Standard & Poor's Ratings Services revised its outlook on the Republic of Costa Rica to stable from negative.
The agency said that it affirmed its 'BB+' long-term local currency and 'BB' long-term foreign currency ratings on Costa Rica.
"The revised outlook is the result of improved fiscal management over the last year," said Standard & Poor's credit analyst Richard Francis. "It also assumes passage of fiscal reform that is expected to yield up to 2% of GDP in further revenues in 2006, bringing the overall general government deficit to about 2.5%."
The general government deficit was 3.5% in 2004, down from 4.3% in 2003 and more than 5% in 2002. This deficit improvement was despite an end to temporary tax measures implemented in 2003, as the government cut expenditure and improved tax collection.
As noted, there is a high probability that fiscal reform, in debate for well over two years, will pass in the next two months under a new fast-track approach that shortens debate in the Congress and allows for a quicker vote. Most of the major parties in the Congress approve of the reform. In addition, major social security reform was approved recently, which improves the overall health of the system.
Over time, the monthly pension contribution, the number of months of contributions it takes to receive a pension, and the number of months used to calculate a pension will increase. The fiscal-consolidation efforts underway will likely reduce monetary and external vulnerabilities that have built up over the last three years.
Despite the improved outlook, Costa Rica still has a number of vulnerabilities, including a large and less-strictly supervised offshore banking sector that takes deposits mainly from residents and re-lends the funds onshore, largely in U.S. dollars. In addition, nearly 60% of local lending is in U.S. dollars. A high degree of dollarization and a crawling peg exchange-rate regime constrain monetary policy.
A change of monetary regime under stress would heighten the risk of banking-sector failures and raise the
government's contingent liability. Further efforts to strengthen the country's netary andfinancial regulatory framework could improve the sovereign's creditworthiness.
The ratings on Costa Rica are supported by the country's long-standing political stability, with stronger institutions and general respect for the rule of law than peer credits. The political stability and high levels of
education have helped Costa Rica attract significant amounts of foreign direct investment and allowed the country to become much more highly diversified, with a large increase in tourism and export revenues over the past decade.
Current account receipts now total nearly 50% of GDP. As a result, the per capita GDP, at US$4,679 in 2005, is double that of the 'BB' median.The stable outlook reflects the government's improved fiscal stance and
the likelihood that further measures will reduce the deficit more to 2.5% in 2006 while its external liquidity and relatively weak monetary stance continue to constrain its ratings. "Improved economic prospects because of the passage of CAFTA--along with further efforts to strengthen the country's monetary and financial regulatory framework--could lead to improved creditworthiness," Mr. Francis added.