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.
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 is facing a complex scenario, since by not achieving consensus to access international loans, it will be forced to seek domestic funding sources, which would put pressure on the exchange rate and interest rates to rise.
The economic crisis that the country is going through due to the outbreak of covid-19 ended up sharpening the country's fiscal situation.
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 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%.
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.
For Moody's, the Costa Rican government's response to the Covid-19 crisis will put negative pressure on the country's fiscal profile.
According to the rating agency's analysis, the measures include a three-month moratorium on tax payments, a gradual reduction in corporate social benefit contributions and extended credit lines for the companies most affected by the economic recession.
Although Costa Rica and Nicaragua approved fiscal reforms this year, it is predicted that the expected results in terms of tax collection will not be achieved.
The document "Centroamérica: análisis sintético, por país, del desempeño de la recaudación tributaria en 2019", prepared by the Instituto Centroamericano de Estudios Fiscales (Icefi), explains that, in the case of Costa Rica and Nicaragua, the expected results in terms of improved collection are still in doubt.
In Costa Rica, the central government's financial deficit at the fifth month of the year maintained its upward trend as a result of higher interest expenditure and stood at 2.6% of GDP.
While the behavior of the financial deficit is largely due to interest payments, the increase in capital spending also shows significant variation, which translates into better infrastructure conditions needed to facilitate the mobility of goods and people, explains a newsletter from the Costa Rican Ministry of Finance.
With the application of the fiscal rule, by 2020 in Costa Rica the growth of current expenditure in the regular budgets of the entities of the Non-Financial Public Sector will not exceed 4.67%.
From the statement of the Ministry of Finance:
March 25, 2019. The Minister of Finance, Rocío Aguilar, reported today that as a result of the application of the fiscal rule, by 2020 the growth of current expenditure in the regular budgets of entities and bodies that are part of the non-financial public sector may not exceed 4.67%.
Although Costa Rica's fiscal reform has already been approved, the IMF proposes raising some taxes as part of an "additional adjustment" to reduce debt and ease financial pressure in the short term.
"... “We are negatively surprised by the simplistic position of the International Monetary Fund that in the absence of money, taxes should be raised, we consider those words unacceptable, because it has been demonstrated in this country that a large part of the deficit is because of the inefficient use of public funds and an issue of state efficiency that does not allow people to become businessmen," said UCCAEP President Gonzalo Delgado."
The financial deficit of the Central Government at the end of last year was equivalent to 6% of the Gross Domestic Product, 1.2% less than originally expected.
According to the authorities, the fiscal deficit as a proportion of GDP was lower than expected because of the measures taken in terms of collection, expenditure containment and efficiency, and the approval of the Law to Strengthen Public Finances.
The rating agency reduced the long-term and senior unsecured bond issuer ratings of the Costa Rican government from Ba2 to Ba1 and changed the outlook to negative.
According to Moody's, among the main factors behind the decline is the continued and projected worsening of debt metrics in the back of large deficits despite fiscal consolidation efforts.
Alvarado administration celebrates the approval of the tax reform in Costa Rica by announcing a series of initiatives that include, among other things, a public employment reform Project.
After a year of proceedings in Congress and after having been reviewed by a Constitutional Chamber, the country's Assembly finally approved file 20.580. By endorsing this project, the government intends to strengthen its public finances through changes made to the taxation system.
After Costa Rica's Constitutional Chamber prepared the path for tax reform in the Congress, the dollar's price against the local currency stopped rising, and positive reactions were reported in the risk outlook.
Last November 23rd, Court IV issued its judgment, so the law project has a free way to move forward more quickly during the coming weeks in the Congress.
After a long and tense wait, the Constitutional Chamber granted the approval for the Law to Strengthen Public Finances to be voted in Congress with a simple majority.
The Court's judgment prepares the way for the law to advance more quickly in the coming weeks in the Congress. Now legislators will be able to vote their approval in the second debate, ending a long period of uncertainty, which led to a significant depreciation of the Colon against the dollar, a rise in interest rates and a general concern about the economic future in the short term.
Fitch Ratings reported that the country is under observation and for now maintains the rating at BB, awaiting what happens with the fiscal reform and the payment of government debt at the end of the year.
Fitch Ratings, a U.S. risk rating agency, reported on November 15th that Costa Rica would be close to a sovereign rating downgrade because of the country's public finances situation.