Costa Rica’s public debt officials may soon find themselves looking fondly back to a golden age of access to the international debt capital markets.
It was time when the country’s deals were met with huge international appetite, it could issue $1.5 billion in fresh debt, launched with no new issue premium thanks to $7.6 billion in orders – and then the bonds would promptly trade up in secondary.
That was all the way back in November.
Things can change quickly. First, Moody’s downgraded the country to B2 on Monday and, by doing so, threw a harsh light on the terrible state of the public finances.
Costa Rica’s fiscal problems are long-standing, but the lead banks on the November deal – Citi and HSBC – were able to put a gloss on the fiscal weakness by pointing to a new value-added tax, the establishment of a fiscal rule and some added flexibility to public sector wages and mandatory spending.
However, the downgrade takes the legs out from any lingering optimism that these reforms would be sufficient: the spiralling cost of debt – combined with the quickly rising stock of debt – is more than outweighing any positive effect of the fiscal reform.
There were plenty of investors sounding the warning that the deal was a sign of froth in the markets – they were just drowned out in the scramble for yield
According to the Institute of International Finance (IIF), Costa Rica’s primary fiscal deficit will narrow this year to 1.3% and to 0.8% next year, from 2.8% last year.
However, that good work is undone by the jump in interest payments, with the total fiscal deficit – including interest payments – expected to be 6.4% this year and 5.7% next year.
While these are improvements on last year’s 7.0%, it’s still a hefty deficit and will see total debt rise to 59% of GDP this year from 53% last year. The IIF predicts it will hit 69% by 2023.
Politicians seem incapable or unwilling to push fiscal reform further or faster, as a high and rising rate of unemployment (12.4% in December) and modest economic growth (2.1% last year) combine with the spectre of the popular protests that spread through the region last year.
Costa Rica isn’t helped by its heavy debt schedule – 43% of public debt is due in the next five years. This will make access to the international capital markets a necessity.
However, as the IMF gathers in Argentina to try to re-order that country’s unsustainable debt burden, the question will be whether the frenzied chase for yield – that has propelled volumes and suppressed interest rates for Latam debt – will be countered by a more sober analysis of the credit worthiness of sovereign issuers.
It should be noted that in November there were plenty of investors sounding the warning that the deal was a sign of froth in the markets – they were just drowned out in the scramble for yield.
And so, when Costa Rica comes to the market later this year – and come it must – it will be a fascinating read on the appetite for not just Costa Rica debt but for Latin American debt more generally.