In its report, S&P also affirmed a 'stable' outlook for Costa Rica, predicted robust economic growth of 6% in 2007, and stronger tax revenues for the government, helping it to reduce its external debt to about 36% of GDP this year, down from 49% in 2003.

S&P analyst Joydeep Mukherji said that the government's ratification of the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) would further boost the prospects for the Costa Rican economy.

"Costa Rica's sovereign creditworthiness could strengthen with the passage of the DR-CAFTA trade agreement later this year, thanks to the positive impact the agreement would have on long-term growth," he observed.

"Better prospects for sustained GDP growth, along with a strengthening of the tax base, would accelerate the gradual, ongoing improvement in the sovereign's fiscal and debt profile," he added.

While all the other signatories of CAFTA-DR, including the United States, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, have signed and ratified the agreement, Costa Rica remains the only country to waver, following fierce protests from labour unions who fear more competition would lead to job losses and drive wages downwards.

In a bid to settle the issue, Costa Rican voters will go to the polls in September this year to decide whether they want the country to ratify the trade agreement, subject to the outcome of a review of the agreement by the country's constitutional court which is due later this month.

CAFTA-DR would eliminate tariffs on 80% of US exports of consumer and industrial goods in signatory countries, with remaining tariffs phased out over 10 years, and eliminate duties on more than half the value of US farm exports to the region. It would also expand IP protections and open telecommunications and other markets.

S&P also affirmed Costa Rica's 'B' short-term currency sovereign credit rating and 'BB+' long-term local rating.