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Standard & Poor's Ratings Services lowered its long-term foreign and local currency sovereign credit ratings for Costa Rica due partly to a lack of tax reform.
The ratings were lowered from 'BB' to 'BB-' and the outlook is negative. At the same time, the agency affirmed its 'B' short-term foreign and local currency sovereign credit ratings.
The downgrade reflects continued fiscal deterioration that has resulted in a growing debt burden and rising interest payments, the agency said. It added that the combination of persistent spending pressures and lack of tax reform has gradually weakened the country's public finances and raised its vulnerability to external shocks.
The ratings agency said that it believes Costa Rica is unlikely to pass a substantial fiscal reform in the near future due to the country's fragmented Congress and the protracted process for agreeing upon legislation. As a result, the agency expects that Costa Rica's general government fiscal deficit will continue increasing this year and surpass seven percent of gross domestic product (GDP) in 2017, which would boost net general government debt above 45 percent of GDP.
Per capita GDP growth is likely to be 2.6 percent this year, not enough to generate the added tax revenues that could help stabilize the fiscal deficit, S&P said.
The agency said that there is a one-in-three chance that it could lower its rating on Costa Rica over the next 6 to 18 months if the country's political leadership fails to reach consensus on fiscal measures and implement them in a timely manner to contain further deterioration in public finances.
In February, Moody's Investors Service changed the outlook on the Government of Costa Rica's Ba1 bond rating to negative from stable due to its expectation that the country's high fiscal deficits will continue.
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