NEW YORK, January 27 (Fitch) Fitch Ratings has affirmed Costa
Ricaâ€™s ratings as
--Long-term foreign and local currency IDRs at â€˜BB+â€™;
--Senior unsecured foreign and local currency bonds at
--Country Ceiling at â€˜BBB-â€™;
--Short-term foreign currency IDR at â€˜Bâ€™.
KEY RATING DRIVERS
Costa Ricaâ€™s â€˜BB+â€™ IDRs reflect the following key rating
--Costa Ricaâ€™s ratings are supported by its political
stability and strong human
development and governance indicators relative to peers. The
to attract large foreign direct investments (FDI) inflows into
manufacturing and service sectors contribute to steady GDP
growth rates and
solid financing of current account deficits.
--Growth in Costa Rica is projected to pick up to an average 4%
of GDP in the
coming two years from 3.5% in 2013, mostly driven by an expected
recovery in the
U.S., its main trading partner. Risks to growth are mostly
domestic, as rising
uncertainty related to the deteriorating fiscal situation could
business and consumer confidence.
--High structural fiscal deficits represent a credit weakness
for Costa Rica.
The general government deficit widened to an estimated 5.1% in
2013 from 4.4% in
2012. Government financing needs at 10.6% of GDP will remain
higher than the
â€˜BBâ€™ category in 2014-2015, also fuelled by a hefty
However, a captive domestic investor base and access to
are expected to mitigate financing risks.
--Consolidated general government debt, which nets out holdings
debt by public pension funds, reached an estimated 32.4% of GDP
in 2013, below
the 36.2% median of the â€˜BBâ€™ category. The debt burden has
increased by 12.4pp
since 2008, reversing most of the reduction achieved between
2002 and 2008. The
incumbent government launched a national dialogue to gradually
reduce the fiscal
deficit to 3% of GDP and stabilize the debt burden at 40% of GDP
by 2019. Yet,
fiscal consolidation is on hold until the end of the electoral
--The prospects of a contested runoff presidential race and a
congress after the February 2014 general elections could
challenge the next
administrationâ€™s capacity to build political support for a
reform. This is particularly likely in light of procedural rules
in Costa Rica
that provide veto power to minority parties in the legislature.
--Limited exchange-rate flexibility, quasi-fiscal losses at the
central bank and
financial dollarization will continue to constrain monetary
policy over the
forecast period. The transition to a more flexible exchange rate
a full-fledged inflation targeting regime is still uncertain.
inflation to stay within the official target band of 5% +/- 1%
owing to softer imported commodity prices and subdued domestic
--Dollarization of private credit, nearly 50% of total bank
loans, represents a
risk to banksâ€™ balance sheets. Supervisory authorities have
put in place
corrective measures but they will take several years to be fully
--Fitch forecasts that the current account deficit will average
5.2% of GDP in
2014-2015, primarily driven by a trade deficit of 13% of GDP.
FDI and government
borrowing are likely to cover the external gap without exerting
The Stable Outlook reflects Fitch's assessment that upside and
downside risks to
the rating are currently balanced. The main risk factors that,
collectively, could trigger a positive rating action are:
--Greater political consensus to address structural fiscal
imbalances leading to
material fiscal consolidation and favorable debt dynamics;
--Increased monetary and exchange rate flexibility that enhances
shock-absorption capacity of the economy
The main risk factors that, individually or collectively, could
negative rating action are:
--Sustained large fiscal deficits that cause a marked
deterioration in debt
dynamics and emergence of fiscal financing constraints;
--Weakening of the macroeconomic policy framework that reverses
--A marked deterioration in the political and business
environment that impair
FDI and growth prospects.
The ratings and Outlooks are sensitive to a number of
--Fitch's base-case scenario assumes an economic recovery in the
therefore a continuation of trade and FDI flows to Costa Rica.
--Fitchâ€™s projections assume that budget deficits will remain
elevated over the
next two years in the absence of significant progress on fiscal
reform. In this
scenario, consolidated general government debt could reach 38%
of GDP by 2015.
--Fitch assumes that market access will remain available to
finance Costa Ricaâ€™s
high financing needs.
--Fitch assumes that the central bank will maintain its foreign
regime over the next two years.
--Fitch assumes that policymaking will not significantly deviate
current investor friendly stand under a new administration.
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