The Big Idea
Costa Rica | Open for business
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Political transition in Costa Rica has renewed optimism about reform there and a break from decades of political fragmentation. My conversation with former finance minister and current majority leader Deputy Nogui Acosta highlighted a pro-growth agenda built around investment, liquidity buffers and financing flexibility. This should trigger a reassessment of credit ratings. There’s even the possibility of a fast-track to investment grade if Fitch unwinds rating penalties for political fragmentation and restricted external financing. The actual ‘BB’ rating could converge with the ‘BBB’ sovereign model rating. This should prompt outperformance relative to ‘BB’ peers and convergence with investment grade credits.
The legislature turned over on May 1 with early momentum for an active agenda. The pro-growth agenda is a priority with several proposals to open the electricity sector to private investment as well as approve a private-public alliance that allows for private investment in strategic infrastructure such as highways, railways, and water. These would require only a simple majority of 29-out-of-57 approval from the ruling PPSO’s 31 deputies. The ability to legislate on the reform agenda without opposition obstructionism should force a reassessment of political fragmentation from rating agencies. Progress looks likely over the next three months, including the approval of the Eurobond law.
There has been much focus on the Eurobond law as the litmus test for external funding as a key constraint across the rating agencies. However, Deputy Acosta emphasizes the recently more active financing strategy with the ability to issue EUR bonds locally for indirect access to external investors. There are also plans to establish a regulatory process for Euroclear settlement of local bonds to broaden external access to already deep local markets. The Eurobond law ($1.5 billion over an 8-year shelf) is still on the agenda with good prospects for crossover support from Frente Amplio to reach the two-thirds majority. This seems to be a priority on the legislative agenda with cumulative policies that broaden access to external financing. This also maybe negates the importance of constitutional reform for reducing the regulatory burden on external financing, although the proposal was already presented for debate.
The ruling majority also reinforces cohesive policy management with plans to approve a restrictive 2027 budget (zero increase in spending) and push back against any populist initiatives that reduces structural revenues. Deputy Acosta will preside over the economic and financial committee with stronger collaboration as former President Chaves now heads the Finance Ministry. This should translate into less policy tensions and broader budget legislative support. There should be broader political support under the initial honeymoon of the Fernandez administration and the high political capital (73% voter support in CIEP-UCR polls) to kickstart the term. This provides further optimism of a successful reform agenda.
The bottom line is stronger governability for more effective policy management that provides upside rating momentum. The positive model bias for the Fitch sovereign rating opens the possibility of an investment grade rating sooner than later as the agency weighs less political fragmentation and less restrictions on external financing. The next few months of progress on the reform agenda could allow for outperformance relative to ‘BB’ peers and the convergence trade to investment grade peers like Paraguay and lower sensitivity to overall market risk to immunize against external uncertainty.
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