New York, June 02, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Costa Rica's ratings
to negative from stable. Concurrently, Moody's has affirmed
Costa Rica's B2 long-term issuer and senior unsecured bond
ratings.
The negative outlook reflects Costa Rica's increased funding risks
due to higher borrowing requirements resulting from pandemic-related
economic and fiscal shocks.
The affirmation of Costa Rica's B2 rating takes into account the
sovereign's higher-than-peer's wealth levels
and its dynamic economy. Costa Rica also benefits from comparatively
strong institutional governance indicators.
Costa Rica's foreign currency bond ceiling remains unchanged at
Ba3; the foreign currency deposit ceiling remains unchanged at B3;
and the local currency bond and deposit ceilings remain unchanged at Ba1.
The short-term foreign currency bond ceiling and the short-term
foreign currency deposit ceiling remain unchanged at Not Prime (NP).
RATINGS RATIONALE
RATIONALE FOR NEGATIVE OUTLOOK
INCREASED FUNDING RISKS RESULTING FROM PANDEMIC-RELATED SHOCKS
The decision to change the outlook to negative reflects the expected impact
on Costa Rica's budget deficits , and the related increased
risk of funding pressures, resulting from the coronavirus shock.
Moody's considers this shock as a social risk under its ESG framework.
The pandemic has led to a sharp recession and higher fiscal deficits which
will require increased borrowing from the government both this year and
next. For 2020 the government will rely heavily on funding from
official sources but next year's borrowing will require tapping
international markets, where spreads today remain prohibitively
high.
Moody's expects the economy will fall 4% in 2020, with
most of the drop in growth felt in the first half of 2020, and that
Costa Rica won't return to positive year-on-year growth
until the first quarter of 2021. Real GDP is expected to recover
in 2021, advancing by about 3%, but will be insufficient
to make up for the lost economic output this year.
The recession, only the third in over half a century, will
lead to higher fiscal deficits due to rising interest costs and pandemic
related-spending. Moody's now expects the 2020 fiscal
deficit to reach 9.7% of GDP and further expects the deficit
to fall only moderately in 2021 to 8.4% of GDP. This
will contribute to a rise in public sector indebtedness that is higher
than what was anticipated when the rating agency lowered the country's
sovereign rating to B2 early this year and add to the medium term challenges
of containing further erosion of the government's balance sheet
and the burden of interest payments on its relatively small revenue base.
Higher fiscal deficits will push government borrowing requirements to
close to 15% of GDP in both 2020 and 2021, a historically
high number. For 2020 the government plans to rely heavily on multilateral
funding as it expects no access to international capital markets but 2021
will require a return to international private funding.
The rating agency estimates this year's funding needs at 14.7%
of GDP, four percentage points of GDP higher than pre-pandemic
forecasts. Multilateral official lending will be a key source of
funding in 2020, representing 36% of all government borrowing
compared to only 13% in 2019. On April 29 the International
Monetary Fund (IMF) approved $504 million in emergency assistance,
adding to loans from the Inter-American Development Bank and the
Central American Bank for Economic Integration.
Moody's expects 2021 funding needs to remain similar to this year's
level but with a greater reliance on international capital markets.
The government expects to issue about $1.5 billion,
or 2.7% of GDP, in international capital markets next
year. Sovereign spreads on external funding stand at close to 800
bps, compared to pre-crisis levels of 400-500 bps.
If interest rates do not return to prior lows the government will likely
need to increase its domestic funding to over 10% of GDP,
testing the ability of the local financial system to meet increased government
borrowing requirements and raising the risk of levels of funding stress
not consistent with a B2 rating. In 2018 lack of access to domestic
and international funding led the government to request an emergency loan
from the central bank.
RATIONALE FOR AFFIRMING THE B2 RATING
COMPARATIVELY STRONG ECONOMY AND INSTITUTIONS SUPPORT CURRENT RATING
Despite the current coronavirus-related recession Costa Rica's
economy is characterized by sustained and stable growth, averaging
3.6% annually from 2010 to 2019. The country's
long term economic outlook remains strong. Costa Rica has one of
the most stable economies in Latin America and this year's downturn
will be only the third recession in the last 60 years. In that
time period Costa Rica's economy has transitioned from simple agricultural
exports, to tourism, light maquilas, and more recently
business outsourcing and medical technology exports. Costa Rica's
GDP per capita (PPP) at $18,702 in 2019 is more than double
the B-rated median of $7,702 and its $62 billion
economy is larger than the $26 billion B-median.
Costa Rica further benefits from economic and market diversity.
Historically dependent on agriculture, farming is now one of the
smaller sectors in the economy. Over the past decades, the
country has made significant strides in diversifying its productive base
by nurturing high-tech and service-based sectors such as
consumer electronics, finance and tourism. Currently,
Costa Rica's largest sectors are healthcare and education, professional
services, which spans scientific and technology sectors, and
manufacturing, together accounting for about 40% of economic
output.
Exports in Costa Rica are generally more diversified than in most other
Latin American countries. Using data from the MIT's Observatory
of Economic Complexity, which looks at the diversity of products
and export markets, Costa Rica ranked 49 out of 125 countries and
third overall in Latin America in terms of economic complexity in 2017,
the latest available data.
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.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental considerations present moderate risks to Costa Rica's credit
profile. Lower crop yields because of climate events can harm the
agricultural export sector. The impact of climate change has recently
been cited by the central bank as potentially having a material impact
on economic growth. These considerations have been incorporated
into our assessment of both economic strength and susceptibility to event
risk.
Social considerations, historically not material to Costa Rica's
credit profile given a long history of stable governments and democratic
institutions, will rise due to the impact of the coronavirus pandemic.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. For Costa Rica the pandemic will lower growth and further
deteriorate government finances, impacting credit metrics and increasing
the risk of social protests. Social risks may also materialize
if future fiscal adjustments were to severely affect popular social programs
and pensions and if that led to widespread protests.
Governance considerations have a moderate to high impact on the credit
profile as the political inability of several administrations has resulted
in a fiscal crisis that will likely require significant fiscal consolidation
and structural reforms.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
Given the negative outlook, a rating upgrade is unlikely.
The outlook could return to stable if the government effectively implements
structural budgetary adjustments that ease funding risks and reduce fiscal
deficits to limit the worsening in government debt indicators and improve
market confidence leading to more sustainable cost of funding.
WHAT COULD CHANGE THE RATING DOWN
Prospects of continued fiscal deterioration that result in higher government
debt metrics than what Moody's currently projects, as well as continued
market access challenges and higher funding costs, could lead to
a rating downgrade. Evidence of stress in the banking system,
or a significant increase in the level of financial dollarization could
also place downward pressure on the rating.
GDP per capita (PPP basis, US$): 17,566 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.7% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2% (2018
Actual)
Gen. Gov. Financial Balance/GDP: -5.8%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2018 Actual)
(also known as External Balance)
External debt/GDP: 48% (2018 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 28 May 2020, 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 decreased. The issuer's
fiscal or financial strength, including its debt profile,
has decreased. The issuer has become increasingly susceptible to
event risks.
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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
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
Yves Lemay
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
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
