New York, December 08, 2021 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of Costa Rica's ratings to stable
from negative. Concurrently, Moody's has affirmed Costa Rica's
B2 long-term issuer and senior unsecured bond ratings.
The change to a stable outlook reflects:
• Gradual deficit reduction and lower funding needs resulting from
a recovering economy
• Expectations that the current International Monetary Fund (IMF)
program will support structural policy changes by the next administration
The affirmation of Costa Rica's B2 ratings considers the sovereign's relative
wealth levels and a dynamic economy balanced by the decade-long
rise in the government's main debt metrics.
Costa Rica's local and foreign currency country ceilings remain unchanged.
The Ba1 LC ceiling, four notches higher than the sovereign rating,
reflects limited government intervention in the economy and a history
of respect for the rule of law. The Ba3 FC ceiling, two notches
below the LC ceiling, reflects the risk of potential transfer and
convertibility controls in the event of a default given the high level
of domestic dollarization.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO STABLE FROM NEGATIVE
RECENT DEFICIT REDUCTION AND LOWER FUNDING NEEDS
Moody's forecasts that Costa Rica's fiscal deficit this year
will be 5.8% of GDP, a large number albeit lower than
both last year's result (8.1% of GDP) and that we
forecasted in early 2021 (7% of GDP). The lower deficits
are the result of faster economic growth and increased revenues.
These trends have supported a reduction in overall government funding
needs easing refinancing pressures.
Real GDP growth will be 5% this year and Moody's forecasts
4% growth in 2022, as the economy recovers from the 2020
Covid -induced recession. Costa Rica has a long history
of adapting to economic shocks and last year's recession was only
the third in over 50 years. Moody's expects that Costa Rica
will return to a 3% average growth after 2023.
Faster economic growth will help raise government revenues to 15%
of GDP by 2023, about 1% of GDP higher than the pre Covid
average and the resulting lower deficits will help reduce funding needs
relative to prior years. We estimate that Costa Rica's gross
funding needs will drop to close to 11% of GDP in 2021-2022
after averaging over 13% of GDP in 2018 and 2019. Reduced
financing pressures will be further assisted by increased borrowing from
multilateral lenders, which usually lend at rates lower than market
funding. Moody's estimates that close to 40% of 2022
government financing needs could be met by the IMF and other multilateral
organizations.
EXPECTATIONS IMF PROGRAM WILL SUPPORT FISCAL CONSOLIDATION UNDER NEXT
ADMINISTRATION
In March of this year the IMF's board approved a three-year
$1.8 billion (2.8% of GDP) arrangement under
the Extended Fund Facility (EFF), a program targeted to countries
seeking to correct structural imbalances over an extended period.
The EFF program was approved in July by Costa Rica's unicameral
legislative Assembly. Approval by the Assembly was an important
signal of political support, with 44 of the Assembly's 57
members voting for implementation.
The main goal of the program is gradual fiscal consolidation, aiming
for a 1% primary surplus by 2023. While some slippage is
likely, and Moody's forecasts a smaller but still positive
primary result of 0.7% of GDP, Moody's expects
that Costa Rica will continue to gradually reduce its deficits as stated
under the program even with a government change. Disbursements
under the program, spread out over the life of the agreement,
are contingent on meeting the agreed upon targets.
Costa Rica's next presidential elections are due in February 2022
with a new administration assuming office in May 2022. The next
government will inherit an existing IMF program, requiring it to
meet existing fiscal targets. Regardless of political orientation,
Moody's expects that the EFF program will be followed through by
the incoming authorities.
RATIONALE FOR AFFIRMING THE RATINGS AT B2
Costa Rica's B2 ratings reflect the balance of a relatively wealthy
and dynamic economy and relatively strong institutions with the large
increase in the country's main debt metrics since 2010.
The country's long term economic outlook remains strong as the economy
continues to transition from simple agricultural exports, to tourism,
light manufacturing, and more recently business outsourcing and
medical technology exports. Costa Rica's GDP per capita (PPP) at
$20,268 in 2020 is more than four times the median of similarly
rated countries and its $64 billion economy is also larger than
rated peers.
Costa Rica also compares favorably to other sovereigns in the region on
measures such as government effectiveness, rule of law and control
of corruption. Costa Rica's democracy is the oldest in the region.
These features of the country's institutional makeup are supportive of
the country's credit risk profile because they speak to institutional
continuity and political stability, elements that tend to be correlated
with policy predictability.
Costa Rica's B2 ratings also reflect the political difficulties
in the last decade to reign in high deficits, which increased debt
from 28% of GDP in 2010 to a forecast 70% this year.
Costa Rica's debt burden, measured both against GDP and government
revenues, is among the highest of all rated peers. And the
country's debt affordability is particularly weak, with interest
payments representing over 30% of all government revenues,
one of the highest levels among rated sovereigns. The high interest
burden increases funding risks for the country in the event of a sudden
or sharp rise in interest rates.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Costa Rica's ESG Credit Impact Score is moderately negative (CIS-3),
reflecting moderate exposure to environmental and social risk, and
a moderately negative governance issuer profile score with limited fiscal
policy effectiveness.
Costa Rica's exposure to environmental risks is moderately negative
(E-3 issuer profile score), related to physical climate change
and natural capital erosion. Lower crop yields because of climate
events can harm the agricultural export sector, and tourism revenue
may be affected by rising sea levels and increased storm severity.
Exposure to social risks is also moderately negative (S-3 issuer
profile score). Social considerations historically were not material
to Costa Rica's credit profile given its long history of stable governments
and democratic institutions but attempts to reduce high fiscal deficits
have encountered significant social resistance in recent years.
Popular demands to reduce perceived inequalities and high rates of violence
will continue to challenge domestic policy choices.
The influence of Governance on Costa Rica's credit profile is moderately
negative (G-3 issuer profile) and risks are mainly related to the
political inability of several administrations to address a growing fiscal
crisis that will require significant fiscal consolidation and structural
reforms. Costa Rica has struggled for almost 10 years to reduce
high fiscal deficits, and several previous reform attempts were
stymied by political differences.
GDP per capita (PPP basis, US$): 20,269 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -4.5% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.9%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -8.1%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.2% (2020 Actual)
(also known as External Balance)
External debt/GDP: 51.7% (2020 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 03 December 2021, a rating committee was called to discuss the
rating of the Costa Rica, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has materially increased. The issuer has become less susceptible
to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Upside rating potential may result from a continued drop in fiscal deficits
that supports declining debt metrics. Approval and implementation
of long term sustainable fiscal structure that reduces the risk of future
increases in debt metrics will also support a positive rating action.
WHAT COULD CHANGE THE RATINGS DOWN
A negative rating action may result from fiscal deterioration that results
in higher government debt metrics than we project, market access
challenges and higher funding costs. Evidence of stress in the
banking system could also strain the rating. Abandonment of the
IMF EFF program that leads to a funding crisis due to lack of market funding
access could also lead to a negative rating action.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
