Moody’s downgrades Costa Rica to Ba1

Moody's Investors Service said it downgraded Costa Rica's government bond rating to Ba1 from Baa3 and changed the outlook to stable from negative.

Moody’s said the action was prompted by institutional weakness, as evidenced by continued political obstacles to comprehensive fiscal reform. Several attempts in recent years to address Costa Rica's growing fiscal deficits and debt have not brought these levels lower. The new Solis administration, which took office in May of this year, indicated it will only gradually introduce fiscal consolidation.

The action was also driven by the fact that as a consequence of inaction, Moody’s expect the current large fiscal deficits and increasing debt burden are likely to continue for the next few years. The fiscal deficit has averaged 4.5% of GDP since 2009, largely driven by spending growth, and is expected to reach 5.8% of GDP in 2014 and 6% next year. The high deficits have materially worsened Costa Rica's debt burden, with debt to GDP expected to rise close to 40% this year, compared to 25% of GDP in 2008.

The stable outlook indicates further rating changes are unlikely in the next 12 to 18 months.

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