Costa Rica’s rating outlook revised to positive by Fitch Ratings

Investing.com -- Fitch Ratings has revised Costa Rica’s Long-Term Foreign-Currency Issuer Default Rating (IDR) outlook to positive from stable, while affirming the IDR at ’BB’. This change in outlook reflects strong growth, improvements in the nation’s external position, a gradually declining debt trajectory, and a continuation of primary surpluses.

Costa Rica’s rating is backed by structural strengths, including a high per-capita income relative to its peers in the ’BB’ category. However, these benefits are offset by high interest payments and political gridlock that hinders reforms and financing flexibility.

The country’s real GDP grew by 4.3% in 2024, driven by consumption and a dynamic export sector. Inflation remained low, averaging -0.4% in 2024, due to a strong exchange rate. Fitch anticipates average inflation to reach 1.7% in 2025, with the central bank maintaining the policy rate at 4%.

Fiscal momentum has started to slow down, with tax revenue growing only 2.4% in 2024. The central government’s primary surplus fell to 1.1% of GDP in 2024, down from 1.6% in 2023. The overall central government deficit grew to 3.8% of GDP in 2024 from 3.3% in 2023.

Fitch projects the central government to reach a 3.1% overall deficit in 2025. Medium term fiscal consolidation is expected to come from a slow reduction in the wage bill and a declining interest burden. Central government debt fell below the 60% threshold at the end of 2024, down from 61.1% in 2023.

The government has proposed revisions to the targets in the Eurobond law, which provides multi-year external borrowing authorization. The revisions are still being discussed in Congress, but Fitch expects them to be approved.

The 2024 deficit was financed through multilateral financing and the domestic market. Fitch expects a similar funding mix in 2025, with the potential addition of USD1 billion in Eurobond issuance if the external borrowing authorization extension is approved.

International reserves grew to USD14.2 billion at the end of 2024, up from USD13.2 billion at the end of 2023. This has put Costa Rica in a slight net sovereign external creditor position as of 2024.

In terms of ESG Governance, Costa Rica has an ESG Relevance Score of ’5’ for Political Stability and Rights and ’5’ for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model.

Factors that could lead to a downgrade include a fiscal policy reversal resulting in an upward debt trajectory or evidence of external liquidity stress. On the other hand, a sustained decline in the central government’s debt/GDP ratio and interest to revenue ratio or evidence of reduced political gridlock that supports progress on reforms could lead to an upgrade.

Costa Rica’s Country Ceiling is ’BBB-’, two notches above the Long-Term Foreign-Currency IDR. This reflects strong constraints and incentives against capital or exchange controls that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

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