Standard & Poor’s Predicts Stable Financial Markets

February 12, 2010

In light of Laura Chinchilla’s election on Sunday, the New York – based Standard & Poor’s Rating Services announced its prediction that the Costa Rican monetary market will remain stable over the next four years.

“The stable outlook reflects our expectation that the next administration of President-elect Laura Chinchilla will maintain stability in key economic policies,” said Standard & Poor’s (S&P) credit analyst Joydeep Mukherji. “The recent increase in the general government fiscal deficit likely will be reversed this year as tax revenues rises along with a recovery in GDP growth.

As a result, the government’s debt burden likely will remain stable in coming years.”

According to S&P, the favorable prediction was based on several factors, particularly the continuation of presidential rule by the National Liberation Party (PLN).

The index rating considered the lack of changes in the “political system and rule of law” a principal factor contributing to a stable financial system. S&P also referenced the high level of social development and moderate government debt as indicators of stability in coming years.

Costa Rica was given the “BB/B” rating for foreign currency and a “BB+/B” local currency credit rating. S&P also rated transfer and convertibility assessment “BBB-” and gave a “BB+” rating on foreign currency senior unsecured debt.

On the negative side of the analysis, S&P stated that the lack of flexibility in the exchange rate limits Costa Rican monetary policy. The report considered this to be a “constraining rating factor” and suggested that a more “supple monetary policy” would improve the country’s financial standing.

Since 2000, the exchange rate of the colon to the dollar has grown an average of ¢27 per year, but adjustments in the exchange rate in 2009 did not follow this pattern.

On Jan. 1, 2009, the colón had a buy value of ¢550 against the dollar, with a sell value ¢10 higher. On Jan. 1 of this year, the buy value stood at ¢558 with a sell value of ¢571. In the first six weeks of the year, the exchange rate has fallen, with a ¢548 buy value and ¢558 sell value as of Tuesday. One year earlier, on Feb.9, 2009, the exchange rate was ¢8 higher.

Since the exchange rate peaked in August, 2009, nearing a sell value of ¢600, Central Bank of Costa Rica (BCCR) officials say they have managed and lowered the exchange rate by releasing more colones into to the economy.

–Adam Williams

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