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 The stable outlook on the B2 rating
reflects Moody's view that funding and liquidity
pressures will remain contained even as debt
metrics continue to rise.
- A.M. Costa Rica wire services photo.- |
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 - Published: Tuesday, February 11, 2020 - Moody's
downgrades Costa Rica's rating
By the A.M. Costa Rica staff and wire services Moody's Investors Service Monday downgraded the government of Costa Rica's long-term issuer and senior unsecured bond ratings to B2 from B1 and changed its rating outlook to stable from negative. According to Moody’s the key drivers for the downgrade were as follows: 1. High fiscal deficits leading to an upward trend in debt metrics which will remain above rating peers; and, 2. Recurring funding challenges resulting from relatively large borrowing requirements that introduce risks to Costa Rica's credit profile. The stable outlook on the B2 rating reflects Moody's view that funding and liquidity pressures will remain contained even as debt metrics continue to rise. In a related decision, Moody's lowered Costa Rica's long-term country ceilings: the foreign currency bond ceiling to Ba3 from Ba2, the foreign currency deposit ceiling to B3 from B2 and the local currency bond and deposit ceilings to Ba1 from Baa3. The short-term foreign currency bond ceiling and the short-term foreign currency deposit ceiling remain unchanged at Not Prime. Moody's said the fiscal deficits averaging over 6% of gross domestic product since 2015 have pushed government debt ratio higher than B-rated peers. “Despite fiscal consolidation measures approved in 2018, Moody's expects these adverse fiscal trends to continue. As a result, Costa Rica's fiscal deficits, debt ratios, and interest burden will remain materially higher than those of similarly-rated peers for the foreseeable future,” said the specialist in its statement. According to Moody's, the government debt is projected to to reach 63% of gross domestic product in 2020, higher than the 56% of the B peer median. “Because the Costa Rican government collects comparatively less revenues than its peers, its government debt-to-revenue ratio will reach 415% in 2020 compared to 263% for peers,” said the specialists in its statement. “Interest payments have been steadily increasing, and will account for over 30% of government revenues this year compared to only 10% for peers. Although Moody's expects the 2018 fiscal reform to reduce deficits, this will happen only gradually, the rating firm said. The company said that last year Costa Rica's fiscal deficit reached 7% of gross domestic product, more than double the median for similarly rated countries. In 2020-22, Moody's forecasts only a small decline, with annual deficits coming just under 6% of gross domestic product. Based on current trends, Moody's projects debt will continue to rise, approaching 70% of GDP by 2022, it said. The estimate of the deficit was at odds with what the government had announced, which was a deficit in 2019 of 6.3%. Moody's added: The fiscal reform approved in 2018 aimed to reduce the overall fiscal deficit through a combination of increased revenues and slower current expenditure growth. As full implementation will be a multi-year process that will span more than one administration, execution risks are material. Moreover, the 2019 fiscal results highlight the difficulties Costa Rica faces in its fiscal consolidation efforts. Despite an 8% increase in overall revenues last year, the government deficit was more than 1% of gross domestic product wider than the authorities' original target, driven by increased interest costs and higher capital spending. According to Moody’s, a combination of high fiscal deficits and a large debt repayments pushed the government's overall funding needs to over 12% of gross domestic product last year. Despite a small drop for 2020, funding needs will remain high, it said. Moody's expects financing requirements close to 11% of gross domestic product in 2020, and projects average annual funding needs to remain above 12% in 2021-22, nominal amounts that will test markets' willingness and ability to cover the government's financing needs, said the ratings firm in its statement. According to Moody’s, relatively large funding needs will pose recurrent financing challenges to the government. Even though funding rates have declined since the government experienced a very tight liquidity position in 2018 - a condition that required an emergency loan from the central bank - Costa Rica's international borrowing rates remain among the highest in the region, exposing the government to changes in market appetite for its debt. Costa Rica's main funding source is local with the domestic financial markets providing three-quarters of all government funding, Moody's noted. As the country's domestic markets lack the size and depth to meet all government funding needs over time, Costa Rica must periodically tap international capital markets. In the past, when access to international capital markets was constrained, it has resulted in pressures on domestic interest rates as the government increased its local market funding, the firm said. The recommendation to assign a stable outlook reflects reduced funding concerns relative to 2018. “Although Moody's expects debt to continue to rise and fiscal deficits to fall only gradually, Costa Rica has shown improved market access in the last year, and Moody's base scenario is that this will continue,” the firm said. Given the recent downgrade, a rating upgrade is unlikely, said the firm. The current rating would be strengthened if the government effectively implements structural budgetary adjustments that materially reduce fiscal deficits, limiting the expected worsening in government debt indicators and, as a result, easing funding risks, it added. Prospects of continued fiscal deterioration that result in higher government debt metrics than what Moody's currently projects, as well as a deterioration in market access conditions associated with materially higher funding costs, could lead to a negative rating action, the firm warned. 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, it added. According to Moody’s on Feb. 5, a rating committee was called to discuss the condition of the Costa Rica government. The main points raised during the discussion were that the country's fiscal or financial strength, including its debt profile, has materially decreased, the firm said, adding that Costa Rica has become increasingly susceptible to event risks. The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019, said the firm. According to the report on the country's balance, made by the Ministry of Finance in January, the primary deficit increased from 2.32% of the gross domestic product in 2018 to 2.78% in 2019. The primary deficit involves the loss in paying direct expenses of the government. The full financial deficit includes an additional 4.18 percent of the gross domestic product that comes from paying interest on loans. This primary deficit increase, according to the government, was due to: - Increase in investment in new roads and maintenance of current ones. - Increase in the cost of the Limón Port Administration Board to finance the restructuring. - An increase in public education investment. - Increase in investment in the Development Bank of Latin America to have access to a loan of $500 million to replace debt at a lower cost and better term. - Loans with other international banks. - Increase in the cost of capitalizing the Bank of Costa Rica due to the bankruptcy of Bancrédito. The gross domestic product is the sum of all goods and services that were transacted in the country. A good estimate for 2019 is $90 billion, according to past estimates and economic growth. That means the full governmental deficit was around $5 billion, about $1,253 for each of the nation's five million residents. -------------------- Could this rating affect the actions of foreign investors? We would like to know your thoughts on this story. Send your comments to news@amcostarica.com |
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