The international credit ratings agency Fitch Ratings published a revealing report on Costa Rica last week, in which it revised the country’s rating outlook from negative to stable, while at the same time chiding the country for a “weak” banking sector, high inflation and a sluggish government.
“The revision in the Rating Outlook reflects the improvement in Costa Rica’s fiscal balances over the past two years, an appreciable decline in its government debt burden, and a further improvement in its external solvency and liquidity ratios,” Fitch Senior Director Shelly Shetty said in a statement.
The improvement was attributed to Costa Rica’s “greater economic dynamism” and its growth expected to reach close to 7% in 2006 driven by expansion in the tourism, construction, mobile telecommunication and other export-oriented industries, said a news release last week from the agency, which is headquartered in London and New York.
The report said though Fitch remains concerned about Costa Rica’s “weak” banking sector – which is partially state-owned, has widespread dollarization and a largely unsupervised offshore banking system – the recent foreign acquisition of large local private banks is likely to reduce risks associated with offshore banking activities and improve the technical and risk management capabilities of the sector.
The improvement in Costa Rica’s rating is because of its “relatively mature” democratic institutions and political stability; tightening of public spending; falling external debt; and “robust” direct foreign investment.
However, a high inflation rate, the government’s inability to pass fiscal reform, which would recapitalize the Central Bank, and the inability to pass the Central American Free-Trade Agreement with the United States (CAFTA), are all strikes against the country’s creditworthiness.
The report said the Central Bank’s move toward the exchange rate bands system from the crawling peg regime in the coming months could improve its ability to implement monetary policy (see separate article).