Fitch Afirma Calificación Internacional de Costa Rica en BB+;

1. Fitch Affirms Costa Rica's LTFC IDR at 'BB+'; Outlook
Remains Stable
Fitch Ratings-New York-13 February 2012: Fitch Ratings has
taken the following rating actions on the Issuer Default
Ratings (IDRs) and Country Ceiling for Costa Rica:
--Foreign currency IDR affirmed at 'BB+';
--Local currency IDR affirmed at 'BB+';
--Foreign currency short-term IDR affirmed at 'B';
--Country ceiling affirmed at 'BBB-'.
The Rating Outlook remains Stable.
Costa Rica’s ’BB+’ ratings are supported by its
institutional strength and favorable social indicators. A
history of political and macroeconomic stability combined
with a skilled labor force continues to attract foreign
direct investment and foster the development of highly
competitive export-oriented industries.
However, Costa Rica’s ratings are constrained by the
country’s narrow and pro-cyclical revenue base and long-
standing budgetary rigidities limits its fiscal
flexibility. Moreover, the authorities’ inability to pass
revenue-enhancing reforms is undermining the country’s
ability to proceed on faster fiscal consolidation. The
recent set back in passing the tax reform highlights the
continued political gridlock on this issue.
Costa Rica’s fiscal deficits have deteriorated since the
global financial crisis as the government used its fiscal
space to stimulate the economy. In the context of moderate
economic growth and in the absence of a revenue-enhancing
reform, Fitch expects fiscal deficits to remain relatively
high, averaging 4.6% of GDP over the next two years.
‘The need to broaden the tax base has gained importance as
the country faces important spending pressures in
infrastructure and security sectors’ said Lucila Broide,
Director in Fitch’s Sovereign Group.
‘While Costa Rica’s low indebtness relative to peers (30.8%
compared with 40.3% for the ‘BB’ median) gives it some
space to deal with fiscal pressures, in the absence of a
tax reform, government debt could increase to nearly 40% of
GDP by 2015’ Broide added. However, Fitch notes that
continued financing flexibility, improved currency
composition of government debt and the country’s structural

2. strengths support its higher debt tolerance and mitigate
concerns regarding increasing government indebtedness.
Fitch expects a relatively good 3.8% average growth rate
over the forecast period driven by the continued recovery
in foreign direct investment flows. Risks to economic
activity primarily stem from renewed weakness in the United
States, the major destination of Costa Rica’s exports, and
an escalation of the eurozone debt crisis. Uncertainty
surrounding the passage of the tax reform could also place
pressure on interest rates and weigh on consumer
confidence.
Inflation of 4.7% in 2011 marked the third consecutive year
at single digits and within the official target of 5% ±
100bps. Fitch expects inflation to average 5.7% over the
forecast period.
‘While cyclical factors have played a role in the
disinflation process, a strong commitment to transition to
an inflation targeting regime and a more flexible exchange
rate have increased credibility in the country’s monetary
framework and improved inflation expectations,’ said
Broide.
Fitch expects the current account deficit to be fully
financed by FDI over the next two years, providing relative
stability to the exchange rate. The bulk of investments
will likely continue in the high-tech sector, but back
office service, medical equipment and tourism sectors will
increasingly attract new investments.
In addition, Costa Rica’s external solvency ratios remain
stronger than peers. Costa Rica has remained a net
sovereign and overall external creditor for the last 8
years. However, international liquidity remains weaker than
‘BB’ rated peers. An active foreign exchange reserve
accumulation program by the central bank partly balances
concerns about the still high financial dollarisation and
limited exchange rate flexibility.
A further expansion of the revenue base that enhances
fiscal flexibility and improves the government debt
dynamics will be positively viewed by Fitch. Additional
strengthening of the monetary and exchange rate frameworks
will beneficial for the credit. Conversely, Costa Rica’s
creditworthiness could be negatively affected if sustained
large fiscal deficits lead to a marked deterioration in
debt dynamics. A sharp erosion of international liquidity

3. and a disorderly exchange rate adjustment could be also
negative.
Contact:
Primary Analyst
Lucila Broide
Fitch, Inc.
One State Street Plaza
New York, NY 10004
Secondary Analyst
Cesar Arias
Associate Director
+1-212-908-0358
Committee Chairperson
Shelly Shetty
Senior Director
+212-908-0324
Media Relations: Cindy Stoller, New York, Tel: +1 212 908
0526, Email: cindy.stoller@fitchratings.com.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2010).
Applicable Criteria and Related Research:
--‘Sovereign Rating Methodology,’ Aug. 13, 2010.
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