The Big Idea
Costa Rica | Fiscal results
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Costa Rica’s latest fiscal results should keep its positive credit momentum intact with continuing prospects of a 1-notch upgrade to ‘BB+’ this year and a trajectory toward an investment grade rating. The country posted a fiscal surplus of 0.9% of GDP and trimmed debt service enough for its fiscal deficit to slide to 3.4% of GDP. This is the fourth year of a primary surplus and second year of lower nominal fiscal deficits. Debt still stands above 60% of GDP.
The review of fiscal performance represents an important input across most rating agencies. It can put a country on either a fast track (active reform agenda) or slow track (lower debt ratios) towards an investment grade rating. The latest guidance from Fitch in early February after elections slightly clarified the positive outlook from last December and even suggested upward credit momentum irrespective of the election results. The positive reaffirmation “reflects strong growth despite global uncertainty, the continuation of primary surpluses, a declining interest burden and international reserve accumulation. Further progress in these areas is not necessarily dependent on policy decisions by the incoming administration. For example, interest payments are projected to decline relative to revenue partly due to the refinancing of legacy domestic debt at much lower interest rates.”
The breakdown of the fiscal and debt data shows supportive underlying trends. The debt service burden decreased from 4.8% of GDP in 2024 to 4.4% of GDP in 2025. This offsets the slightly lower primary surplus at 1% of GDP in 2024 to 0.9% of GDP in 2025 for a reduction in the nominal fiscal deficit from 3.7% of GDP to 3.4% of GDP. This fiscal discipline hasn’t been so easy considering low tax revenues on the combination of high 4.7% GDP growth last year against average flat inflation in 2025. The underlying trends show total revenues up 0.8% year-over-year and a declining trend at 12.8% of GDP in 2025 against 13.2% of GDP in 2024. The spending restraint is therefore critical with flat spending in nominal terms from a decline in current spending against an increase in capex.
The slight uptick in debt ratios back above 60% of GDP reflects the pre-emptive funding strategy to improve the external liquidity buffers at a moment of high external uncertainty. “The behavior of the debt-to-GDP ratio at the end of 2025 reflects a strategic decision to strengthen the Central Government’s liquidity,” Fitch wrote. “During the year, an active liability management policy was implemented, including raising €1 billion and conducting operations such as reverse auctions and swaps, with the aim of bolstering cash reserves and mitigating refinancing risks in a highly uncertain environment. This strategy resulted in an increase in the nominal debt balance, as it brought forward resources to better manage future maturities, reduce vulnerabilities associated with amortizations, and ensure the timely fulfillment of the National Treasury’s financial and operational obligations.”
This tradeoff should be viewed favorably across most rating agencies since regulatory restrictions on external borrowing should require higher buffers on foreign exchange reserves and treasury deposits. Costa Rica now compares quite favorably against regional trends with 20% of GDP in foreign exchange reserves far above the regional average and 10 months of import coverage. The central government deposits are also at peak levels in foreign currency at 2% of GDP. The tradeoff from higher liquidity was a bump on the debt ratios from 59% to 60% of GDP.
The crossover above the 60%-of-GDP debt threshold activates the most restrictive interpretation of the fiscal rule with current and capital spending not exceeding 65% of the average nominal GDP growth over the previous four years. This would imply more restrictive spending at 4% year-over-year in the 2027-2028 budgets on the data lags; however, actual spending has been far below these thresholds as authorities prioritize credit rating upgrades with strict fiscal discipline.
The bottom line is that the latest fiscal data should reinforce positive rating momentum while the unwind of political fragmentation represents the important catalyst for an investment grade rating. The next test shifts to the reform agenda when congress turns over in May with an activist agenda the catalyst for still more positive reform momentum and optimism for convergence with investment grade comps.
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