Fitch Affirms Costa Rica’s Currency Ratings But Urges Passage Of Fiscal Reform

by Mike Godfrey, Tax-News.com, Washington

30 August 2004

The international rating agency Fitch Ratings has affirmed its long-term foreign and local currency ratings of 'BB' and 'BB+' respectively for the Republic of Costa Rica, although it assigned a Negative Rating Outlook.

“The Negative Outlook and the ratings reflect Fitch's concerns over Costa Rica's persistently high fiscal deficits and the high level of dollarization of its banking system, which in the context of a crawling peg regime increases the country's financial vulnerability,” noted the analysis.

A stabilization of the country’s outlook would require the passing of the long awaited tax reform package which the agency sees as critical to improving public finances and ensuring future economic growth.

However, Costa Rica has achieved strong economic growth at 6.5% in 2003, and is expected to show 4% growth this year, Fitch observed.

Last year's growth, combined with greater revenues from the contingency fiscal package (CFP) helped to rein in the central government fiscal deficit to 2.9% of GDP.

“On the positive side, Costa Rica's rating strengths include its modest external debt burden, a successful diversification of its export base, and relatively strong social indicators, distinguishing it from other countries in the region,” observed Fitch.

The agency also stated that measures to strengthen the banking system, including better scrutiny of off-shore banks, as well as reversal of dollarization would be viewed positively.

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