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In latest blow, US’s largest bank, JP Morgan urges pullback on Costa Rica bonds

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May 18th, 2015 (InsideCostaRica.com) In the latest blow to Costa Rica’s standing on international financial markets, the United States’ largest bank by assets, JP Morgan Chase is advising its investors to reduce their holdings in Costa Rican bonds, citing increasing risk for its decision to lower Costa Rica’s standing on its emerging markets index from neutral to what it calls “underweight.”

 

According to JP Morgan, despite there being consensus for the need to stop what it describes as the country’s “fiscal hemorrhage,” that there is little chance that the trend will be reversed.  The country’s fiscal deficit is expected to reach 5.7% of GDP this year.

 

Amongst other reasons cited by the bank for its prognosis is the lack of political capital of the ruling Citizen Action Party (PAC) in Costa Rica’s Legislative Assembly, where opposition party lawmakers are in the majority.  The result is very little progress on comprehensive fiscal reform, a situation unlikely to change anytime soon.

 

To further add to the country’s financial woes, according to JP Morgan, Costa Rica’s economic growth is at its lowest level in more than five years, with expected growth of just 3.4% in 2015, significantly below its potential growth of 4.3% as estimated by the International Monetary Fund.

 

Meanwhile, government expenditures – and its deficit – continue to grow:  lawmakers approved a 19% increase in the government budget for 2015.

 

The move by JP Morgan could cause serious problems for the Costa Rican government, which has been relying on bond issues to cover its budget shortfalls.

 

The guidance by JP Morgan is the latest in a string of setbacks affecting the country’s credit rating and financial reputation on international markets.  Ratings agency Moody’s downgraded the country’s credit rating to “junk” status in September 2014, while earlier this year Fitch downgraded the country’s outlook from “stable” to “negative.”

 

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  • Yeims

    The government must reduce or preferably cut many programs that simply are not productive and some even unneeded. Raising taxes is not an option because the majority of citizens are already taxed to the max. Then, after cutting out the real deadwood, all government employees need to either become productive individually and as a team, or be let go.

  • prdatki

    First the Government has to cut all benefits to Elected and Appointed officials, Jail the last two presidents and take all of there assets.No retirment pay to ex Judes and Congress. Tax Churches ,legalize Marijuana and tax it .The money should go for education. Get rid of mandatory CAJA payments and do a audit of the entire Government.

  • Ken Morris

    It looks like the staffers at JP Morgan nailed it. The PAC isn’t powerful enough to push through fiscal reform on its own, and the PLN-led opposition in the Legislative Assembly doesn’t want fiscal reform now. It only wants to destroy the PAC and win the next election, so will oppose any compromise that gives the PAC any of the credit. It’s a political stalement led by legislators wealthy enough to personally survive a meltdown.

    The question is whether there is any solution, and JP Morgan staffers may be right that there isn’t. At this point the policy solutions proposed in the other posts are irrelevant. It doesn’t matter what solutions are best, what matters is that the PLN in particular doesn’t want to agree to any solutions.

    Then the question becomes what happens next, and the answer doesn’t look good–unless you’re in the PLN and planning to run for election.

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