Costa Rica’s credit rating was cut Sept. 16 by Moody’s Investors Service from baa3 to ba1, also known as junk status.
Moody’s reasons for downgrading Costa Rica’s credit rating to below investment-grade were institutional weakness in Costa Rica’s political outlook and the growing debt burden there with no end in sight. The silver lining for Costa Rica is that their rating is classified as stable, meaning no further downgrade is likely for the next 12 to 18 months.
“Several attempts in recent years to address Costa Rica’s growing fiscal deficits and debt have not brought these levels lower. The new Solis administration, which took office in May of this year, has indicated it will only gradually introduce fiscal consolidation,” Moody’s stated in the press release.
In May 2014, Costa Rica elected a new government led by President Luis Guillermo Solis, but Moody’s does not believe the new government is doing enough to fix the country’s fiscal problems. Costa Rica’s annual national deficit averaged 4.5% of GDP from 2009 to 2013, up from only 0.9% in 2004 to 2008. Moody’s expects the debt to reach 5.8% of GDP for 2014. Costa Rica’s overall national debt grew from 25% of GDP in 2008 to almost 40% in 2014, as estimated by Moody’s.
Moody’s stated that possible recourse for Costa Rica includes structural budget adjustments through increases in tax revenues and/or spending cuts. Further inaction by Costa Rica, possible bank failures, or an increase in the dollarization of Costa Rica’s economy could cause more future downgrades, according to the agency. The Costa Rican colon is down 7.1% against the dollar in 2014.
According to Bloomberg, Costa Rica’s Finance Minister and Vice President Heilo Fallas stated the current problems are the result of the previous administration and that “The current government responsibly recognizes the situation, for which the fiscal measures that have been taken in the short-term and which will be implemented in the coming months have as their goal the strengthening of public finances.”
While Moody’s recent action just now labels Costa Rica’s credit status as junk, Standard & Poor’s and Fitch ratings already classified the nation as such.