Fitch predicts slowed reform for Costa Rica

Fitch Ratings said that while the victory of Oscar Arias in Costa Rica's (BB/negative) recent presidential elections bodes well for reforms, the narrow victory margin could affect the pace of reforms. Contrary to pre-election polls in which Arias was leading by several percentage points, he won only by a very narrow margin. As Arias' party, the PLN, failed to obtain a simple majority in Congress, it remains to be seen how quickly the new administration will be able to garner sufficient support in a divided Congress to enact crucial reforms, Fitch said.

While Arias is viewed to be in favor of the U.S.-Central American Free Trade Agreement (CAFTA) and is pro-fiscal reform and pro-private enterprise, a weaker election mandate could undermine his ability to spearhead reforms, the agency said.

The fiscal reform has passed the first vote in the legislative assembly, but it is unclear whether it would be passed before the next administration takes over in May. Fiscal reform entailing revenue-raising measures is necessary to improve the medium-term outlook for the Costa Rican public finances, the agency said. Although Fitch recognized the recent reduction in Costa Rica's fiscal deficit, the agency predicted that a permanent reduction in the general government deficit would require a revenue-enhancing reform.

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