Reducing the Fiscal Deficit: A Great Challenge

After the multi-sector dialogue in Costa Rica was concluded, the main risk qualifiers agree that because the agreements signed to reduce the deficit are not enough, the government should execute its fiscal policies in a timely manner.

Tuesday, December 1, 2020

Although Costa Rica's fiscal situation was already precarious before the health and economic crisis that led to the covid-19 outbreak began, the scenario started to worsen since March of this year.

The Costa Rican government has had to manage to stay afloat, since due to the drop in economic activity and the decrease in government income, on September 17 the Alvarado administration presented the plan with which it intended to mitigate the fiscal impact of the health crisis, which consisted of a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.75 billion credit.

The proposal caused widespread discontent and the authorities were forced to convene a national dialogue, a process that concluded on November 21, when 58 agreements were reached that focus on reducing the fiscal deficit.

Gabriela Torres, Moody's senior sovereign debt analyst, told Elfinancierocr.com that "... it is positive that some agreements were reached, but now the big question is: How much of this will be implemented in time to effectively result in the reduction of the deficit? Costa Rica requires a fiscal adjustment of at least 4% of the GDP, or bringing the primary deficit close to zero."

According to Lisa Schineller, Costa Rica's sovereign rating analyst for Standard & Poor's, the "... national dialogue was important in generating proposals and promoting the participation of sectors of society. However, given the current dynamics, the most pertinent for the rating is the timely fiscal action and execution to reduce the high deficits and financing needs."

For Carlos Morales, director of Latin American sovereign ratings at Fitch Ratings, "... the dialogue table is an important step towards achieving fiscal consolidation, but the agreements agreed upon are not enough to stabilize the public debt. The Government and Congress must focus on seeking a fiscal adjustment that allows for a reduction of the primary deficit by at least 5% of the national product."

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More on this topic

Public Finances: What is Expected in 2021

October 2020

After the Alvarado administration agreed to backtrack on the proposal to negotiate a $1.75 billion loan with the IMF, it is predicted that next year the government will depend on domestic debt to finance its expenditures.

In mid-September, and in the context of a severe economic crisis that had been brewing before the pandemic, the Executive presented the plan with which it intended to mitigate the fiscal impact of the Covid-19 crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.75 billion loan.

Costa Rica: Public Spending Cut is Not Enough

August 2017

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.

Costa Rica: Ratings Agencies Insist on Fiscal Adjustment

April 2015

Fitch, Moody's and Standard & Poor's are once again warning of the need to generate more revenue and cut public spending in order to avoid "negative consequences for ratings."

On average agencies provide a period of 12-18 months for the fiscal deficit and public debt to stabilize, while clarifying that "...

Investment Risk Grade in Costa Rica

April 2014

According to Moody's, the country's credit rating does not reflect the current conditions of the economy, highlighting in particular the unsustainability of the fiscal deficit.

Costa Rica is running out of time to solve its high public spending problems and stop the budget deficit from continuing to grow the way it has been doing up until now.

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