Caribbean & Central America - February 2021

Costa Rica appears to have made some progress in finding a solution to its fragile fiscal position, but ratings agencies warn the danger has not passed.

On 21 January Costa Rican authorities released better than forecast fiscal results for the end of 2020, with a fiscal deficit of 8.1% and a debt-to-GDP ratio of 67.5%. The fiscal deficit is up from 6.94% of GDP in 2019, but less than the official forecast of 9.2% and the 9.5% estimated by the Organisation for Economic Co-operation and Development (OECD) in a December 2020 report. According to official figures, as of December 2020 central government debt totalled ¢24.29bn (US$39.6bn), equivalent to 67.5% of GDP, of which 76.2% is domestic and 23.8% is external. the better than feared results are encouraging, but they are still cause for concern. 

President Carlos Alvarado thinks that one way of getting a handle on the financial shortfall is through making a deal with the International Monetary Fund (IMF). As a result, there was cause for celebration in government circles on 22 January, when officials announced a staff-level agreement with the IMF for a three-year Extended Fund Facility (EFF) worth around US$1.75bn. The programme, which awaits approval by the IMF management and executive board, as well as Costa Rica’s national assembly, aims to boost macroeconomic stability, support a recovery from the economic crisis derived by the coronavirus (Covid-19) pandemic, and “help promote inclusive and sustainable growth, including through innovative digitalisation and climate-change mitigation and resilience building”, according to the IMF.

The aim is to achieve a primary fiscal surplus of 1% of GDP by 2023 and reduce public debt, said the IMF. Finance Minister Elián Villegas told local media the aim is to bring the debt down to 50% of GDP by 2035. Proposed measures to boost the tax intake include a 0.5% tax on houses worth over ¢150m while 14 state-owned companies, such as the postal service and the electricity utility, will contribute up to 30% of their profits to paying government debt for four years, among other things. Other measures include proposed customs reforms which aim to reduce tax evasion and contraband while congress is also discussing a bill on public employment which would regulate salaries in the state sector.

While the government hailed the IMF agreement as a first step, the challenge is far from over - particularly in securing its approval in the deeply fragmented 57-member unicameral national legislature in which the ruling Partido Acción Ciudadana (PAC) has just ten seats. In interviews with national daily La Nación, published on 27 January, analysts for international credit ratings agencies, Moody’s Investors Service, Fitch Ratings and Standard & Poor’s (S&P) all highlighted as the “main obstacle”, the process of getting the programme and associated reforms, approved by the legislature. A 14 December 2020 statement by Fitch highlighted as a sign of the legislature’s “fraught relationship with the executive”, legislators’ refusal to approve a US$245m loan from the Inter-American Development Bank in November 2020.

Meanwhile in the La Nación article Moody’s analyst, Gabriel Torres, underlined the gravity of the situation, warning of the high risk of an economic shock. “The IMF is the last chance Costa Rica has before a big crisis and a possible default”, said Torres. “If [the plan] is not approved, the market will be spooked”, Torres added. The December 2020 Fitch statement also warns that Costa Rica is not out of the woods even if an IMF deal is approved, citing a “wide fiscal deficit, high borrowing costs and post-pandemic recovery challenges” (see sidebar).

• Economic recovery?

The latest figures from Costa Rica’s central bank’s (BCCR) monthly economic activity index (Imae) show signs of recovery, recording a 6.5% year-on-year decrease in November 2020, the smallest fall since the start of the pandemic back in March. However, Fitch believes that significant fiscal adjustment is needed because of the differential between GDP growth and borrowing costs. The agency said Costa Rica should aim for a 2.5% primary fiscal surplus by 2025 to stabilise the debt ratio.