Moody’s cuts Costa Rica’s credit rating to “junk” status

September 17^th, 2014 (InsideCostaRica.com) Costa Rica’s credit rating was cut to junk status by Moody’s Investors Service yesterday, based on the country’s widening deficit and large debt burden.

Moody’s lowered the country’s credit rating from Baa3 to Ba1, which represents “significant credit risk” and places Costa Rica below investment grade.

The firm cited political obstacles to comprehensive tax reform that could help rein in the country’s widening deficit.  Moody’s said it expects the country’s fiscal deficit and debt burden to continue in the coming years.

“Several attempts in recent years to address Costa Rica’s growing fiscal deficits and debt have not brought these levels lower. The new Solis administration, which took office in May of this year, has indicated it will only gradually introduce fiscal consolidation,” Moody’s said in a press release.

“As a consequence of inaction, we expect the current large fiscal deficits and increasing debt burden are likely to continue for the next few years. The fiscal deficit has averaged 4.5% of GDP since 2009, largely driven by spending growth, and is expected to reach 5.8% of GDP in 2014 and 6% next year. The high deficits have materially worsened Costa Rica’s debt burden, with debt to GDP expected to rise close to 40% this year, compared to 25% of GDP in 2008.”

Moody’s said that material improvements to the country’s fiscal situation are unlikely in the short term.

“Today’s downgrade reflects our expectations that material fiscal improvements are unlikely in the next one to two years. A negative consequence of Costa Rica’s entrenched democratic tradition has been the cumbersome process of consensus-building. For the past few administrations, the government’s weak position in Congress has delayed approval of legislation because of the need to forge ad-hoc alliances. Consequently, efforts to approve significant fiscal reforms have been impeded.

We expect continued political obstacles to comprehensive fiscal reform during the Solis administration, in office since May 2014. The government aims to introduce new revenue measures by early 2015, but successful implementation will be difficult and the impact on the fiscal deficit insufficient to undo the rise in the debt burden. We expect that the current government will only gradually introduce fiscal reforms going forward,” Moody’s said yesterday.

Moody’s also cited the country’s large debt burden as its second reason for the downgrade.  Costa Rica’s debt burden will reach nearly 40% of GDP this year, compared to 25% in 2008.

The country is already rated as “junk” (below investment grade) by Standard & Poor’s and Fitch Ratings.

Finance Minister, Helio Fallas stressed in an interview with Diario Extra that the fiscal situation was “inherited” by the Solis administration, but that actions being taken by the administration will ultimately improve the country’s outlook – and credit rating.

Moody’s warned Costa Rica in April that it could face a downgrade if the new government of Luis Guillermo Solís delayed fiscal reform until next year.