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.
Fitch Ratings has changed the outlook from stable to negative, due to "diminished flexibility to finance its rising budget deficits and public debt burden, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance."
EDITORIAL
Costa Rica is running out of time.The decision taken by Fitch Ratings to reduce from the outlook for the sovereign debt rating from stable to negative reflects a serious problem that the country faces and shows us that, in the not very long term, the rating agency could lower this rating, currently in the BB category.
The government's financial deficit rose from 3.4% of GDP in September 2016 to 4% in the same month this year, explained by an increase in the financial cost of debt and an increase in capital expenditure.
From a statement issued by the Ministry of Finance:
At the end of September, the central government's revenue and expenditure figures reflect the need for comprehensive fiscal reform (via income and expenditure), which will make it possible to sustain the state's finances, as well as stability and continuity of social achievements which the country achieved throughout its history.
Tax revenues went from a rate of change of 7% in March 2016, to a rate of 8.5% in the same month of this year.
From a statement issued by the Ministry of Finance:
Authorities at the Treasury announced the performance of the central government's fiscal figures at the end of the first quarter of the year, which indicate how tax revenues continue to show good results, going from a rate of change of 7% in March 2016 to 8.5% in the same period this year.
As of February total expenditures recorded a slowdown of 1%, having increased by 6.8% compared to the 7.8% increase in the same period in 2016.
From a statement issued by the Ministry of Finance:
The First Vice President and the Minister of Finance, Fallas Helio, presented this week the tax figures at the end of February 2017, which show that both the primary deficit (total revenue less noninterest expense) as well as the financial deficit maintain the same behavior seen in February last year, 0.8% of GDP and 1% of GDP respectively.
In line with warnings from other ratings agencies regarding the serious fiscal problem and the lack of political will to solve it, Moody's has downgraded its rating from Ba1 to Ba2 with a negative outlook.
New York, February 09, 2017 -- Moody's Investors Service has today downgraded Costa Rica's government bond rating by one notch to Ba2 from Ba1, and maintained the negative outlook on the rating.
In comparison to 2015 revenue grew by 9% and expenses by 6%, and total public debt as a proportion of GDP reached 45%.
From a statement issued by the Ministry of Finance:
The figures for income and expenditure of the central government indicate that by the end 2016,the shortfall of government revenue to cover expenses was 5.2% of GDP, less than the 6% calculated at the beginning of the year and less than the amount that was observed in 2015 (5.7%). This result represents a reduction of 2% (equivalent to ¢32 billion) from the deficit of 2015, which makes it the lowest deficit in the last four years.
The debt rating has been lowered from BB + to BB, due to the high fiscal deficit and the lack of implementation of reforms to start correcting the problem.
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+'. The Outlooks were revised to Stable from Negative.
The favorable conditions in the global economy allowed the country to grow by 4.25% in 2016, and administrative efforts to reduce the fiscal deficit were noted, however they will not prevent the debt /GDP ratio from growing.
From a press release by the IMF:
Costa Rica’s economy growing robustly, GDP expected to growth by 4.25% in 2016
More needs to be done to stabilize public debt levels
Key for government and Congress to reach consensus on VAT and income tax reforms proposals to help address fiscal imbalances
As of October 2016 revenue grew by 8.9% and growth of current expenditure decreased from 7.5% in October 2015 to 3.2% in the same month this year.
From a statement issued by the Ministry of Finance:
A fiscal deficit, accumulated up to October, of 3.9% of GDP and an increase of 5.3 percentage points of income over expenditure, were the results of the central governments fiscal figures at the end of that month.
Although the growth rate of government expenditure has slowed, it is above inflation, while rising incomes have allowed for a reduction of the fiscal deficit compared to last year.
From a statement issued by the Ministry of Finance:
A reduction of ¢168,742 million in the financial deficit (revenues minus expenses), and a difference of seven percentage points between increased income and expenses, are the fiscal figures for the Central Government recorded with just three months to go until the end of the year.
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):
The Central American Institute for Fiscal Studies -Icefi- assessed Costa Rica's budget for 2017, and as a result believes that if the prospects for medium and long term fiscal insufficiency are maintained, there is a serious risk of losing the social achievements of this Central American nation and accumulating fiscal deficits and public debt that could jeopardize the sustainability of the state in the medium and long term.Finally, he reiterated the need for a comprehensive fiscal agreement to ensure economic growth and social welfare in the country.
Standard & Poor's cites persistent difficulties in approving a fiscal reform in the short term, given the political fragmentation that exists in the Legislature.
Analyst Joydeep Mukherji said "... two previous governments have tried to make a fiscal reform and failed and that the government of Luis Guillermo Solis has had difficultyconvincing the Legislative Assembly ...".
The countries facing the greatest risk of fiscal unsustainability within three years are El Salvador and Honduras, followed by Costa Rica and with less risk, Nicaragua and Panama.
From the "EconomicOutlook"section of the V Report on the State of the Region 2016:
As in old fashioned patriarchal homes, if there must be suffering, the first to suffer are the stepchildren, and only afterwards, if necessary, the legitimate children.
EDITORIAL
The announcement by the Solis administration that it has a plan B in case it does not manage to get legislative approval for the proposed tax increases designed to address the serious and growing fiscal deficit, highlights the existence in Costa Rica of first class citizens and second class citizens.