Eurobond sales to help Costa Rica pay down debt
Vice President Luis Liberman and Finance Vice Minister Juan Carlos Pacheco announced Wednesday evening that the Finance Ministry received $1 billion from the issuance of debt bonds – known as Eurobonds – on the international market.
Liberman said the government would use half the money to pay the public debt in dollars over coming months.
Pacheco said that 80 percent of participating firms bought titles. Investment fund managers acquired 76 percent of the bonds, and of these, 51 percent was purchased by U.S. investors. European and Asian investors acquired little less than half, and Costa Rican investors took 2 percent.
Liberman added that the bond issue is the biggest in the country’s history.
“Costa Rica has been absent from international markets since 2004, because we were paying the foreign debt with domestic debt, affecting private business activity and increasing the government’s debt interests,” he said.
President Laura Chinchilla called the operation to obtain financing from the Eurodollar market “highly successful for the country, for the improvement of public finances and for reducing pressure on interest rates caused by the fiscal deficit.”
Earlier this week, financial experts speculated about the possibility that Eurobond transactions could keep the exchange rate to the lower band and push a decrease in the Basic Passive Rate (BPR).
Consulting firm Aldesa posted on its website Tuesday that negotiations in the Foreign Currency Negotiation Market amounted to $11.5 million, which could mean that starting Wednesday, after the government’s announcement, the exchange rate could remain permanently at the lower band (₡500) if profits were exchanged into colones.
But Liberman quickly dismissed this option and explained that the main objective of the issuance is to use half the obtained funds to reduce the cost of interest on government debt, both foreign and domestic, without adding pressure on the exchange market.
Exporters had expressed concern about a fixed exchange rate. Last month, Chamber of Exporters President Mónica Segnini told The Tico Times it could hurt business, because “the colón equivalent of unit sales remains stagnant, while colón costs increase with local inflation.”
Exporters also believe it will be difficult for the government to hold the exchange rate at ₡500 in the medium term.
Lieberman said it is difficult to estimate benefits, but “at least we know it will keep BPR from reaching levels of up to 11 percent, like it did a few months ago.”
He also said the operation saved the government ₡30 billion ($60 million) in interest due to the substitution of domestic debt with foreign debt at lower rates.
An additional $500 million will be used to pay down debt, some of it in colones, “but the payments will be under a plan defined by the Finance Ministry and the Central Bank, to avoid affecting the exchange rate,” the vice president said.
The Eurobonds Route
The Eurobonds plan began last July when lawmakers passed a bill authorizing the issuance of up to $4 billion in debt bonds.
In September, Chinchilla signed the bill into law.
On Nov. 16, the government issued $1 billion in dollar-denominated 10-year bonds, and on Nov. 21, the Central Bank confirmed the entry of the funds.
Pacheco said that despite being a complex process, “it was carried out in a record time of two and a half months, meeting the proposed schedule and in full compliance with the law.”
He also highlighted one of the most important achievements was that the issuance obtained the lowest interest rate in the history of Costa Rica’s participation in the international market (4.25 percent).
During the process, technical groups from Citigroup and Deutsche Bank, responsible for the issuance, visited 40 firms, 80 percent of which invested in the Costa Rican bonds, signaling confidence in the country’s economy despite the current economic situation internationally.
Regarding the possibility of a future bonds issue, Liberman said, “it is premature to consider it.”
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