Public Finance with Reserved Forecast

In this regional context of economic crisis, falling fiscal revenues and increasing public debt, Costa Rica's debt level is expected to rise to 75% of GDP by 2021, and in the case of El Salvador, the indicator could exceed 85%.

Wednesday, August 19, 2020

The outbreak of covid-19 in Central America forced the government to declare severe household quarantines and to restrict several economic activities, restrictions that in some cases are still in place after five months of health and economic crisis.

This scenario has led to a drop in economic activity, a reduction in public revenue and an increase in the debt of governments, which have had to seek financial resources to cope with the crisis.

See "Costa Rica: Tax Collection Falls 6%" and "Nicaragua: Fiscal Collection Collapses"

According to the report "Central America: Coronavirus Pandemic Will Affect Fiscal Accounts and Debt Indicators" prepared by Moody's risk rating agency and published Aug. 18, Costa Rica and El Salvador will be the countries in the region with the least flexibility in their public finances to cope with the negative effects of the economic crisis.

The document explains that "... the fiscal space decreased for all Central American sovereigns, Costa Rica and El Salvador in the weakest positions. We evaluated the fiscal space by observing the evolution of public debt and the long-term interest burden."

The risk rating agency predicts that Costa Rican and Salvadoran finances will have the greatest imbalances between income and expenditure during 2021.

Check out the "System for monitoring the markets and economic situation in Central American countries", developed by CentralAmericaData.

Moody's analyst Gabriel Torres told that in the case of "... Costa Rica increased its debt in years of good growth, of fat cows. Now we are in a period of lean times and it requires a fiscal adjustment, to lower the deficit."

Torres added that "... in 2021, we expect expenditures to decrease as the pandemic subsides, although it will remain above pre-health crisis levels."

According to Moody's projections, Panama's debt-to-GDP ratio will reach 55.7% next year, Nicaragua's 48.6%, Honduras' 44.4% and Guatemala's 33.8%.

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The rating agency decided to keep the long-term issuer's note at B2, but changed the risk outlook from stable to negative, arguing that there are greater risks to the country's financing due to increased borrowing requirements.

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