy is to seek approval for the recently submitted tax reform proposal intended to raise tax revenues by 2.5% of GDP. However, the final passage of this reform remains unclear at this point. Hence, Fitch believes that in the absence of a tax reform, the government would need to exercise tough spendingrestraint to support medium-term fiscal consolidation efforts.

Costa Rica's current account deficits are likely to remain over 4% of GDP during the forecast period. However, the continued inflow of foreign direct investment and the recent accumulation of international reserves buttress the capacity of the country to cope with external shocks. External liquidity, at 154%, is in line with peers. Fitch notes that Costa Rica's external balance sheet is a relative strength compared with rating peers as the sovereign and the country as a whole remain solid net external creditors.

While the comparatively high level of financial dollarization and heavy state participation in the banking system persist as credit challenges, Costa Rica's improved financial supervision and the elimination of the off-shore banking system have reduced banking sector's vulnerabilities. This potentially reduces the contingent liability for the sovereign.

An expansion in the narrow revenue base that improves fiscal flexibility, a sustained reduction in government indebtedness as well as further strengthening of the country's monetary and exchange rate regimes would benefit creditworthiness. On the other hand, a marked and sustained deterioration in fiscal accounts and government indebtedness, a sharp deterioration in external accounts and liquidity that result in a disorderly adjustment of the exchange rate and a return to high inflation environment would be negative for creditworthiness."



More on this topic

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From a press release by Fitch:

Fitch Ratings-New York-19 January 2017: Fitch Ratings has downgraded Costa Rica's Long-Term Foreign- and Local-Currency IDRs to 'BB' from 'BB+'.

Fitch Downgrades Guatemala's Ratings to 'BB'

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From the press release by Fitch Ratings:

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Fitch Ratings Affirms Rating of BB + for Guatemala

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The agency has affirmed the international rating of Guatemala as 'BB +' with Stable Outlook.

From a statement by Fitch Ratings:

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Fitch Publishes Panama Sovereign Report

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The upgrades reflect a sustained improvement in public finances, underpinned by recent tax reforms, and the economy's resilience to the global financial crisis and associated recession.

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