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.
The governments of Costa Rica and Nicaragua will face greater challenges in obtaining financing in external markets, because of the lowering of their risk ratings by international agencies.
Arguing that Costa Rica reflects consistently large fiscal deficits, short-term financing needs because of a strong repayment schedule and budget financing constraints, Fitch Ratings reported on January 15 that the country's long-term foreign currency issuer default rating was downgraded from BB to B+.
In the view of Moody's, Fitch and S & P, the latest projections of public debt and fiscal deficit by the Central Bank of Costa Rica, further worsen the outlook for the debt rating.
Last week the Central Bank of Costa Rica (BCCR) released a report in which it explained that for this year it is expected that the public debt with respect to the Gross Domestic Product (GDP) will reach 53.8%, and by 2019 this indicator will reach 58.4%.
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.
An announcement from Moody's confirms the limited room for maneuver left to the country when obtaining external financing, compromising access to credit for the private sector.
Costa Rica has received a new warning over a possible lack of access to funds in the international market with which to alleviate its growing fiscal deficit. After China's decision not to buy $1 billion in bonds , the rating agency Moody's anticipates a rise in interest rates in the country and a deterioration of credit and growth.
The company managing San Jose International Airport will be issuing bonds in order to refinance bank debt assumed in the works to expand the terminal.
From a statement issued by Moody´s:
New York, September 18, 2015 -- Moody's Investors Service, ("Moody's") assigned a provisional rating of (P) Ba2 to Aeris Holdings Costa Rica S.A. de C.V.'s issuance of approximately US $127 million of senior notes ("Notes"). Proceeds will be used to refinance the outstanding loans consisting of roughly $89 million obtained in 2011 from Overseas Private Investment Corporation and Inter-American Development Bank, and $25 million of the IBSA Subordinated Loan (a loan from the shareholders).
Although they have recovered the upward trend seen before Moody's withdrew the investment grade rating, they still have not returned to the pre-announcement levels.
Prices of Costa Rican debt securities increased between 1.2% and 4.5% on the international market, with those with a maturity of 2043 registering the highest increase, "... which ended up being traded at a price of 83% on 17 September, registering 87.5% on 27 October.
The lack of long-term solutions for reducing the fiscal deficit and improving the structure of public spending threaten the investment grade rating given by Moody's in 2010.
For the last four years the loan portfolio of the Salvadoran financial system has been growing at an average rate of 3.5%, below the 11% growth average in the rest of the region.
A report produced by the rating agency Moody's notes that growth in El Salvador's financial sector has been stagnant since 2010, as the total loan portfolio has not achieved growth rates above 3.5% per year.
Moody's is warning that countries with oil deals with Venezuela face risks if this country reduces or eliminates its financial support to the block.
A report by the rating agency notes that "In the countries of Central America and the Caribbean, the "most vulnerable" are Nicaragua and Jamaica, while less exposed are Honduras and Guatemala."
Moody's reached this conclusion after analyzing data from the current account balance of each member country, its dependence on oil imports, particularly on crude oil from Venezuelan.
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.
Rating agency Moody's has warned that the country has little time to approve a tax reform before financial instability affects its investment grade.
"We are reaching the point at which it is approaching the time to take a decision (on the country's credit rating). There is no doubt that the approval of a project to improve public finances is taking longer than we expected," said Gabriel Torres, an analyst at Moody's.
The decision to go abroad to raise funds is based on the BCR's recent investment grade risk rating by Moody's.
"The goal is to transfer the debt in dollars from short to long term. We needed the rating by Moody's in order to get into more sophisticated markets," said Mario Rivera BCR manager.
The agency believes that the investment rating is on shaky grounds due to the lack of progress on reforms to mitigate fiscal deterioration.
According to Gabriel Torres, principal analyst on sovereign debt, if a new tax bill is not created "it is likely to have a negative impact on the rating, a change in perspective."