LEAPS AND BONDS

Costa Rica 2019 | FINANCE | FOCUS: EUROBONDS

To put an end to its public debt and fiscal deficit, the government is set to issue eurobonds, although there is still no agreement about an upper limit.

Since the country's transformation into an economy based on tourism, corporate and IT services, and manufacturing of electronic parts and medical supplies, Costa Rica has been enjoying a more-or-less stable economy over the past 20 years. Costa Rica's economic policies have been by and large successful in keeping hyperinflation, which often haunts Latin American economies, at bay.

However, the country's growing public debt and fiscal deficit are yet to be fixed. According to a 2017 report by the International Monetary Fund (IMF), Costa Rica's fiscal deficit was still “high" in 2017, while the country's public debt was growing despite the steps taken by the authorities in the previous year. President Luis Guillermo Solis later acknowledged that Costa Rica was indeed dealing with a liquidity crisis.

Although Costa Rican authorities are aware that a fiscal reform must be enacted to end the country's financial woes once and for all, a short-term solution is also needed to remedy the deficit without running the risk of interest rates getting out of control. Since early 2018, there have been talks of the Ministry of Finance issuing eurobonds, namely international securities issued in a foreign currency.

According to Rocio Aguilar, Costa Rica's Minister of Finance, roughly USD4 billion worth of bonds will be issued over a four-year period from 2018. This is not be the first time that international bonds have been called to the rescue. Back in 2012, the country's legislative assembly authorized a similar issuance of foreign securities for a total sum of USD4 billion over four years, ending in 2015. Since the last issuance of eurobonds in 2015, Costa Rica has shown a preference for internal bonds as a means for compensating for the country's fiscal deficit; however, the growing deficit and plummeting economic growth have placed extra pressure on the internal market in recent years.

Not everyone has reacted positively to the news so far. CADEXCO, the country's union of exporters, has expressed its concern, pointing out that the plan for issuing eurobonds will tip the scales in favor of Costa Rica's national currency colón against the US dollar which, in turn, will undermine exports. What is more, the appreciation of the nation's currency, which might sound like a positive development, can slow down the growth of country's tourism industry. Some Costa Rican exporters, instead, advocate for more restrictions on public spending in combination with a radical fiscal reform.

Indeed, issuing eurobonds is not the only solution considered by the Ministry of Finance, and a tax reform has been on the ministry's agenda since early 2018. In the proposed taxing framework, taxes will be imposed on all profits made by natural and legal persons alike. However, the plan needs to be implemented with utmost care, as tax reforms have a notorious tendency to backfire in the form of widespread tax evasion and a general slowdown in business activities.

In any case, the tax plan was finally approved after a long process, during which the reform was reviewed by the congress, constitutional chamber, and legislative assembly. The project's ultimate objective is to give fresh blood to Costa Rica's public finance by optimizing the performance of Costa Rica's taxation system. One of the most controversial changes envisaged in the reform is that the general sales tax will be replaced with a value-added tax (VAT). According to the country's minister of finance, Rocio Aguilar, this reform will also have a positive impact on the value of Costa Rican eurobonds in international markets.
In late 2018, it was announced that the total sum of Costa Rica's international bonds would be knocked up to USD5 billion—and even possibly USD6 billion—in order to keep up with the country's growing public debt. Commenting on the new plan, Finance Minister Aguilar added the plan will be authorized for four years—USD1.5 billion per year in the first and second years of the plan and USD1 billion per year in the third and fourth years. Meanwhile, the Ministry of Finance will try to extend the authorization for an additional two years.