The novel Coronavirus Pandemic caused a lesser economic collapse in Costa Rica compared to most of Latin America and the Caribbean but found the country with a lower capacity to respond due to the delicate conditions of its public finances. This is clear from the latest outlook report from the International Monetary Fund (IMF) for Latin America and the Caribbean, published this October.
The international entity pointed out that there are clear differences in the rate of recovery of the countries of the region, as countries such as Brazil, Costa Rica, and Uruguay “experienced less pronounced collapses at the worst moment of the crisis”; however, the deficit conditions of States such as Costa Rica have limited their response space.
The Fund pointed out that in the three countries mentioned “the differences in economic activity concerning January were smaller than in other countries” until July; However, it stressed that, “both in Costa Rica and Brazil the fiscal deficit that prevailed until 2019 “was already much higher than the one that would be compatible with a debt goal level of 60% of GDP, if it were maintained for 10 years”.
The adverse fiscal situation; however, was considered a structural problem in the Latin American region by the Fund. The entity affirmed in its report that the countries of the region arrived with “limited fiscal buffers”, even more than at the time of the 2008 financial crisis.
High debt, high needs
The IMF also noted that the gross financing needs of Latin American countries reached high points and grew this year in most countries of the region, with requirements above 10% of GDP, as in the case of Costa Rica ( 5% of its production). As observed, this was another example of the “limited fiscal space” that nations already had to meet their needs.
Along these lines, the entity mentioned that countries tend to face problems such as high levels of debt maturity and other structural problems that “may have increased vulnerability to shocks,” such as a low acquisition of debt in foreign currency. The IMF mentioned that Costa Rica, Brazil, Chile, Mexico, and Peru are “well below 50%” in this indicator.
Regarding this weakness, the Fund recalled that the participation of foreign investors “provides more depth and transparency”, although it also recognized that “it could be an additional source of vulnerability” by “making local debt markets more susceptible to sudden global market changes during periods of high volatility and uncertainty.”
In Costa Rica, the issuance of titles abroad requires legislative approval by at least two-thirds of the National Assembly”; as well as the acquisition of credit with international and multilateral organizations.
This limits the State to seek most of its resource requirements in the local market, made up of pension funds, institutions, and public or private banks; that make up a smaller group and that, therefore, offers worse conditions in terms of interest and terms.
Access to lower financing costs is another challenge mentioned by the IMF in light of the increase in the accumulated debt levels of the countries, especially if one takes into account that the largest needs could mean downgrades in many states’ credit ratings.
“Increased debt could result in worse mid-level credit ratings overall, with a somewhat larger effect in countries with relatively higher expected increases in debt (…) However, several Latin American and Caribbean economies have already faced downgrades since the start of the Pandemic. These include the Bahamas, Bolivia, Chile, Costa Rica, Ecuador, Mexico, and Trinidad and Tobago”.
A battered economy
Despite experiencing a minor collapse in health matters and experiencing an economic recovery, according to the IMF, which seems more encouraging; the national economy was hit hard by the new Coronavirus Pandemic. The Central Bank readjusted its estimates and projected an economic contraction of 5% for this 2020, the largest since the national crisis of the 1980s. The IMF estimates this contraction at 5.5%, with a slight rebound of 2.3% by 2021.
The 2020 figure is 0.4 points better than the average for Central America, and 3.6 points better than the average for South America; however, that of 2021 is lower than the expectation for both regions.
The Costa Rican contraction, according to the Central Bank, would even be marked by a drop in domestic consumption as well; something that had not been seen since 1982. Against this background, the Treasury maintains projections of a financial deficit of 9.3% of GDP and of a primary deficit (not counting debt payments) of 4% of production. At the beginning of the year, the first mismatch was estimated at 5.3% of GDP and the second barely aimed to exceed 1% of production.