Caribbean & Central America - January 2023

Costa Rica’s fiscal deficit has fallen after ballooning for years, and lawmakers have approved an external bond issuance after the International Monetary Fund (IMF) completed a successful third review of its agreement with the country.

The IMF concluded its review under the Extended Fund Facility (EFF) on 14 November, according to a statement from the organisation, which lauded authorities for “taking important steps to strengthen their economic reform program”. Then there was more good news for President Rodrigo Chaves on 25 November, when lawmakers approved the issuance of up to US$5bn in Eurobonds over the next three years. These are intended to cover upcoming financial obligations, such as a US$1bn debt repayment due in early 2023, and will be issued in four tranches.

Approval for issuances requires a two-thirds supermajority in the unicameral chamber, which last gave the greenlight to a bond issue in 2019. Uncertainty over financing has affected borrowing costs in recent years and, while the later tranches of bonds are subject to hitting fiscal targets, the approval will help to improve confidence. And on 5 December, the finance ministry released encouraging figures which showed that, as of October 2022, Costa Rica’s deficit was ¢798.0bn (US$1.3bn), equivalent to 1.8% of GDP. This represents a reduction of two percentage points compared to the same period in 2021, and the Chaves government claims that the figure is the lowest since 2013.

Commenting on the developments, ratings agency Fitch Ratings said that Costa Rica is outperforming both its expectations and the EFF targets. The country recorded a primary surplus of 2.3% of GDP from January-October 2022, its highest since 2008, compared to a 0.3% primary deficit in 2021, said Fitch, and the agency struck an optimistic tone about the future in a statement published 5 December. “Financing needs will remain elevated given the concentration of debt maturing between 2023-2026, but robust fiscal performance and the government’s commitment to furthering this under the IMF Extended Fund Facility (EFF) should further ease liquidity pressures,” it said. Fitch also said that lower financing needs could help to cut government interest payments, which cost the equivalent of 4.1% of GDP according to the latest finance ministry figures and are a major cause of the country’s negative fiscal balance, but the agency warns that this depends on the state of the global financial markets.

Fitch continues its rosy assessment by forecasting that central government debt will fall from 68.0% in 2021 to 63.8% in 2022, reversing the “steady fiscal deterioration that led to debt/GDP almost tripling between 2008 and 2020,” with a downward debt trajectory for the next five years. It also forecasts real GDP growth of 4.2% in 2022, slowing to 2.7% in 2023. 

Pressure over social spending

Overall the outlook for Costa Rica’s public finances appears largely positive given recent developments, but President Chaves will likely face pressure from civil society groups pushing for more social spending, which has fallen due to fiscal pressures in recent years.