How Serious Have Costa Rica's Fiscal Problems Become?
Costa Rican Finance Minister Rodrigo Chaves announced this month that the government is planning to sell state-owned liquor distillery Fanal and a public bank in a bid to lower expenditures and use savings to pay down debt. The announcement came the same day as Moody’s Investors Service downgraded the country’s long-term issuer and senior unsecured bond ratings from B1 to B2. Standard & Poor’s credit rating for Costa Rica stands at B+ with a negative outlook, the same as Fitch’s latest rating. Why are ratings agencies taking a dim view of Costa Rica’s finances? Are the government’s plans to sell some of its assets financially significant, and what else should it do to manage the country’s ballooning deficit? What factors are driving Costa Rica’s growth, and what headwinds will the economy face in the period ahead?
Eli Feinzaig, economic consultant and chairman of the Liberal Progressive Party (PLP): “At 7 percent of GDP, Costa Rica’s fiscal deficit exceeded the government’s own projections by 0.8 percentage points in 2019, despite a 1.1 percentage-point jump in tax revenues due to the implementation of the December 2018 fiscal reform. The primary deficit jumped to 2.8 percent from 2.2 percent in 2018. Finance Minister Rodrigo Chaves’ announcements lacked credibility for the same reason that the deficit ballooned: the government has shown no taste for fiscal discipline. His proposed action plan is lacking in detail. His promise to cut tax evasion in half within two years depends on a highly unlikely timetable of events, and no particulars were provided as to how that goal could be achieved. Although the minister’s plan to concession the state-owned liquor distillery and sell a public bank are a welcome policy change, success is not guaranteed in a highly divided congress. Furthermore, with public debt hovering near 60 percent of GDP, the government is expected to raise no more than $200 million from both transactions, barely 0.5 percent of outstanding debt. With the full impact of the tax increase on economic growth to be…”Read More
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