April 7, 2014 / 4:40 PM / in 4 years

Fitch: Fragmented Politics May Hinder Costa Rica Consolidation

(The following statement was released by the rating agency) NEW YORK/LONDON, April 07 (Fitch) Building political support for comprehensive fiscal reform could be challenging for the next Costa Rican government due to a high degree of political fragmentation, Fitch Ratings says. High structural fiscal deficits remain the key weakness in Costa Rica's sovereign credit profile, and it is still not entirely clear what fiscal approach the new administration of Luis Guillermo Solis will take. Fiscal deterioration poses challenges for stabilising the government debt burden and the authorities' capacity to respond to adverse shocks and future spending demands, and this may eventually erode business and consumer confidence. Solis's victory in Sunday's run-off presidential elections was widely expected after the incumbent party's candidate ceased campaigning when opinion polls gave Solis, of the opposition Partido Accion Ciudadana party, a substantial lead. However, February's general elections resulted in the greatest fragmentation in the country's history, with nine parties represented in the 57-member legislative assembly. No party has a simple majority, and legislative rules in Costa Rica give obstructive powers to minority parties. The new administration may benefit from greater public and political awareness of fiscal challenges, following attempts by the outgoing government to highlight the importance of fiscal problems in Costa Rica. In a recent document it outlined a possible roadmap to reduce the deficit by 3.5% of GDP over five years in order to stabilise the debt burden. This could provide the basis for discussion on the new administration's fiscal consolidation strategy, although no formal announcements to this effect have been made. The new administration will be inaugurated on 8 May. Costa Rica's low revenue base and rigid expenditure profile produces high structural fiscal deficits. The deficit reached 5.4% of GDP in 2013. Fiscal imbalances became more prominent in 2012 and heavy public financing needs pushed up local interest rates, forcing the sovereign to tap the international bond markets with issuance of USD1bn. Fitch affirmed Costa Rica's 'BB+'/Stable sovereign rating in January. Greater political consensus on addressing structural fiscal imbalances, leading to material fiscal consolidation and favourable debt dynamics, would be rating positive. Failure to address fiscal deterioration would put pressure on the rating. Contact: Lucila Broide Director Sovereigns +1 212 908-0898 Fitch Ratings, Inc. One State Street Plaza New York, NY Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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