Moody’s rating agency placed Costa Rica’s long-term ratings and the ratings of unsecured bonds under review because of:
1. Expectations of a continuous worsening of fiscal indicators and public debt and the evidence of an increase in financing pressures.
2. Reservations on the ability of the government to implement an effective fiscal consolidation plan and reverse negative fiscal trends.
During the review period, Moody’s will evaluate the likelihood of approval of a comprehensive fiscal reform that will be effective in stopping the persistent upward trend in the government’s debt indicators. Similarly, the review will explore alternative financing scenarios to determine the credit risks associated with restricted access to the market.
Costa Rica has been reporting large government deficits for several years and Moody’s expects the 2018 fiscal deficit to end at 7.2% of GDP, compared to 4% of GDP in 2011. The high deficits increase public debt, so Moody’s estimates it will reach 54% of GDP in 2018 compared to 30% in 2011.
According to the rating agency, debt levels are now materially worse than those of other countries with similar ratings, even more in terms of interest charges, equivalent to 24% of government revenues compared to an average 8% for the group with a low rating.
The agency also highlighted the fact that on September 28th, the Central Bank of Costa Rica announced that it would buy 498 billion (1.4% of GDP in 2018) in Treasury notes from the Ministry of Finance, a financing mechanism for emergency that had not been used for more than two decades. This decision highlights the growing financing pressures, as the government’s greater dependence on the domestic market has been raising local interest rates.
Moody’s anticipates continued pressures as the annual financing needs of the government are likely to remain above 14% of GDP in 2018-2019, compared to 11% of GDP in the previous five years.