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Rating Action:

Moody's upgrades Costa Rica's sovereign ratings

09 Sep 2010

New York, September 09, 2010 -- Moody's Investors Service has upgraded Costa Rica's government bond rating from Ba1 to Baa3. The outlook, which had been positive, has been revised to stable.

RATINGS RATIONALE

The main drivers for the upgrade are:

1) Our expectation that key government debt metrics will continue to be well-positioned relative Baa rated peers, despite a recent deterioration in public finances; and

2) A recently tested ability to manage external shocks and to avoid balance-of-payments crisis. Given Costa Rica's relatively high level of financial dollarization and a not-so-flexible exchange rate regime, a balance of payments or financial sector crisis had been one of Moody's concerns.

"Costa Rica's debt indicators, both external and public, have improved significantly over the past few years, a process that reflects a consolidation in public finances and decreasing government reliance on external financing ," said Alessandra Alecci, a Moody's Vice President -- Senior Analyst responsible for Costa Rica's ratings. "On the fiscal front, years of adjustments allowed Costa Rica to pursue counter-cyclical policies without a meaningful deterioration in public indebtedness," she added.

The ratio of public debt to GDP fell to around 43% in 2009, from levels above 60% just a few years ago. A similar improvement has been observed in other government debt metrics, suggesting a considerably improved ability to service debt obligations relative to the past and comparable to that of other Baa-rated countries, particularly in the region.

"An upgrade despite the recent fiscal deterioration -- the fiscal balance of the central government went from a small surplus to deficits in the order of 4.0% of GDP -- reflects Moody's confidence that policy consensus regarding fiscal responsibility will enable the authorities to take the appropriate corrective actions to ensure a reversal of public debt metrics to pre-crisis levels," explained Alecci.

Moody's anticipates that over the next couple of years, a reversal of the recent fiscal deterioration will lead to further debt consolidation. Given that the expenditure increase observed in recent years has a permanent component, a tax reform or other revenue-enhancing measures will be necessary.

On the external front, the accumulation of international reserves coupled with a government's financing strategy focused on the domestic market have resulted in lower levels of external debt and decreasing related vulnerabilities. Foreign-direct investment finances the majority of the current account deficit, a trend that is expected to continue in light of expected inflows directed to the telecom sector which Costa Rica has recently liberalized as a result of its entrance to CAFTA, the free-trade agreement with the US. Public external debt relative to GDP is expected to end 2010 below 10%, half the level recorded in 2004. The ratio of external debt to foreign-exchange reserves is now around 200% compared with levels of about 400% 10 years ago.

Costa Rica's ability to navigate through the global crisis relatively unscathed revealed an increased credit resilience. The economy experienced only a brief and shallow recession in 2009 and is now recovering. Significant capital outflows and pressure on the currency during the crisis did not compromise the country's external position. In Moody's view, the episode was an important stress test given the relatively high level of financial dollarization and a exchange rate regime that still operates within bands. Initial indications of a shift towards single-digit inflation is an encouraging sign that may facilitate the adoption of a more flexible exchange rate regime, thus eliminating another source of potential credit risk.

PREVIOUS RATING ACTIONS AND METHODOLOGIES

The last rating action affecting of Costa Rica was on August 12, 2008, when Moody's assigned a positive outlook to Costa Rica's Ba1 government bond ratings, the Baa3 foreign currency country bond ceiling and the Ba2 foreign currency bank deposit ceiling.

The principal methodology used in rating of Costa Rica was Sovereign Bond rating methodology published in September 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

This issuer did not participate in the credit rating process. The Rating Committee was provided, for purposes of the rating, access to the books, records and other relevant internal documents of the rated entity or related third party.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Alessandra Alecci
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mauro Leos
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA
Moody's upgrades Costa Rica's sovereign ratings

No Related Data.
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