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.
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.
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.
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.
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.
Moody's downgraded the long-term issuer ratings and the Costa Rican government's unsecured bonds.
Yesterday the risk rating agency reported that expectations of a continued decline in fiscal indicators and evidence of increased financing needs are some of the reasons behind the decision to revise the country's debt rating.
Rocio Aguilar, Finance Minister, explained to Crhoy.com that Moody's warning is "...
The business sector welcomes the progress achieved with the tax reform approval in the first debate, but notes that it does not fully solve the financial problems facing the government.
In the debate last Friday, the representatives approved the file number 20.580, known as the tax reform law. The approval was optimistically received by the Costa Rican Union of Chambers and Associations of Private Business Sector (Uccaep).
The Central Bank explained that the short-term loan of almost $870 million to the Ministry of Finance will have no impact on inflation.
From a statement issued by the Central Bank of Costa Rica:
September 25, 2018.In accordance with what is authorized by Costa Rican legislation, the Board of Directors of the Central Bank of Costa Rica (BCCR) agreed, on Tuesday, September 25, 2018, to the acquisition of Treasury Notes, issuedby the Ministry of Finance, for an amount of ¢498,858.8 million.
The deterioration of public finances and the inability of the Alvarado administration to end the blockades set up by trade unionists are again drawing the attention of rating agencies and the international market, who foresee a complicated economic future for Costa Rica.
According to the risk rating agency Moody's, the demonstrations by public sector unions are increasingly complicating the path towards a much-needed reform of public finances, which would take its first steps with the approval of the bill that is being discussed in the Legislative Assembly.
Like lemmings running towards a cliff, Costa Rica repeats the kind of actions that underscore the definition of a society incapable of stopping on the road to a terminal crisis.
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.
The cost of not making decisions about the serious fiscal problem affecting Costa Rica "is incommensurable and has the potential to affect not only the economic but also the social and democratic order of the country."
This is the emphatic and clear position of the Comptroller General of the Republic of Costa Rica regarding the serious and risky situation in which the public finances of the country find themselves.Furthermore, as is well mentioned in the report "Fiscal and Budgetary Evolution I semester 2018", published recently by the institution, if decisions related to solving problems of short-term liquidity and modifying the structure of public expenditure to the medium and long term continue to be delayed, the cost to the country will be much more than just economic.
The fiscal deficit closed the first half of the year at 2.4% of GDP, up from 2.2% of GDP in June 2016, mainly due to an increase in the financial cost of debt.
From a statement issued by the Ministry of Finance:
At the end of the first half of 2017, the primary deficit (difference between income and interest-free expenses) remained similar to the previous year, at 0.9% of GDP.
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.
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.
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: