Moody’s warns Costa Rica could face downgrade if fiscal reform delayed


April 23rd, 2014 ( Ratings agency Moody’s is warning that Costa Rica could lose its current Baa3 credit rating should the new government of Luis Guillermo Solís delay fiscal reform until next year.

The warning comes as part of Moody’s latest credit opinion on the country, published on April 15th.

Costa Rica’s current ‘Baa3-negative’ rating is the lowest investment-grade rating issued by the agency. The ‘negative’ outlook was tacked onto the country’s rating in September of last year over concerns about the country’s rising debt burden, fiscal deficits and stalled legislation to address the problems.

Now, Moody’s warns, the country could face losing its Baa3 rating if the country’s incoming government is unable to push through fiscal reforms this year. A downgrade to Ba1, the next notch below Baa3, would lower Costa Rica’s rating from investment grade to speculative grade, and could have a significant impact on the economy as the country would be forced to pay higher interest on its foreign debt bonds, such as the $1 billion worth of Eurobonds it put on the market on April 1st.

“We want to see a positive signal from the new government and how serious they are,” said Gabriel Torres, principal analyst for sovereign debt at Moody’s.

Torres added that the country’s current situation is “not sustainable,” and the ratings firm would likely review Costa Rica’s rating before year-end.

Soon-to-be Finance Minister, Helio Fallas, said that confronting the country’s fiscal situation would be a top priority, including the issue of tax evasion.

The incoming government, meanwhile, has promised not to raise taxes before 2016.

The most recent Moody’s report cites some of its concerns as the growth of public debt and the high fiscal deficit that have emerged over the last several years.

Moody’s points out that Costa Rica’s public debt skyrocketed from 25% of GDP in 2009 to 40% of GDP last year.

Meanwhile, Costa Rica’s fiscal deficit is expected to be 6% of GDP this year.

Costa Rica gained its Baa3 rating from a previous Ba1 rating in September 2010. The investment-grade rating has helped the country to raise billions of dollars from investors by issuing foreign debt bonds, including a $1 billion issue in November 2012, as well as two separate $500 million issues last year, and $1 billion in April of this year.

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