Fitch Affirms Costa
Rica at 'BB'; Outlook Stable
Fitch Ratings has today affirmed Costa
Rica's long-term foreign and local currency
Issuer Default Ratings (IDRs) at 'BB' and
'BB+', respectively. The Outlook on both
ratings is Stable. Fitch has also affirmed
Costa Rica's short-term foreign currency IDR
at 'B' and the Country Ceiling at 'BB+'.
Costa Rica's ratings are supported by its
high per capita income; a relatively diverse
economy, which traditionally attracts
sizeable foreign direct investment (FDI);
and its net external creditor position. The
ratings are constrained by a narrow fiscal
revenue base, a comparatively weak monetary
and exchange rate policy framework, and
relatively low international liquidity
indicators.
'The cyclical downturn exposed structural
weakness related to Costa Rica's high
dependence on the U.S. economy and a
relatively narrow tax revenue base,' said
Casey Reckman, Director in Fitch's sovereign
group.
Costa Rica's real GDP growth contracted by
1.3% last year owing to weaker domestic
demand and the collapse in external demand
and reduced FDI flows. A more favorable
external environment and some recovery in
domestic activity could underpin 2.9% real
GDP growth in 2010. However, the trend in
GDP growth could be weaker over the forecast
period than in recent years due to the slow
pace of economic recovery in the U.S. and
somewhat lower FDI flows.
Costa Rica's public finances deteriorated in
2009 as revenues contracted and
counter-cyclical spending was financed with
increased borrowing. As a result, central
government debt increased to 27% of GDP in
2009 from 25% in 2008. The authorities plan
to unwind the additional fiscal stimulus
during the first half of 2010, but last
year's social expenditure increases could be
difficult to trim.
In the absence of higher growth, fiscal
consolidation could be achieved through
revenue-enhancing fiscal reforms and
continued improvements in tax
administration. However, political and
institutional gridlock could continue to
hinder passage and implementation of fiscal
or other meaningful reforms.
Costa Rica has demonstrated resilience
against the destabilizing effects of the
global economic and financial crisis. The
financial system was not exposed to toxic
assets, and a precautionary IMF Stand-by
Arrangement (SBA), at USD735 million or 18%
of end-2008 international reserves, helped
bolster investor confidence and preserve
macroeconomic stability. Nonetheless, Costa
Rica remains vulnerable to external shocks
due to its comparatively high financial
dollarization, structural current account
deficits (CADs) and fragile albeit improved
international liquidity.
'Sustaining macroeconomic stability and
policy credibility is important for
upholding investor confidence and supporting
economic recovery, especially as
inflationary pressures increase and
extraordinary multilateral support is
withdrawn,' said Reckman.
Further strengthening of Costa Rica's
monetary and exchange rate policy framework,
as well as its external balance sheet, could
benefit the sovereign's ability to cope with
external shocks and, in turn, its
creditworthiness. Stronger growth and a
credible fiscal strategy to stabilize the
government debt burden could also support
creditworthiness. On the other hand,
sustained fiscal slippage and deteriorating
debt dynamics could be negative for Costa
Rica's ratings. |
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