The rating agency Standard & Poor’s (S&P) on Tuesday downgraded Costa Rica’s credit rating to “B” with a negative outlook in response to doubts about the implementation of fiscal reforms and the effect of the pandemic on the country’s economy.
“We expect a sharper contraction in Costa Rica’s GDP and further fiscal deterioration in 2020 and 2021,” the credit agency said in a statement, also pointing to uncertainty regarding the government’s recent cabinet change amid the pandemic.
The risk rating agency also expressed doubts about the commitment from President Carlos Alvarado’s government to the 2018 tax reform, saying there are “contradictory signals” from the executive branch.
This reform, aimed at containing the deficit, left the country with little margin to face the pandemic, and Costa Rica had to ask the International Monetary Fund for assistance.
In late April, the IMF approved $504 million in emergency financing for Costa Rica to help the Central American nation deal with the economic damage inflicted by the pandemic.
According to S&P, Costa Rica’s deficit could rise to 9% in 2020 without significant changes in 2021, with the possibility that the 2022 general elections will discourage a “correction.”
“We also expect the general government debt to rise to 70% of GDP in 2022,” the agency said.
S&P said that containing interest costs and taking advantage of flexible debt agreements could help Costa Rica improve its financial outlook.
Moody’s Investor Services, a United States-based financial company, also downgraded its perspective on Costa Rica this month.
Moody’s predicts Costa Rica’s economy will recover in 2021 but that the bounce back will “be insufficient to make up for the lost economic output” from this year.