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Villalta calls budget deficit focus ‘alarmist’

Costa Rican opposition presidential candidate José María Villalta says he’ll cut tax deductions and boost salaries of police and teachers if elected president, calling concerns about the country’s widening budget deficit “alarmist.”

Villalta, 36, is seeking to force a second round vote with ruling party candidate Johnny Araya in the Feb. 2 race to succeed President Laura Chinchilla. Villalta has 26 percent support among likely voters compared to 39 percent for Araya and 18 percent for Libertarian Movement Party founder Otto Guevara, according to a Jan. 8-13 poll by CID-Gallup. A candidate needs 40 percent to win outright or face an April 6 runoff.

Central America’s second-biggest economy was put on negative outlook by Moody’s in September, citing widening budget deficits, a rising debt burden and a failure to pass fiscal legislation. The strength of Villalta’s candidacy is making it harder for the government to pass fiscal reforms before a second-round vote, Citigroup economists Jorge Pastrana and Jeffrey Williams wrote in a Jan. 7 report.

“It’s likely that the neoliberal economists who have led the country in previous years have blown the issue of the fiscal deficit out of proportion,” Villalta, who heads the Broad Front Party and is their only representative in Congress, said in an interview Tuesday. “But we do think it’s a problem that needs to be tackled in an holistic way.”

Chinchilla’s government has spent the past year drafting a plan to limit the growth of public sector jobs and salary increases. The 56-year-old Araya, who stepped down as mayor of San José to campaign, said he’ll boost financing for young entrepreneurs and consider scrapping the country’s 13 percent sales tax and replacing it with a higher value-added tax.

Moody’s said its negative outlook was justified by a fiscal deficit that climbed to an average 4.4 percent in the 2009-2013 period, up from about 1 percent in the previous four years. The ratio of debt-to-gross domestic product was headed toward 37 percent in 2013 from 25 percent in 2008, Moody’s said.

“Large fiscal deficits and a rising debt burden remain Costa Rica’s main medium-term credit risk and ratings constraint,” according to the Sept. 23 report.

Moody’s rates Costa Rica’s $45 billion economy Baa3, the lowest investment-grade level, putting it in the same category as Indonesia and Spain. Both Standard & Poor’s and Fitch rate Costa Rica below investment grade.

Costa Rican dollar bonds have lost 2.1 percent the past six months, compared to a 1.6 percent return for Latin American debt, according to JPMorgan Chase & Co.’s EMBIG index. The economy grew 5 percent in the third quarter from a year earlier, up from 3.8 percent in the same period of 2012.

As president, Villalta said he would seek to reduce tax deductions for companies and raise salaries for public sector workers near the bottom of the pay scale, saying senior managers in the government bureaucracy are overpaid at the expense of workers including teachers and policemen.

“There is a great lack of balance between salaries,” Villalta said. “Many are underpaid.”

Sitting in a sparse downtown office with a yellow party flag flying outside, Villalta said he wants to renegotiate parts of the country’s free trade agreement with the United States, Dominican Republic and Central America, known as CAFTA-DR, to improve intellectual property protections and labor rights and allow him to set price caps on medications.

Voters in the country of 4.7 million people have grown weary of corruption scandals in the government and are ready for change after eight years of rule by the National Liberation Party, or PLN, Villalta said.

Finance Minister Fernando Herrero resigned in 2012 after the daily La Nación said he avoided paying property taxes, a charge he denied. The transportation minister also resigned that year over alleged corruption on a road project. Last May, the communications minister resigned and Chinchilla fired her anti-narcotics chief and a deputy minister after questions arose about her use of a private jet to fly to Peru.

Ahead of next month’s election, the PLN has started an advertising campaign telling voters not to “vote left,” saying a victory for more liberal candidates would put private sector jobs at risk.

The 13-point gap between Araya and Villalta in the latest Gallup poll, which had a margin of error of 3.2 percentage points, is wider than a December survey which showed the two candidates just five points apart. That bolsters the prospects of a victory by the ruling party, allowing for fiscal adjustment, Jefferson Finch, an analyst at Eurasia Group wrote in a report Wednesday.

“Desire for change in the electorate is high, but it will be difficult for the fragmented and ideologically polarized opposition parties to build an electoral majority,” Finch wrote.

Villalta dismissed the PLN’s campaign ads and said the surveys show relatively weak support for Araya after his two PLN predecessors won with over 40 percent support in the first round.

“Those in charge of propaganda in the PLN saw a chance to distract voters from the corruption and mistakes this government has made,” Villalta said. “Campaigns based on fear never add votes. They’re done to destroy other candidates or boost abstentions and that’s what is happening in Costa Rica.”

© 2013, Bloomberg News

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