Fitch cuts Costa Rica to B rating

Fitch cuts Costa Rica to B rating

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Fitch Ratings has downgraded Costa Rica to B from B+, saying widening deficits and mounting debt obligations have led to increased risks in the near term as the economy suffers from the effects of the coronavirus pandemic.

"The ongoing health crisis comes at a time when Costa Rica's fiscal space is limited and rapidly narrowing, raising risks to post-crisis debt sustainability," Fitch said in a report on Friday. "The interest bill is climbing rapidly, and the debt burden is on a relatively steep upward trajectory," it added.

Fitch gave Costa Rica's ratings a negative outlook due to "uncertain prospects" for economic growth and borrowing costs after the outbreak, it said in the report.

This year, Costa Rica will rely on loans from multilateral agencies to finance the budget. Looking ahead, however, the government could face higher funding costs in the international and domestic capital markets, Fitch said.

The rating agency expects GDP in Costa Rica to fall 4% in 2020 as containment measures against the coronavirus outbreak lead to lower demand and higher unemployment.

Domestic demand was already on the decline, thanks to high unemployment and weak private credit growth, but external demand is expected to fall as tourism comes to a halt and exports decrease.

But the economy will likely rebound and grow 2.6% in 2021, although a prolonged downturn in tourism could impact a recovery, Fitch said.

The government will lose revenues during the downturn and the fiscal deficit will rise to 9% of GDP, according to Fitch's estimates. It will also spend an estimated CRC260 billion ($458 million), or 0.75% of GDP, on recovery efforts from the health crisis, which it plans to pay for by reallocating existing funds in the budget and taking out multilateral loans, Fitch said.

As a result, the government's debt burden will approach 70% of GDP by the end of the year, up from 58.5% at the end of 2019. Government debt will also reach 471% of revenues in 2020, Fitch said.

The government's financing needs, meanwhile, will account for nearly 13% of GDP this year and will likely remain above 12% in 2021 and 2022.

Before the coronavirus outbreak, Costa Rica issued $1.5 billion in 11-year bonds in November last year to ease financing pressures for the first quarter this year. It also discussed a stand-by agreement with the International Monetary Fund (IMF) to take off more pressure.

Now the country plans to borrow up to $3.18 billion from multilateral lenders in 2020, equal to 5.2% of GDP. Other than a $500 million loan from the South American development bank CAF, the government needs congressional approval to take out loans from the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CABEI) and the IMF, according to Fitch.

"Failure to secure these external loans would lead to a fiscal financing gap, given prohibitive external market borrowing costs and limited domestic market size," Fitch said.