April 8th, 2014 (InsideCostaRica.com) Global ratings agency, Fitch Ratings is warning that building political support for comprehensive fiscal reform could be challenging for the next Costa Rican government due to a high degree of political fragmentation.
“ Solis’s victory in Sunday’s run-off presidential elections was widely expected after the incumbent party’s candidate ceased campaigning when opinion polls gave Solis, of the opposition Partido Accion Ciudadana party, a substantial lead. However, February’s general elections resulted in the greatest fragmentation in the country’s history, with nine parties represented in the 57-member legislative assembly. No party has a simple majority, and legislative rules in Costa Rica give obstructive powers to minority parties,” Fitch said in a statement released by the agency.
Meanwhile, Solis’s PAC party will have just 13 of the 57 seats in the Legislative Assembly.
“High structural fiscal deficits remain the key weakness in Costa Rica’s sovereign credit profile, and it is still not entirely clear what fiscal approach the new administration of Luis Guillermo Solis will take. Fiscal deterioration poses challenges for stabilizing the government debt burden and the authorities’ capacity to respond to adverse shocks and future spending demands, and this may eventually erode business and consumer confidence,” Fitch said.
“Costa Rica’s low revenue base and rigid expenditure profile produces high structural fiscal deficits. The deficit reached 5.4% of GDP in 2013. Fiscal imbalances became more prominent in 2012 and heavy public financing needs pushed up local interest rates, forcing the sovereign to tap the international bond markets (..) [with the recent issuance of $1 billion worth of bonds],” Fitch said.
Fitch affirmed Costa Rica’s ‘BB+’/Stable sovereign rating in January.
Failure to address the country’s fiscal deterioration would put negative pressure on the rating, the agency warned.