Central government tries to soften negative debt rating from Fitch

Reading about national finances is about as interesting as watching paint dry, but in the long run what a government does with its money determines how pleasant the future will be.

That is why Casa Presidencial quickly came out with an upbeat press release Wednesday when the Fitch rating organization affirmed the country’s unsecured foreign- and local-currency bonds at BB+. That rating is classified by Fitch as non-investment grade speculative.

The bottom line is that Costa Rica will have even more trouble selling its bonds to investors. The country had hoped that the People’s Republic of China would purchase $1 billion in bonds, but the Chinese declined, perhaps due to that country’s own problems.

Fitch is one of the major rating agencies on which investors depend. Everyone who issues bonds and other debt instruments wants to be AAA.

Casa Presidencial cited what it called obstruction by legislators to the passage of new taxes. It quoted Helio Fallas, the vice president and minister of Hacienda saying that tax collection had increased 10 percent last year.

Unfortunately the minister also reported that the nation’s
deficit rose to 5.9 percent of the value of the country’s gross domestic product.

The deficit was not lost on Fitch. The rating agency said:

“The negative outlook reflects adverse public debt dynamics, driven by large fiscal deficits, and legislative gridlock preventing progress on reforms to correct fiscal imbalances in a timely manner.”

It said that a 2016 deficit of 6.9 percent is likely.

Favorable factors include an improving U.S. economy and lower petroleum prices, said that agency. However, it said it doubted that the current tax proposals could eliminate the deficit.

The central government will use the Fitch report to pressure lawmakers to pass a value-added tax and higher income tax rates. But there is resistance because the Luis Guillermo Solís administration has not outlined clear steps to drastically cut the deficit.

Fallas, himself, is lobbying to purchase the Corporativo El Tobogán for $121.7 million.  And the legislature has plans for a $77 million office tower.

This entry was posted in Costa Rica News. Bookmark the permalink.