The approval of the legislative plenary of the bill that authorizes the government of Costa Rica to issue debt securities in the international market for US$5 billion, popularly known as “eurobonds”, reduces uncertainty about the financing capacity in the next three years, says Fitch Ratings.
In a statement issued this week, the risk rating agency considered that financing needs will remain high given the concentration of debt maturing between 2023 and 2026, “but the solid fiscal performance and the government’s commitment to promoting this in the framework of the Extended IMF Facility (SAF) should further alleviate liquidity pressures.”
With 53 of the 57 deputies and in a first debate, the Legislative Assembly approved at the end of November the issuance of external bonds equivalent to 7.2% of the gross domestic product (GDP) forecast for 2022, with US$1.5 billion in the first and second half of 2023, US$1 billion in 2024 and US$1 billion in 2025.
According to Fitch Ratings, the lower financing needs could ease the rapid increase in government interest payments, although this will also depend on global financial conditions.
“We forecast central government debt to decline to 63.8% of GDP in 2022 from 68.0% in 2021. This marks a sharp reversal of the steady fiscal deterioration that led to debt/GDP nearly tripling between 2008 and 2020″.
Furthermore, a decline is expected over the next five years, reflecting a better primary balance and a significantly improved real interest rate differential relative to growth.
The agency forecasts real GDP growth of 4.2% in 2022, supported by external demand and resilient domestic consumption despite relatively high unemployment (12% in September) and inflation, which reached 12.2% in August, but decreased to 8.99% in October.
Meanwhile, it forecasts that by 2023 it will slow down to 2.7% as external demand falls.
It also believes that the approval of the global bond issuance will ease external financing pressures, as previous restrictions led the public sector to be a net buyer of foreign currency rather than a provider, resulting in a depreciation of the colón.
UNCERTAINTY ABOUT FINANCING CAPACITY
The November approval is the first since Congress authorized just US$1.5 billion of issuance in 2019 in response to a request for US$6 billion over six years.
Congressional control over foreign market issuance and multilateral lending had caused uncertainty about the government’s financing capacity, which has had broader macroeconomic implications in the past.
“This uncertainty has not completely disappeared, as 2024 and 2025 issuances are conditional on meeting fiscal targets (including primary balance, debt/GDP, and interest/GDP) and government efforts to address evasion by investing in scanners at customs and improving tax administration through digitization,” Fitch Ratings said in its analysis.
The risk rating agency anticipates that the government’s financing needs will remain relatively high (above 9% of GDP until 2025) given the short-term debt service schedule.
Financing in 2022 has come mainly from the domestic market and multilaterals. Along these lines, Congress has approved US$1.5 billion in multilateral loans for 2022. The recent approval of external issues, together with a reduction in the fiscal deficit, could reduce pressure on prices in the domestic market, the agency anticipated.
With information from Bloomberg Línea