Moody’s warns Costa Rica: Time is running out for fiscal reform

September 23^rd, 2013 (InsideCostaRica.com) The rating agency Moody’s warned Costa Rica that it is running out of time to pass fiscal reforms before the imbalance in public finances have consequences in the country’s investment grade rating.

“We are reaching the point at which it is time to make a decision (on the country’s credit rating).  There is no doubt that the approval of reforms to improve public finances is taking longer than we expected,” Moody’s Gabriel Torres told local daily, La Nacion.

Moody’s upgraded Costa Rica’s credit rating to Ba1 from Baa3 in September 2010.  The better rating gives more confidence to foreign investors to purchase Costa Rica bonds, and allows the country to receive lower interest rates.  The improved rating was also key in the placement of Eurobonds in November 2012 and April 2013.

Moody’s has not yet issued its country report for Costa Rica for 2013, while waiting for the country to introduce fiscal reforms.

“We are concerned about the issue of spending and the increase in public debt.  For several years, the government has tried to pass a tax reform, but without success,” Torres said.

Edgar Ayales, Minister of Hacienda (Treasury) said losing investment grade by Moody’s would be disastrous for the country and would further deteriorate the country’s debt situation.

Ayales said that an increase of one or two percentage points in interest rates would have a significant impact on the country’s external debt.

However, Ayales said that on October 3^rd, the country’s “Fiscal Consolidation Plan” would be unveiled to the public.  The plan includes three basic aspects: increased revenue, reduced spending, and lowering the dependence on internal and external financing.

The plan aims to reduce Costa Rica’s fiscal deficit by 3.5% between 2014 and 2018.  “We are at a crucial time to take the necessary [actions] to stabilize public finances,” Ayales said.

Costa Rica is one of the few countries in Latin America (along with Argentina and Brazil) that has not made significant changes to its tax code following the economic crisis, according to the Economic Commission for Latin America and the Caribbean (ECLAC).  Most countries in the region pushed for an increase in value added tax (VAT) and income tax to increase revenues.