Costa Rica is planning to come to the international bond market for the first time, seeking to issue up to $4.5bn over three years. But investors see its economy as a point of vulnerability in Central America, weakened by the US economic slowdown and grappling with fiscal fragility and uncertainties about its implementation of reforms.
Costa Rica approved a fiscal reform late last year to curb public spending. Officials have pledged to cut the primary fiscal deficit, which is now more than 2%, to zero, and then achieve a primary fiscal surplus by 2023. “We will see the full effect of the reform in 2020,” Rodrigo Cubero, president of the Central Bank of Costa Rica, told GlobalMarkets.
“When markets start seeing the turnaround in the primary balance, they will also give us confidence. Spreads on the Costa Rican debt have already been narrowing, but clearly this trend needs to continue,” he said. “We do have strong macroeconomic pillars, but the weak link was the fiscal side. So, restoring fiscal sustainability was critical to restore confidence. The fiscal reform will do the trick, but we have to make sure we implement it strictly.”
However, investors are less convinced. “Costa Rica is among the Central American countries we are most worried about, and we really think that they have to tackle the fiscal situation,” said JD Bütifoker, head of emerging markets at Voya Investment. “If the growth outlook is weaker than expected, the government will have to cut spending more than expected, with all the uncertainties related to the ability of the government to cut public wages.”
The central bank expects 2.6% economic growth this year, but some investors are sceptical. Other economists predict another weak year, at 2.2%.
“The fiscal reform is very difficult to implement because it directly reduces some of the [growth] benefits of powerful elements of the public sector,” said Joydeep Mukherji, director of Latin American sovereign ratings at S&P Global. “It is going to be a challenge to meet the targets that are established in the fiscal reform.”
The fiscal deficit, and its impact on Costa Rica’s debt dynamics and debt trajectory, was the biggest risk for the country, he added. “Costa Rica has not tapped the international bond markets (because it needs a two thirds majority in Congress to approve it). As a result, it had to roll over a lot of short term debt domestically and that has been spiralling,” Mukherji said.
Costa Rica planned to issue up to $4.5bn of bonds over three years, Bütifoker said, adding: “That would really alleviate the pressure on short term yields and the domestic bond market — but that depends on Congress approval.”