Costa Rica’s Economic Outlook Now Stable, According to Fitch, Moody’s and S&P
Costa Rica’s economic recovery after the first waves of the Covid-19 pandemic and its fiscal improvements have recently earned it positive revisions of its credit scores. Moody’s Corporation, Fitch Ratings, and Standard & Poor’s (S&P) have revised the country’s economic outlook to stable from negative in the past months.
These are the so-called “Big Three” credit rating agencies. Costa Rican financial authorities think this reflects the progress made after the economic activity collapsed during 2020, which further complicated long overdue fiscal measures.
Fitch updated its rating for the country on March 11, 2022. “The revision of Costa Rica’s Outlook to Stable from Negative reflects the significantly better-than-expected improvements in the fiscal position and economic activity following the 2020 pandemic-related shock,” the agency stated, calling its 2021 economic outcome “robust.”
Costa Rica’s improvements
The adherence to a spending cap and the recent approval of a public-employment reform have also supported Fitch’s revision. The new public-employment law, which President Carlos Alvarado signed this month, is a sign of continued compliance with the $1,8 billion loan the country signed with the International Monetary Fund (IMF) in 2021.
“Fitch expects the better fiscal position, improved domestic borrowing costs and the ongoing economic recovery will be sufficient to place debt/GDP on a gradual downward path,” says the agency, that hopes that “this will continue under the new administration to be led by the winner of April’s second round of the presidential election.”
Even though Costa Rica’s outlook is now stable according to Fitch, its rating remains at ‘B’. ‘B’ ratings indicate that in said country there’s a default risk with a limited margin of safety. Although financial commitments are being met, in the business and economic environment there’s still vulnerability to the capacity of continued payment.
“Costa Rica’s ‘B’ rating reflects weaknesses in public finances and political gridlock that has prevented timely passage of reforms addressing these and constrained the government’s external financing capacity,” Fitch explains. The counterbalances are strong governance and higher economic development and per-capita income.
A recovering economy
Moody’s did the same as Fitch back in December 2021. The agency changed the credit score of Costa Rica from negative to stable, reflecting “gradual deficit reduction and lower funding needs resulting from a recovering economy” and expectations that the IMF program “will support structural policy changes by the next administration.”
As part of the deal with the IMF, Costa Rica committed to having a 1% primary surplus by 2023. Moody’s forecasts that it’ll be 0,7%, “smaller but still positive.” “Moody’s expects that Costa Rica will continue to gradually reduce its deficits as stated under the program even with a government change.”
In the same fashion as Fitch, Moody’s revised Costa Rica’s economic outlook to stable but kept the ‘B2’ bond rating. According to the agency’s methodology, a ‘B2’ risk grade means that the country’s bond issues are classified as speculative and that its credit risk is high. This rating also showcases the “political difficulties” to reign in high deficits.
The country’s debt increased from 28% of its GDP in 2020 to a forecast of 70% in 2021. Its debt burden “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.”
However, the long-term outlook “remains strong” while its economy transitions from agriculture to tourism, manufacturing, outsourcing, and medical technology exports. Its GDP per capita ($20,268 in 2020) is more than four times the median of similarly rated countries and its economy is larger than rated peers, according to Moody’s.
“Moderate progress in fiscal consolidation”
The last credit rating agency to update the country’s economic outlook was S&P Global Ratings, which did so on March 17, 2022. The agency modified the perspective of Costa Rica’s credit rating from negative to stable, but its rating continues at ‘B’.
The recent approval of the public employment law and the approval of the review conducted by the IMF were the reasons for the economic outlook change. Nevertheless, S&P stressed that it is difficult for Costa Rica to advance politically to apply needed fiscal reforms.
“The stable outlook reflects our expectation that, regardless of who wins the presidential election, political support for modest progress on fiscal consolidation will continue, facilitating access to external financing,” said the agency.
“On the right path”
The country’s finance minister Elián Villegas highlighted that the economic outlook revisions to stable from these agencies send a message to local and international investors that Costa Rica is on the right path to fiscal consolidation. The price for Costa Rica’s investment risk is lower, meaning that the interest rate is lower, he said.
“The rating agencies, Moody’s first and then Fitch, recognize that the agreement with the IMF, the efforts to increase collection and reduce public spending, as well as an adequate analysis of the amount of contracted debt, are the right path for an economy like Costa Rica and, therefore, the level of risk has been decreasing,” Villegas said.
Update – 03.22.22: This article was updated to include S&P’s latest analysis about the Costa Rican economy.
