Fitch Downgrades Costa Rica Rating To 'Negative'

by Amanda Banks, Tax-News.com, London

02 May 2003

International ratings agency, Fitch has recently downgraded Costa Rica's sovereign rating from 'Stable' to 'Negative' in response to concerns over the country's fiscal problems in the last few years.

The Costa Rican government has accumulated a high fiscal debt burden as a result of declining tax revenues and high levels of spending, and given the nation's slow rate of growth in recent years, these factors combined to produce a general government debt of 50% of GDP by 2002. Consequently, the fiscal deficit had climbed to 4.3% of GDP by the end of last year.

To address this problem, the Pacheco administration devised a plan aimed at expanding the tax base and increasing the government's tax revenues. This came in the form of the temporary Fiscal Contingency Plan for 2003, which had the specific intention of increasing tax revenues by 1 percentage point of GDP. In addition, the Permanent Fiscal Reform plan aims to increase the tax base, minimise tax exemptions and impose a value added tax, which it is hoped will raise revenues by a further 2% of GDP.

The Fitch study also found that Costa Rica has left itself open to the harmful effects of volatility in the currency markets as a result of a limited foreign exchange reserve and a high level of dollar denominated debt.

However, to Costa Rica's credit, Fitch did note that the country benefited from having a diverse export base as a result of a stable level of foreign direct investment (FDI). The ratings agency also praised the country's strong democratic institutions.

Nevertheless, according to Fitch, Costa Rica's improvement will depend on reform of the offshore banking sector particularly in relation to regulation, further tax reform and a commitment to privatisation programmes.

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