Finance Ministry Expects Worsening Fiscal Situation

September 24, 2004

THE Finance Ministry says it expectsto face adverse conditions in the comingmonths when it issues more debt bonds tocover the government’s expenses as partof the 2005 budget.New Finance Minister Federico Carrillo has warned the government mighthave to pay higher risk premiums on newdebt bonds because of adverse conditionsaffecting the country’s economy, the dailyLa Nación reported.Analysts believe rising internationalinterest rates and a dramatic drop in theassets of the country’s investment funds(TT, May 14) will make it harder for theCosta Rican government to sell new debtbonds.Carrillo and José Rafael Brenes, managerof the National Stock Exchange,insist the placement of debt bonds couldbecome even more difficult if the government’sfiscal situation does not improve.Both stressed the need for the approvalof the much-debated Permanent FiscalReform Package as a way of increasinggovernment revenues and reducing the needto become more in debt.Carrillo went as far as to warn thegovernment’s finances would “collapse” ifthe fiscal reform is not approved by legislators.Financial analysts have expressed concernabout the country’s situation, sayingif a politically unstable climate persists, itcould negatively influence the country’sinternational risk rating and make it harderfor the country to obtain additionalfunds on the international market.The government’s hands appear tiedwhen it comes to cutting spending.Salaries, pensions and interest paymentson the debt occupy 91% of the government’srevenues, according to La Nación.These three types of expenses are growingeach year, leaving little money for infrastructureprojects and other types of governmentexpenses.In recent weeks, credit evaluator FitchRating and Moody’s Investor Service reiteratedtheir “negative” rating for the outlookof Costa Rica’s economy, citing failureto approve the much-debatedPermanent Fiscal Reform Package as oneof the reasons (TT, Aug. 20).The resignations of key governmentofficials in charge of overseeing the country’seconomy and nationwide proteststhat blocked the country’s main highways,borders and ports (TT, Aug. 27; Sept. 3,10) have increased uncertainty amonginvestors.However, the situation has not resultedin sudden or drastic changes in theprices of Costa Rica’s sovereign debtbonds, according to La Nación.

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