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Costa Rica’s Solís urges calm after Moody’s knocks investment rating down to junk status

September 17, 2014

President Luis Guillermo Solís told representatives from the Costa Rican Banking Association (ABC) that Moody’s Investor Services’ decision to drop Costa Rica’s investment rating to junk status was not a crisis and urged calm during a meeting Wednesday morning. As the public sector tries to hash out how its weakened standing will affect the budget, consumers may have to pay more for loans in dollars.

“This hasn’t tanked Costa Rica’s credit rating. It’s not like that. International banks continue to offer Costa Rica financial assistance,” the president said before entering the meeting with Vice President and Finance Minister Helio Fallas. “I don’t see a crisis here by any means.”

Solís said the problem was “inherited” after several years of inaction by lawmakers to address fiscal reform. Former President Laura Chinchilla (2010-2014) made fiscal reform a priority for her administration but was unable to wrangle the necessary votes from the Legislative Assembly to pass a comprehensive bill.

Soon after the news of the downgrade broke, Libertarian Movement Party lawmaker Otto Guevara said that curbing public sending was urgent to avoid future downgrades.

“This, friends, lawmakers, is extremely serious. What is the consequence of this downgrade? That probably other rating agencies will follow. It’s very likely Fitch will do the same and Standard & Poor’s will do the same,” Guevara said.

Guevara’s comments preceded concerned statements from the Union of Private-Sector Chambers and Associations and ABC about the urgent need to address the fiscal situation.

Adriana Rodríguez, a securities analyst from Aldesa Securities, told The Tico Times that Standard & Poor’s and Fitch already had Costa Rica ranked as a high-risk investment and that further downgrades were less likely. Rodríguez observed that warnings about the direction of Costa Rica’s deficit from Fitch in particular could be a cause for concern, especially if the Legislative Assembly is unable to pass several tax bills, including one that would move Costa Rica to a value-added tax. Moody’s had Costa Rica ranked at Baa3 investment grade for four years before Tuesday’s downgrade.

Rodríguez added that the downgrade would likely drive up borrowing rates for the $1 billion in Eurobonds Costa Rica plans to issue in 2015, according to the budget proposal for next year. Increased interest rates could also trickle down to consumers, who may have to pay more for loans or goods denominated in dollars, such as cars, for example.

“It’s something that affects all spheres of life, not just the public debt,” Rodríguez said.

Citizen Action Party lawmaker Ottón Solís told Radio Monumental that Moody’s decision put the Costa Rican budget impasse in “black and white” terms, adding that the severity of the situation was no secret.

Moody’s downgraded Costa Rica’s rating to junk status, from Baa3 to Ba1, citing the country’s inability to control its swelling deficit, estimated to reach 6.7 percent of gross domestic product in 2015. The Costa Rican currency, the colón, has depreciated roughly seven percent against the U.S. dollar since January but has recently entered a period of stability.

Solís said that he planned to meet with potential investors during a trip next week to New York, where he will participate in a climate change summit and the United Nations General Assembly meeting.

The president defended Fallas and his administration’s proposals to control the deficit, including the tax bills and recent attempts to combat tax evasion.

“We’re going to take this calmly, tranquilly and seriously, because it’s a subject that demands serious [consideration],” Solís said.

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