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Fitch: Tighter liquidity situation in Costa Rica creates fiscal woes

Tighter liquidity conditions in Costa Rica are adding up to the country's fiscal problems, Fitch Ratings said Aug. 10.

Increases in Costa Rica's structural spending and the failure to raise taxes to fund the spending boost due to institutional gridlock had led central government debt to rise to 45% of GDP in 2016 from 24% in 2008. Meanwhile, a rapid depreciation in the Costa Rican colon has driven the central bank to implement a rate hike, sell U.S. dollar reserves and line up a $1 billion credit line with the Latin American Reserve Fund.

According to Fitch, this has resulted in tighter liquidity conditions and a rise in the local currency sovereign yield curve. "Initial reluctance on the part of the National Treasury to validate these higher rates led to unsuccessful auctions in June and July," the rating agency said. "This prompted the government to announce it was facing a liquidity squeeze and led to reported delays in some payments."

However, Costa Rica has successfully auctioned and placed debts in August, which supports Fitch's view that "financing will remain forthcoming and thus supportive of the sovereign's debt service capacity."

The local market is also a reliable source of fiscal financing for Costa Rica, but it is becoming more costly, Fitch warned. "Colon depreciation and higher interest rates are already lifting interest costs in 2017, and capital spending is rising on a large pre-election budget hike."