Fitch Assigns 'BB' Rating To Costa Rica's $250 Million Issue

by Leroy Baker, Tax-News.com, New York

16 January 2004

The international ratings agency Fitch, announced on Wednesday that it has assigned a ‘BB’ rating to Costa Rica’s recent ten-year $250 million debt issue, although the country’s outlook has been rated as ‘Negative’.

According to Fitch, the nation’s rating is supported by its “modest external indebtedness, a successful diversification of the export base through significant foreign direct investment flows, robust democratic institutions, and favorable social indicators.”

However, the ratings agency noted that the country’s outlook is constrained by its “twin deficits”, and explained that the subsequent assignment of a Negative Outlook reflects “high fiscal deficits and high level of dollarization of the banking system in the context of a crawling peg exchange rate regime,” increasing Costs Rica’s financial vulnerability.

The Fitch report observed solid economic growth last year, underpinned by strong exports by chip maker Intel, although it found that the government “was unable to use the opportunity of higher growth to consolidate fiscal accounts sufficiently.” The report also noted the government’s failure to pass key tax reforms.

“Going forward, a stabilization of Costa Rica's sovereign creditworthiness will depend on the ability of the government to tackle fiscal deficits and implement structural reform," the report argued, concluding that:

"A comprehensive tax reform, further strengthening of bank supervision, especially of off-shore banking activities, and progress on privatization would be viewed favorably by Fitch.”

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