New York, December 05, 2018 -- Moody's Investors Service ("Moody's") has today downgraded the Government
of Costa Rica's long-term issuer and senior unsecured bond
ratings to B1 from Ba2 and changed its rating outlook to negative,
concluding the review for downgrade that was initiated on 18 October 2018.
The key drivers for today's downgrade are as follows:
1. The continued and projected worsening of debt metrics on the
back of large deficits despite fiscal consolidation efforts; and
2. The significant funding challenges emerging for the country
as rising debt, deficits and interest costs lead to rapidly rising
borrowing requirements
The negative outlook reflects Moody's view that fiscal consolidation
efforts present material implementation risks that could exacerbate the
country's borrowing challenges if crystallized.
In a related decision, Moody's lowered Costa Rica's long-term
country ceilings: the foreign currency bond ceiling to Ba2 from
Baa3; its foreign currency deposit ceiling to B2 from Ba3; and
its local currency bond and deposit ceilings to Baa3 from Baa1.
The short-term foreign currency bond ceiling was lowered to Not
Prime (NP) from P-3 and the short-term foreign currency
deposit ceiling remains unchanged at NP.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO B1
WORSENING DEBT METRICS DESPITE FISCAL REFORM EFFORTS
Moody's expects that Costa Rica's ongoing fiscal consolidation
efforts will be insufficient to quickly and materially reduce its high
fiscal deficits. As a result debt metrics will continue to rise
in the coming years and remain much higher than countries with Ba ratings.
Fiscal deficits averaging 5.2% of GDP since 2010 have almost
doubled Costa Rica's debt burden over that period. Moody's
estimates that by end-2018 Costa Rica's government debt will
have risen to almost 54% of GDP and 360% of revenues.
In comparison the median of B1 rated sovereigns will be 54% of
GDP but only 241% of revenues. Debt affordability is also
worsening as interest payments will consume almost one quarter of government
revenues in 2018, compared to less than 15% in 2010.
To address the high deficits Costa Rica's government has pushed
a new fiscal consolidation law which was approved by the Legislative Assembly
on December 3. But even with the new reform in place the budget
deficit will remain high in the coming years and it will take several
years even to stabilize the growth of the debt burden, longer to
make any material inroads into it. The reform aims to reduce the
fiscal deficit below 4% of GDP by 2023 through a combination of
revenue increases and spending reductions. But several of its provisions
are spread over time, and most of the forecast reduction relies
on limiting the growth of current expenditures, which will be difficult
in the face of popular opposition and in an environment of slowing growth;
Moody's expects real GDP growth to slow to an annual average of
2.5% between 2019 and 2022.
As a consequence the reduction in the fiscal deficit will take time and
the full impact of the reform will need to wait until 2022. In
the meantime, while Moody's expects the reform to narrow the deficit,
the rating agency forecasts it will remain high at close to 7%
of GDP in 2018 and rising to around 7.5% in 2019,
in contrast with official estimates which project a decline in the deficit
for next year. Moody's forecasts that the debt ratio will
rise to nearly 59% in 2019 and peak at around 65% in 2022.
RAPIDLY RISING FUNDING CHALLENGES AS BORROWING REQUIREMENTS RISE
More immediately, a combination of higher debt, large deficits
and rising interest costs have resulted in greater annual government funding
needs. Gross funding needs, which had averaged 10%-11%
of GDP prior to 2018, will be in the order of 13% of GDP
in 2018 and Moody's projects it will rise further to some 15%
in 2019, if deficit reduction targets are missed and the government
continues to increase its reliance on short-term funding.
Access to market funding at rates that are sustainable over the longer-term
has been increasingly challenging as investor sentiment deteriorated in
light of the lack of progress in addressing Costa Rica's large budgetary
imbalances. Interest rates on foreign issuance have risen particularly
fast with Costa Rican bonds today yielding almost 5% more than
comparable US debt, while a year ago the difference was only 3.6%.
Limited funding options forced the government to access funding from the
Central Bank of Costa Rica in September, in amounts close to 1.2%
of 2018 GDP. This emergency financing mechanism must be paid back
before the end of the year. The authorities' decision to use the
Central Bank facility highlights the government's diminishing options
in the face of rising funding pressures.
Despite the fiscal reform efforts which seem to have eased market volatility
somewhat, Moody's believes that the country will remain highly exposed
to adverse shifts in market sentiment in the coming years, particularly
if it fails to achieve its deficit reduction targets. Since fiscal
deficits will remain high for several years, reducing existing funding
pressures will require a reduction in both the domestic and international
interest rates Costa Rica must pay, which will be challenging in
the absence of clear and rapid progress on reform. Costa Rica's
government will rely heavily on external borrowing for the next several
years, planning to borrow up to US$6 billion, almost
10% of GDP, from 2019 to 2023.
RATIONALE FOR ASSIGNING NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that there are considerable
implementation risks associated with the government's fiscal consolidation
efforts that could further exacerbate the country's borrowing challenges
if crystallized. The strength of the government's newfound
commitment to fiscal reform remains unproven, and falling real GDP
growth will make it even more difficult to meet fiscal revenue targets.
Rising global interest rates for emerging market issuers will also pressure
funding costs higher.
WHAT COULD CHANGE THE RATING DOWN/UP
Given a negative outlook a rating upgrade is unlikely. However,
Moody's would stabilize the outlook at the current rating level if the
rating agency expected the government to adopt further structural budgetary
adjustments that limited the expected worsening in the government debt
indicators and, as a result, eased funding risks.
Prospects of continued fiscal deterioration associated with persistently
higher debt metrics and increased susceptibility market access risks would
likely lead to a negative rating action. Additionally, evidence
of stress in the banking system or a significant increase in the level
of financial dollarization could also place downward pressure on the rating.
GDP per capita (PPP basis, US$): 16,894 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.5%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -6.2%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.9% (2017 Actual)
(also known as External Balance)
External debt/GDP: 27.1% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 30 November 2018, 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 institutional strength/framework,
have decreased. The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer has become more susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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 ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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 Risk
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
