Pandemic leads Moody’s to drop Costa Rica’s ratings forecast

Moody’s Investor Services, a United States-based financial company, changed its outlook on Costa Rica’s ratings from stable to negative.

The move comes months after the company downgraded Costa Rica’s long-term bond credit ratings to B2.

The rating outlook is tied to the economic shock of the coronavirus pandemic, according to Moody’s:

Funding risks due to pandemic

Moody’s predicts that Costa Rica’s economy will shrink 4% this year, and while it will recover in 2021, the bounce back will “be insufficient to make up for the lost economic output.”

At the same time, pandemic-related spending will lead to a rising deficit — something Costa Rican authorities have themselves acknowledged — and increased borrowing requirements.

“The decision to change the outlook to negative reflects the expected impact on Costa Rica’s budget deficits, and the related increased risk of funding pressures, resulting from the coronavirus shock,” Moody’s writes.

“For 2020, the government will rely heavily on funding from official sources, but next year’s borrowing will require tapping international markets, where spreads today remain prohibitively high.”

Costa Rica has asked that the International Monetary Fund issue zero-interest loans to mid-income countries that have been impacted by the coronavirus.

The country’s fiscal deficit will reach 8.6% of GDP for this year, up from an initial forecast of 6.2% of GDP, according to the Ministry of Finance.

“The outlook could return to stable if the government effectively implements structural budgetary adjustments that ease funding risks and reduce fiscal deficits to limit the worsening in government debt indicators and improve market confidence leading to more sustainable cost of funding,” Moody’s said.

Comparatively strong economy

Moody’s affirmed Costa Rica’s B2 (non-investment grade) long-term bond credit ratings due in part to the country’s “comparatively strong economy,” the company said.

“Costa Rica’s economy is characterized by sustained and stable growth, averaging 3.6% annually from 2010 to 2019,” they wrote. “The country’s long term economic outlook remains strong.

“Costa Rica has one of the most stable economies in Latin America and this year’s downturn will be only the third recession in the last 60 years.”

Moody’s also noted that Costa Rica’s economy, once reliant on agriculture, is now more diversified with focuses on tourism and technology.

Costa Rica has announced its intentions to grow industrial hemp, attract wealthy retirees, and encourage the science and health technology sectors as avenues for economic recovery.