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Fitch cuts Costa Rica's ratings amid ongoing fiscal imbalances

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Fitch cuts Costa Rica's ratings amid ongoing fiscal imbalances

Fitch Ratings on Jan. 19 downgraded Costa Rica's long-term foreign and local currency issuer default ratings to BB from BB+, while revising the outlook to stable from negative.

Costa Rica's country ceiling was also lowered to BB+ from BBB-, while its short-term foreign and local currency issuer default ratings were affirmed at B.

In making the downgrade, Fitch pointed to Costa Rica's "deteriorating debt dynamics," noting that the central government's fiscal deficits grew to some 5.7% of GDP in 2015. And while the country saw some improvement in 2016, the deficit is still expected to rise further in the coming years due to higher interest rates and spending, the rating agency added.

As a result of the fiscal imbalances, Costa Rica's debt burden has also grown sharply, rising to 41% of GDP in 2016 from 20% eight years earlier. Fitch said it expects Costa Rica's debt burden to hit 60% of the country's GDP within the next decade.

"The government's tax reform proposals to rein in the fiscal deficits have made little progress in Congress given its fragmented structure and the cumbersome legislative process," Fitch said. "The outlook for passage of the crucial VAT and income tax proposals … has significantly diminished as the February 2018 congressional and presidential elections approach."

The rating agency said that its new baseline scenario excludes the passage of any meaningful tax reforms through 2018.

Still, Fitch noted that the country's stable outlook is supported by resilient growth and financing flexibility in the captive local market, as well as by a solid tourism sector and export base. Fitch noted that Costa Rica's GDP growth is estimated at 4.2% in 2016, and the rating agency expects 2017 and 2018 to return growth north of 4% as well.

Meanwhile, Costa Rica's BB ratings are supported by structural indicators that are strong relative to peers, including high per capita income, social development and governance standards. The ratings are also driven by the country's successful economic model centered around high value-added service and manufacturing activities, which supports robust growth and foreign direct investment inflows.