Government optimistic despite credit downgrade

The finance ministry reacted optimistically Tuesday to the news that a major financial services firm had downgraded the country’s credit rating.

The ratings came from Moody’s Investors Service, Inc. which downgraded Costa Rica’s government bond rating to Ba1 from Baa3. Moody’s has also changed the outlook to stable from negative.

Later Tuesday, Moody’s downgraded the ratings of the two major state banks because, it said, they were closely linked to the government.

The result will be that Costa Rica will have to pay more to borrow money. But the credit downgrade also provides ammunition for those who would seek cuts in the national

budget and more taxes.

Helio Fallas, the minister of Hacienda, in a prepared statement said that the current government had inherited the financial situation and that Moody’s did not take into consideration actions that have been taken in the last three months.

Moody’s said the rating action recognized institutional weakness, as evidenced by continued political obstacles to comprehensive fiscal reform. Several attempts in recent years to address Costa Rica’s growing fiscal deficits and debt have not brought these levels lower, it said, adding that the new Luis Guillermo Solís administration, which took office May 8, has indicated it will only gradually introduce fiscal consolidation.

Solís has said he will not seek new taxes for the first two years of his term, Instead, his administration would concentrate on increasing tax collection, he said.

Moody said that as a consequence of inaction, the firm expects the current large fiscal deficits and increasing debt burden to continue for the next few years. The fiscal deficit has averaged 4.5 percent of gross domestic product since 2009, largely driven by spending growth, and is expected to reach 5.8 percent in 2014 and 6 percent next year, it said. The high deficits have materially worsened Costa Rica’s debt burden, with debt to gross domestic product ratio expected to rise close to 40 percent this year, compared to 25 percent in 2008, Moody’s added.

Fallas said that the government would present to the legislature tax reform seeking a value-added tax by the end of the year. He also noted that the central government has frozen hiring except in the educational sector.

Fallas also noted that the downgrade was expected and that the government would redouble efforts to regain the better rating.

Moody’s was not as optimistic. The firm said:

“Today’s downgrade reflects our expectations that material fiscal improvements are unlikely in the next one to two years. A negative consequence of Costa Rica’s entrenched democratic tradition has been the cumbersome process of consensus-building. For the past few administrations, the government’s weak position in congress has delayed approval of legislation because of the need to forge ad-hoc alliances. Consequently, efforts to approve significant fiscal reforms have been impeded.

We expect continued political obstacles to comprehensive fiscal reform during the Solís administration, in office since May 2014. The government aims to introduce new revenue measures by early 2015, but successful implementation will be difficult and the impact on the fiscal deficit insufficient to undo the rise in the debt burden. We expect that the current government will only gradually introduce fiscal reforms going forward.”

Moody’s also said that it expected fiscal deficits to average 6 to 7 percent in 2015 and 2016 because of current expenditures.

Even as news of the action by Moody’s was circulating through financial circles, lawmakers voted to approve a $450 million loan with the  Banco Interamericano de Desarrollo to improve the transportation infrastructure. Among other projects will be reinforcement of breakers at Caldera, improvements of the ferry stations in Paquera and Playa Naranjo on the Nicoya peninsula as well as a string of road improvements.moody091714

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