Credit rating agency Fitch placed Costa Rica’s Issuer Default Ratings (IDR’s), which is basically an opinion on an issuer’s general capacity to fulfill its financial obligations, on rating watch negative (RWN), this gives the country anywhere from one to three months to resolve its public finances before lowering its already low rating.
Costa Rica is currently rated as BB (elevated vulnerability to default risk, more susceptible to adverse shifts in business or economic conditions; still financially flexible).
“The RWN on Costa Rica’s IDRs reflects acute financing constraints facing the sovereign, which pose risks to its ability to meet budgetary obligations and debt maturities in the remainder of 2018, including a loan from the central bank (BCCR). This comes against the backdrop of persisting uncertainty around lawmakers’ ability to pass effective legislation to contain the country’s high and widening fiscal deficits. Fitch will review the rating in the next one to three months in light of the outcome of the pending fiscal reform legislation, its impact on the budget deficit and the government’s financing situation. This review to resolve the RWN could result in a downgrade of one or more notches”, explains the press release.
The rating agency emphasizes that the government’s financing needs have become increasingly burdensome which has led the government to borrow from the local capital market.
“Fitch expects the passage of the fiscal reform before year end. The reform, nevertheless, is likely to contribute a relatively small share of the fiscal adjustment that would be needed to stabilize rising government debt, according to Fitch’s estimates. The government’s plan to comply with the spending cap is not yet clear, and it could be challenged by pressure from public sector unions and other legal requirements affecting budgetary allocations. Moreover, Fitch sees a risk of reform fatigue following the difficult political negotiations and social backlash that faced the pending reform. These risks pose challenges to implementing additional measures designed to further narrow the deficit and stabilize the debt metrics.”
Fitch concludes by affirming that economic growth is relatively resilient “but signs of negative spill-overs are emerging” and also that the continued uncertainty around the fiscal reform and the government’s financial needs have generated pressures on the exchange rate.
Costa Rica is currently rated as BB (elevated vulnerability to default risk, more susceptible to adverse shifts in business or economic conditions; still financially flexible).
“The RWN on Costa Rica’s IDRs reflects acute financing constraints facing the sovereign, which pose risks to its ability to meet budgetary obligations and debt maturities in the remainder of 2018, including a loan from the central bank (BCCR). This comes against the backdrop of persisting uncertainty around lawmakers’ ability to pass effective legislation to contain the country’s high and widening fiscal deficits. Fitch will review the rating in the next one to three months in light of the outcome of the pending fiscal reform legislation, its impact on the budget deficit and the government’s financing situation. This review to resolve the RWN could result in a downgrade of one or more notches”, explains the press release.
The rating agency emphasizes that the government’s financing needs have become increasingly burdensome which has led the government to borrow from the local capital market.
“Fitch expects the passage of the fiscal reform before year end. The reform, nevertheless, is likely to contribute a relatively small share of the fiscal adjustment that would be needed to stabilize rising government debt, according to Fitch’s estimates. The government’s plan to comply with the spending cap is not yet clear, and it could be challenged by pressure from public sector unions and other legal requirements affecting budgetary allocations. Moreover, Fitch sees a risk of reform fatigue following the difficult political negotiations and social backlash that faced the pending reform. These risks pose challenges to implementing additional measures designed to further narrow the deficit and stabilize the debt metrics.”
Fitch concludes by affirming that economic growth is relatively resilient “but signs of negative spill-overs are emerging” and also that the continued uncertainty around the fiscal reform and the government’s financial needs have generated pressures on the exchange rate.
