The Big Idea

Costa Rica | Possible upgrade ahead of issuance

| February 3, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Costa Rica’s latest full year fiscal performance should set off a much-awaited review from the credit rating agencies and possible upgrade ahead of its imminent Eurobond launch.  It’s curious that rating agencies have waited so long to upgrade the country. The fiscal accounts have shifted from a 2018 primary deficit of 2.6% of GDP to a 2022 surplus of 2.1%. And there is already a 4-year track record of strong fiscal performance.

There is no other country in the region that has adjusted its fiscal accounts by nearly 5% of GDP, especially through the Covid shock. If S&P can deliver a one notch upgrade without warning to the Dominican Republic, then there is no reason why Costa Rica also couldn’t benefit from similar treatment. The rating agencies are far behind the curve with already full convergence of Costa Rica spreads to other ‘BB’ credits. The often-heard pushback is that spreads are too tight. But this undermines broad commitment to fiscal discipline may even blunt medium-term efforts to win an investment grade rating.

The cumulative fiscal adjustment of 5% of GDP is strong and may represent a permanent structural shift that restores the fiscal anchor. This fiscal adjustment has occurred through various stress tests of the fiscal rule and the ultimate stress test of the Covid shock itself.  There have been attempts but no success on weakening the rigidity of the fiscal rule and no obvious social or political pressures to unwind the fiscal anchor. The IMF and rating agencies alike would probably accept some flexibility on what appears an overly austere fiscal rule. But there has been no cooperation from the legislature or any societal pushback to relax the spending constraints.  The fractured legislature and policy paralysis perversely would reinforce fiscal consolidation.

Costa Rica should be able to maintain a 2% of GDP primary fiscal surplus for a few reasons:

  • Costa Rica is a highly democratic and rules-based country
  • There is broad support among political establishment and social sectors to reduce structural spending, comply with the IMF program and restore the fiscal anchor necessary for debt sustainability
  • Public employment reform hasn’t even yet kicked in to provide additional budget flexibility and future savings based on lower public wages (that would offset any potential weakening of the fiscal rule)

The bottom line is that the institutional strengths should reinforce the trend 2% of GDP primary surplus, slowly reduce the debt burden and gradually stabilize debt dynamics into the BB rating category.

The current ‘B’ rating is overdue for upgrade. The bonds spreads trade similar to ‘BB’ peers but, unlike the other credits, Costa Rica could already be on a path for investment grade. There are no other obstacles to regain the investment grade rating other than slowly working down debt ratios. The crux of the problem was temporary stimulus that become permanent after the global financial crisis in 2008/09. This represented over a decade of large fiscal deficits and debt accumulation.  The country is now on a firm path to reduce the debt burden. Meanwhile, Costa Rica already benefits from well diversified and solid trend growth, low inflation, high foreign direct investment and a flexible foreign exchange rate. Costa Rica also boasts strong ESG credentials before that was even a concept. The strong institutions and social indicators are favorable metrics that have few if any comparisons in the region outside of Uruguay.

There has also been an important reduction in liquidity and rollover risks. Not only for the lower gross financing needs but also for the broader access to financing options. Costa Rica is unique for its deep local markets, authorization for multi-year (and conditional) Eurobond issuance and unprecedented access to the IMF and multilateral funding. This broad-based funding accessibility looks more in line with BB or investment grade credits than B credits.

If there is debate about a path towards investment grade, then Costa Rica should already be moving closer towards a ‘BB’ credit rating. If the Dominican Republic can benefit from a sudden one-notch upgrade, then so too should Costa Rica. There has already been a 4-year track record on fiscal performance through various stress tests as well as a noticeable reduction in liquidity risks. This is an opportunity for rating agencies to make a bold move.  The optionality for positive headlines also errs for even stronger demand for the upcoming Eurobond issuance. If the Dominican Republic 8-year issuance serves as a reference at 10 times oversubscribed, then the pricing should be equally tight for Costa Rica with particularly high demand for an infrequent issuer.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539


U.S. Fixed Income Trading Commentary Disclaimer

This commentary has been prepared by the U.S. fixed income trading desk of Santander Investment Securities Inc. (together with its affiliates, “Santander”) for its institutional investor clients only, and may under no circumstances be redistributed beyond the recipient in whole or in part.  The recipient is an “institutional account” as defined in FINRA Rule 4512(c) that (i) is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies and (ii) will exercise independent judgment in evaluating any potential investments and any recommendations of any broker-dealers.  For the avoidance of doubt, this commentary is not suitable for or intended for retail investors. 

This commentary has not been produced or reviewed by, and does not otherwise reflect the views or input of, the Research Department of Santander (“Santander Research”).  This commentary may conflict with the views of Santander Research, is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors and is not independent from the interests of Santander.  Santander may have positions (long or short) in, effect transactions in or make markets in the subject securities (or related derivatives) mentioned in this commentary, and such positions or trading may be inconsistent with this commentary.  However, Santander is under no obligation to make a market in or otherwise provide liquidity in any security discussed herein.  This material may have been previously communicated to Santander’s trading desk.  Santander may have in the past or may in the future provide investment banking services (including underwriting activity and loans) or other services for the companies mentioned in this commentary.

This commentary has been provided for informational purposes only and is not a recommendation, offer or solicitation for the purchase or sale of any security or related instrument.  This communication is intended to be short term and brief in nature, and therefore does not provide a full analysis of any issuer or security or a sufficient basis upon which to base an investment decision.  The individual circumstances of the recipient’s investment objectives and needs have not been considered in this commentary, and nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to the recipient’s individual circumstances.  Information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy or completeness.  The recipient should not rely on this commentary for any investment decision or other action, and Santander expressly disclaims any liability for any losses arising from any reliance on or otherwise related to this commentary.  This commentary reflects the personal views of the individual sender of such commentary, and no part of his or her individual compensation was, is or will be directly or indirectly related to its content.  This commentary is provided as of the date and time thereof, and Santander does not undertake any responsibility to update or revise any of the information contained herein, which may change without notice.  Past performance is not indicative of future results.

Fixed income securities, including those described herein, are subject to many risks, including, but not limited to, interest rate risk, the credit risk of the issuer, inflation risk, liquidity risk and risk of a downgrade by rating agencies.  Emerging markets investments are additionally subject to political, economic, legal, regulatory, market, settlement, execution, currency and other risks.  Fixed income, and specifically emerging markets, investments are not suitable for all investors. 

Santander Investment Securities Inc. is an SEC registered broker-dealer, FINRA member and SIPC member.  Santander Investment Securities Inc. is a direct, wholly-owned subsidiary of Santander Holdings USA Inc., which is a direct, wholly-owned subsidiary of Banco Santander, S.A

Siobhan Morden
1 (212) 692-2539

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles