Public Finances at Risk

The decline in tax collection, the government's short-term commitments and the possibility of a reduction in the credit rating are factors that worsen Costa Rica's fiscal situation.

Tuesday, October 23, 2018

According to figures from the Finance Ministry, during the first nine months of this year the tax collection of the Costa Rican government had a slight increase of 1% over the same period last year. This increase is far from the interannual increases reported in the same period in recent years.

After releasing the results of income and expenditure of the central government up to September, Finance Minister, Rocio Aguilar, explained through a statement that "... These results, along with scarce resources to address the priorities of the state, the announcement of the next review of country risk rating, the poverty index released this week, the increase in delinquency of the financial system, among other factors, are clear evidence that the country can no longer withstand the difficult fiscal situation, in the absence of a law to strengthen the Public Treasury to open the way to begin to resolve it."

The statement details that at the end of the third quarter of the year, the financial deficit of the central government reached 4.5% of Gross Domestic Product (GDP) and the primary deficit 1.9% of GDP, 0.3% more than in 2017. This result maintains the trend observed since July, when the largest financial deficit in the last five years was reached.

In addition to the country's complex fiscal situation, last week Moody's downgraded its long-term issuer ratings and the Costa Rican government's unsecured bonds.

In the same vein, the Central American Institute for Fiscal Studies (Icefi) reported today that in 2018 the fiscal deficit is expected to reach 7.1% of GDP, up from 6.2% in 2017, and the central government's debt will represent 53.5% of GDP, manifesting short-term unsustainability and increasing the vulnerability of Costa Rica's economy.

Icefi explains that the fiscal situation observed in Costa Rica makes it necessary to recognize that it is urgent to carry out a fiscal adjustment that allows debt sustainability in the short term, without jeopardizing fiscal sufficiency. In this regard, the proposed fiscal reform seems to be necessary, but the proposed fiscal adjustment is not enough to clean up public finances, as some estimates place the annual impact between 1.2% and 1.5% of GDP, below the 4.8% necessary to ensure debt sustainability.

See press releases from the Finance Ministry and Icefi.

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Costa Rica: Public Finances Deteriorate Further

August 2018

The high level of financing and the economic slowdown explain the increase in the fiscal deficit of the central government, which at the end of July reached 3.3% of GDP, the highest in the last six years.

The decrease in tax revenues, due to a slowdown in economic activity, added to the high level of government debt, explained the strong rebound in the fiscal deficit in the first half of the year. Of the total deficit, about two thirds correspond to interest. 

Costa Rica's Fiscal and Political Sickness

October 2016

The ICEFI points to a "chronic political inability to achieve comprehensive fiscal agreement" which is jeopardizing the sustainability of the state in the medium and long term.

From a statement issued by the Central Institute for Fiscal Studies (Icefi):

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.

Standard & Poor's Raise Honduras' Rating to B +

July 2015

The agency improved the rating from B to B + highlighting the process of fiscal consolidation in place since 2014 but warned of weak internal controls and limited transparency in the public sector.

From a statement issued by Standard & Poor's:

We expect that continued implementation of recent fiscal and energy-sector reforms will contain Honduras' general government fiscal deficit to around 4% of GDP over the next two years, helping to keep net general government debt below 40% of GDP over the same period.

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