Deficit leads Moody’s to downgrade Costa Rica’s credit rating

Moody’s Investor Services, a United States-based financial company, downgraded the Government of Costa Rica’s long-term bond credit ratings to B2 from B1, it announced this week in a press release.

The move, which coincided with a rating outlook change to stable from negative, is due to the following factors, according to the company:

High fiscal deficits leading to an upward trend in debt metrics

Moody’s says that, while the fiscal reform passed in 2018 will help reduce Costa Rica’s fiscal deficit, “this will happen only gradually.”

In 2019, Costa Rica’s fiscal deficit reached 6.96% of GDP, the highest figure of the last three decades, according to the Ministry of Finance. In response, the government announced further fiscal consolidation plans with a focus on containing public spending, replacing high-interest loans, and reducing tax evasion.

Moody’s expects Costa Rica’s “adverse fiscal trends to continue” as these measures are implemented, and financial analyst Nathalie Marshik said the country has “absolutely no room for error in 2020,” according to Bloomberg.

“The 2019 fiscal results highlight the difficulties Costa Rica faces in its fiscal consolidation efforts,” the Moody’s report said. “Despite an 8% increase in overall revenues last year, the government deficit was more than 1% of GDP wider than the authorities’ original target, driven by increased interest costs and higher capital spending.”

Recurring funding challenges resulting from relatively large borrowing requirements

Moody’s notes that the fiscal deficit and debt repayment increases the Costa Rican government’s funding needs, which will “pose recurrent financing challenges.”

“Costa Rica’s international borrowing rates remain among the highest in the region, exposing the government to changes in market appetite for its debt,” the report said.

Moody’s says that while a rating upgrade is “unlikely,” Costa Rica can improve its financial standing by implementing “structural budgetary adjustments that materially reduce fiscal deficits, limiting the expected worsening in government debt indicators and, as a result, easing funding risks.”