Most new ministers appointed by Chaves have proven expertise in the area they will be in charge of.

Regarding foreign relations, Chaves could take a turn from his predecessor Carlos Alvarado concerning the totalitarian governments of Latin America.

The government and the Assembly headed by the opposition seem on the way to dialogue.

We are cautiously optimistic about relations between the executive and legislative branches due to the recent history of disagreements.

SELL: While liquidity and solvency indicators are neutral to negative, Eurobonds do not seem attractive given their relatively low yields. 

Everything seems to indicate that the second round will be tight, but we have some reasons to think that Figueres could end up as the winner.

The last CIEP-UCR poll reveals that Chaves' advantage decreased from 10 pp to 3 pp, which implies a statistical tie between both candidates.

The Costa Rican government has not met the structural benchmarks agreed with the IMF

The new government will likely renegotiate the targets agreed with the IMF, but Chaves is proposing more modifications than Figueres

Revenue-related laws seem to be the program's stumbling block since neither Figueres nor Chaves are generally supportive of tax increases

We believe that a negotiation between Figueres and the IMF could be completed more quickly than one between Chaves and the IMF

SELL: Fiscal reforms that would allow improving liquidity and solvency indicators are not expected in the short term and low yields rema...

With 88.2% of the votes counted, former president Figueres won the elections with 27.3% of the vote, and he will face Rodrigo Chaves (PPSD-center), who got 16.7%.

Both candidates are moderate and market-friendly, so we expect them to maintain a close relationship with the IMF.

Due to their high unpopularity, we believe that in any case, the risk of social unrest will increase during the next government.

Under high uncertainty, we maintain our base case scenario that Figueres will win the presidency.

The main event of the year is the presidential and legislative election that will take place on February 6.

José María Figueres continues to lead the polls, but the race remains wide open. Under high uncertainty, our base case is that Figueres will win the presidency in the runoff.

The presidential debates held this week seem to have favored underdogs who were behind in the polls, increasing the probability that an outsider may get into the April runoff.

The lack of political consensus will put compliance with the IMF agreement at risk. We estimate that the primary deficit will reach -0.6% of GDP, 30 b....

We review the main 2022 electoral events among the countries we cover, describing the big picture of Costa Rican, Lebanese, and Angolan elections.

The race for the Costa Rican presidency remains wide-open after former president José María Figueres lost most of his tenuous lead due to corruption scandals related to his party (PLN, center-left).

Lebanese Parliamentary elections will be held on March 27, 2022, six weeks ahead of schedule due to the recent amendments to the electoral law, which also allows Lebanese expatriates to vote for all 128 MPs instead of just six.

According to the polls, the Angolan oppos...

For the first time since 2008, the government ran a primary surplus (0.3% of GDP) in the first nine months of the year; however, the fiscal deficit stands at -3.9% of GDP.

The fiscal estimates of the budget look very pessimistic because they were calculated based on a GDP growth of 3.7%, 0.8 p.p. lower than the central bank's recent forecast.

If the government manages to implement the proposed spending cuts, we estimate the primary surplus would reach 0.1% of GDP in 2022; however, the overall balance will still be a negative -4.7% of GDP.

More reforms are required to achieve the primary balance target of 0.3% of GDP a...

The 2Q21 results show that the economy grew 9.4%, mainly driven by the low base effect from last year.

High-frequency indicators show that it is highly probable that the Costa Rican economy had already recovered its pre-pandemic levels in 3Q21.

However, our growth estimate for this year (4.9%) is the lowest in the region.

While Guatemala, Nicaragua, and El Salvador all registered a significant year-on-year increase in government consumption, in Costa Rica it fell.

HOLD: With no Eurobonds issuance for next year, financing will rely on the domestic market and multilateral organism. Credits suffered more in the short e...

Less than five months before the general elections, there is no frontrunner among the 20 candidates for the presidency. 

Although it seems that José María Figueres has a tenuous lead, the reality is that it is still too early to predict the election results.

Could we see a radical outsider in the Costa Rican presidency? We think this looks unlikely at the moment as the candidates leading the polls are moderates, but 5 months is an eternity in politics.

Emerging markets faced massive capital flight as a result of the COVID-19 crisis.

However, there has been debate as to whether the severe initial shock was primarily the result of an interruption in liquidity flows and not the deterioration of macroeconomic variables.

Growth in emerging economies may have taken a permanent hit but, at the same time, emerging markets could become more attractive to those hunting for yield.

We believe that the deepness of the impact of the pandemic on EMs can be quantified.

We take a comprehensive look at political risk indicators in a group of Emerging Market countries, trying to identify potential sources of conflict.

We analyze the electoral scenarios in the four Latin American nations that will have electoral processes during the end of 2020 and all of 2021.

We review the scenarios in the parliamentarians of Argentina and El Salvador, we comment on the electoral process that will take place in Venezuela, and we review the perspectives of the presidential elections in Ecuador.

We evaluated the World Bank’s governance indicators for our sample countries in 2019 and share our view of thes...

We recommend going long COSTAR 23 and COSTAR 25, currently trading at 94.15 and 88.8 cents on the dollar, respectively

The 2045-2023 spread and the 2045-2025 spread, currently at 121 bps and 105 bps, are at levels associated with significant financial stress and should move closer to 260 bps and 200 bps respectively if the curve regains steepness.

We believe that Costa Rica will ultimately be able to improve its debt profile and roll their domestic maturities with their swap program.

One of the cornerstones of the thesis behind this trade is Costa Rica’s short-term liquidity profile, and a key indicator to gaug...

The government has relied mostly on domestic financing, as 69.6% of the fiscal gap has been financed internally.

The increasing dependence on domestic financing, especially short term debt, has led to a significant increase in roll-over risks, as 23.1% of the domestic debt is USD-denominated.

The next important maturities of USD-denominated debt will be in February 2021 (USD 152 mn) and in May (USD 276 mn).

We updated our 2020 fiscal estimations from 9.8% to 10.1% of GDP, mostly driven by a decline in fiscal revenues.

HOLD: We are not constructive about Costar Rica as a long-term credit, but we remain vigilant on do...

Protests have been shaking the country creating a generalized atmosphere of anarchy in the last weeks in rejection to the proposal of tax hikes.

The executive and legislative branch called for another dialogue that we see as having little chance of success.

Rescate Nacional Movement will decide on new actions on Sunday but the restart of the blockades is off the table for now..

The Alvarado administration finally presented its IMF proposals on September 17, seeking congressional approval before the start of negotiations.

Minister Villegas announced a series of temporary and permanent measures on revenues and expenditures that will yield on average 6% of GDP in the next four years.

The main problem is that 85% of the plan relied on taxes (temporaries and permanents), 10% in the elimination of tax exemptions and only 4.7% on expenditures cuts.

There is a strong rejection in society to the application of taxes, especially to the financial transactions tax which accounts for 55.6% of the new fiscal ...

Costa Rica has been facing years of a dangerous mix of elevated fiscal deficits and low economic growth rates, and the streak will continue in the foreseeable future.

The government has been covering the yearly financing gap primarily through the domestic debt, up to the point that domestic indebtedness represents more than 77% of the central government’s debt.

However, the short-term rollover risk for the domestic debt seems low at the time and it could be even better if the government achieves its short-term refinancing goals.

We assign a BUY to COSTAR external bonds given their low short and mid-term payment burd...

Today, the deputies approved, in the first debate the RFI with the IMF. The second debate was scheduled for August 27.

Primary deficit stood at 1.6% of GDP in the 1H20, from previous year’ 1.1%, while Central Government debt stock stood at 62.8% of GDP at the end of 1H20, for an increase of 7.2 pp compared to June 2019.

We have adjusted our 2020 GDP contraction estimate from 3.2% to 5.6%.

We now expect fiscal deficit to stand at 10.7% of GDP by the end of 2020 (from previous 9.6% of GDP), 1.4 pp above Finance Ministry estimates (9.3% of GDP).

The government presented today a new bill to cut 1% of GDP in spending.

Currently, there are USD 2.3 bn in external loans pending from Congress approval (24.7% of Costa Rica’s financing needs).

Opposition deputies indicated that they are no longer going to grant “blank checks” to the Executive.

The new elections are one year and ten months away and the political campaign seems to have already began in Congress.

COSTAR 6.125 2031 traded stagnant at 89.17 on Monday, with a yield of 7.75%. Over the past month, we have seen almost no movement as political noise subsided, even if concerns of a prol...

Rodrigo Chaves departure due to "irreconcilable differences" with the president caused a lot of noise in the market. As we have been saying, the greatest risk for a worsening of our fiscal estimates comes from politics.

April’s IMAE result showed a deceleration in its seasonally adjusted m-o-m contraction from -5.4% to -4.7%, when all the containment measures were underway.

We do not see any significant deterioration on our previous fiscal estimates and we maintain a projection of a fiscal deficit of 9.6% of GDP in 2020

We estimate that financing needs amount to USD 9.1 bn (15.3% of GDP), of which 62.6% ha...

May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt

Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood

The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports

We’ve been preparing fo...

Costa Rican bonds will garner lots of attention with high yields and coupons, but is it too good to be true?

We assess the bonds’ local and external segments for foreign investors and find some surprises.

We believe a good short-term bet includes both external and local bonds, with a big share of the latter.

Following 2021, the outlook turns darker (we just do not know how much) and warning signs should not be ignored henceforth.

The economic results of 2020 and 2021 will tell if an internal debt restructuring is avoidable in the medium, or even the short term.

As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.

The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.

We discuss the worst debt restructuring events so far this century.

Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.

The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.

A pandemic year was on the cards, the dramatic magnitude of its effects was not.

The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.

Emerging countries with a history of volatile economic growth will show the worst results.

Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.

After the fiscal rule fiasco in 2019, the 1Q20 figures looked promising, but then the COVID-19 came and clouded the outlook

We updated our fiscal deficit estimate from 8.3% of GDP in April to 9.6% of GDP, due to higher expenditures and a downward adjust in GDP

GDP could contract 4%, a slightly worse result than the official estimate of -3.6%, mainly driven by the performance of the key tourism industry

Despite the harsh prospects for economic figures, the government has moved quickly to close the financing gap that we estimate at 15.3% of GDP

Recurrently high fiscal deficits and a high debt-to-GDP ratio transla...

Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.

The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.

Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.

El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...

The safest rung of EM hard-currency sovereign bonds fell on March but has already retraced all their losses.

Mid-quality EMs plunged over March and have risen somehow since, but haven’t fully recovered.

This segment has seen a 320 bps rise in average yield in 2020, going from an average 6.1% yield to 9.3%.

We believe high-yield bonds in our mid-quality group have significant upside if they avert a credit event.

After a dry March, markets are again open for fresh bonds, but only from relatively high-quality issuers.

US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.

Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.

The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).

The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).

The IMF has approved just over USD 16.0 bn for 61 countries.

Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.

Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...

On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.

Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.

On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...

The Covid-19 crisis is prompting experimentation with quantitative easing in emerging markets. A group of Eastern European countries has already announced their intention to implement or expand local asset purchase programs.

A second group of QE candidates is in South America, where Colombia and Chile have already implemented asset-purchase programs. Brazil is in the process of discussing a constitutional amendment that would allow its central bank to join in.

Broadly speaking, the general trend in Eastern Europe has been of central banks not establishing formal limits to their QE programs, while the trend in South America has ...

Two weeks ago, we singled out some early calls for a generalized global debt moratorium in our Global Strategy Viewpoint: Force Majeure. The idea has gained significant traction and is becoming one of the main themes in economic and financial discussion.

While we don’t think a generalized moratorium on commercial bonded debt is likely to succeed, investors should be aware that it is a growing theme and bondholders will probably be under increased pressure to accept attempts at restructuring bond terms.

There are some indications that China is a significant roadblock for the IMF-World Bank initiative for a bilateral debt m...

Alongside containment policies, the government has announced several fiscal, monetary and sectorial measures aiming to offset the negative impact of the outbreak in Costa Rica’s economy

Last week, Alvarado administration summited a plan to the Legislative Assembly to allocate CRC 225,000 mm (about USD 390 mn or 0.6% of GDP) to support 375,000 families

So far, despite the fact that the Costa Rican congress is controlled by the opposition, the factions within the parliament have been quite collaborative with the executive branch

The effect of the coronavirus will impact the fiscal results in the months to come, not on...

The COVID-19 crisis is raising a difficult question of public policy for emerging market economies with low fiscal space, which have to reconcile economic and social policy with debt service.

The relation between liquidity and solvency problems is not straight-forward: the COVID-19 shock, which presents liquidity challenges first and foremost, can unearth underlying solvency problems and can also turn liquidity problems into solvency ones if improperly managed.

We’re already seeing some early calls for an international debt holiday to exempt countries from paying during the COVID-19 crisis. Multilateral organizations are ...

The current crisis will translate into twin demand and supply shocks, with an oil price war on top of it.

The demand shock driven by declines in the world’s main trading partners will particularly affect emerging markets which are characterized by low diversification of exports and production.

Supply chains around the world have been disrupted by factory closures, first in China and now in Europe and the US.

The markets most exposed to a potential slowdown are the major commodity exporters: Venezuela, Ecuador, Angola and the markets most reliant on Chinese and US tourism.

In most EMFI countries the tourism act...

Our EMFI Core Index has fallen 27.6% year-to-date (YTD), while Our EMFI Expanded Index has fallen 19.2%. The last two weeks have been particularly bad, with consecutive 10% declines.

Unsurprisingly, countries heavily reliant on oil have suffered the most. Among our 34-country group, almost every oil-reliant one has fallen more than the 18.3% median.

The second thing that jumps to the eye is that the riskier countries have fared proportionally worse than relatively safer countries, when excluding oil-dependent countries.

We’re also seeing several countries crossing the 10% yield threshold, usually associated with dis...

The outbreak of the Coronavirus, as well as the “oil price war” between Saudi Arabia and Russia have triggered almost complete certainty that a global recession is coming over the next quarter.

Some economists are expecting a 2-quarter rolling recession, but there is potential for the downturn to extend further if the virus reemerges after activity is unfrozen.

Emerging market debt is taking a beating in 2020 so far. The countries we cover registered a median 14.3% fall year-to-date, with the worst performer doing as bad as 60.3% down (Ecuador) and 38.5% down (Angola).

We compare indicators on 4 major categori...

February was a bad month for EM debt, as the market went into risk-off mode pushing bonds to backtrack on the gains made over the previous two months. 11 out of the 15 countries in our EMFI Core Index fell on the month, while the weighted index itself fell 5.8%, retracing below December levels.

Our Expanded Index ex. Core confirms February’s sell-off, registering declines in 21 out of 25 countries and an aggregated fall of 0.9%. Nonetheless, this fall is significantly below that of our EMFI Core Index.

Our selection of countries is clearly biased towards some large and risky high-yielders, which translates to an expectabl...

Costa Rica held elections for 6,138 municipal authorities yesterday. Abstention was 63.6%, the lowest reported in a municipal election so far. However, in San José the most populous municipality in the country abstention reached 74.6%.

Total results will be announced today by the Supreme Electoral Tribunal (TSE). Initial results based on a 11pm partial tally of votes showed that the opposition National Liberation Party (Partido de Liberación Nacional, PLN) is the major political force in the country, with 70,303 votes (28.9%), followed by Social Christian Unity Party (Partido Unidad Social Cristiana, PUSC) with 34,305 v...

In the last decade Central Government fiscal figures have been deteriorating steadily, going from a surplus of 0.2% of GDP in 2008 to a deficit of 5.9% in 2018. Given the performance of the fiscal figures, the country has been discussing a fiscal reform for nearly two decades. A reform bill was finally approved on December 3, 2018.

Broadly speaking, the fiscal reform fell short in the attempt to offset the increasing debt service burden. Between January and October, the primary balance did improve and went from 2.1% deficit in 2018, to 1.8% in the same period of 2019; however, the global deficit of the central government reached 5.4%...

On July 1, the bill that authorizes the Executive Power, through the Ministry of Finance, to place USD 1,500 million in debt bonds in the international market was approved in the first debate. The decision was approved by 34 deputies. However, for final approval the proposal must be backed by a qualified majority, 38 votes. For this reason, today the second debate was held, where the bill was approved with the support of 43 deputies.

The Ministry of Finance seeks to boost external financing because interest rates in the domestic market are higher than what would be obtained abroad.

On July 1 the Value Added Tax (VAT) became effective as part of the implementation of the Law to strengthen Public Finances (Law No. 20,580) approved on December 3, 2018. The VAT replaces the previous General Sales Tax. In general, VAT maintains the tax rate of 13% but it applies to a greater number of products and incorporates all service providers. Plane tickets, medical and educational products and services, raw materials and production machinery are some of the goods and services whose tax rate is lower than the general rate (between 2% and 4%). In addition, a 1% tax is applied to a list of foods that cover basic needs.

Recently, the International Monetary Fund (IMF) encouraged the Costa Rican government to improve its indicators of unemployment, equality and fiscal balance in order to become a member of the Organization for Economic Cooperation and Development (OECD). The Organization said in a statement that "additional fiscal actions, concentrated in the short term, would be needed to alleviate financing pressures and improve debt dynamics." The IMF also pointed out that such fiscal adjustment should be supported by well-designed actions on the income side. In the light of this recommendation, it is necessary to ask oursel...

The search for financing is part of the country's fiscal strengthening plan. The Government needs to borrow to continue paying its obligations, since the income is still too few to face the investments and the same public debt previously acquired. Recall that most of the Costa Rican debt concentrates its maturities between the next two and five years.

According to our estimates, of using the external market, Costa Rica would pay about USD 50 million less in interest per year, if the government can finance itself in the international market by issuing USD 1.5 billion in Eurobonds. The government would expect to have the project ru...

For the International Monetary Fund (IMF), the country should aspire to generate annual resources equivalent to 0.75% of the Gross Domestic Product (GDP) and for this has made recommendations such as raising the rate of Value Added Tax (VAT) ) from 13% to 15%, increase property taxes (includes vehicles), reduce the exempt amount of personal income tax, increase selective taxes on goods and services, and tax the surpluses of cooperatives.

In the opinion of several economists consulted, adopting the suggestions of the IMF would cause more negative effects than benefits for the recovery of the economy, because the country is still in un...

The Central American Bank for Economic Integration (BCIE) announced on Tuesday a loan of 100 million dollars to Costa Rica. The resources will be used by the Bank of Costa Rica to finance operations of micro, small and medium enterprises, business clients of the industrial, agricultural and cooperative sectors, as well as a housing component.

"This is a sample of the confidence of the Central American Bank of Economic Integration in the macroeconomic stability of the country and in its policies of economic reactivation," said the representative of Costa Rica before the BCIE, Ottón Solís.

In the previous ...

Costa Rica closed the year 2018 with a fiscal deficit of 6% of the Gross Domestic Product (GDP), 1.2% lower than what had been projected by the economic authorities (7.2%) and even lower than that of the year 2017 ( 6.16%), reported the Ministry of Finance. In the latest report of the Ministry of Finance with data until the end of October, the fiscal deficit accumulated 5.1% of GDP, 0.4 percentage points higher than the figure of October 2017. So, how in two months the government Costa Rican managed to reverse the upward trend of the fiscal deficit?

As for the debt, for the year 2018 it closed at 53.7% of GDP, lower than the official...

The information disseminated, this Tuesday, January 8, by the National Institute of Statistics and Census (INEC) shows that inflation measured by the CPI ended 2018 with an interannual increase of 2.03%, compared to the end of 2017. This figure it is within the target range of 2% to 4% projected by the Central Bank of Costa Rica (BCCR).

In the same way, inflation is in line with the growth prospects of the Central American country. According to the projections of the International Monetary Fund (IMF), the year 2018 would have closed with an increase in GDP of 2.6%.

Although the inflation target was reached, one of the greatest ...

On November 23, the Constitutional Chamber issued the long-awaited statement in which it claims not to have found flaws of unconstitutionality in the legislative process or in the substance of the fiscal reform promoted by the Government. The sentence was approved unanimously by the magistrates.

Next week it is expected that the full ruling of the Constitutional Chamber will be given and a date for the second vote can be agreed. President Alvarado said weeks ago that he expected the fiscal reform bill to become law in early December, and there is a high probability that it will be.

Another indicator that has improved markedly i...

The Costa Rican society continues in the midst of the crisis that has triggered the approval process of the tax reform. . The Constitutional Chamber announced that it will issue its revision of the draft Law no later than November 26, so President Carlos Alvarado expects the reform to become law at the beginning of December.

Despite the fact that the intensity of the union strike has diminished, the consequences that it has left in the Costa Rican economy are beginning to be evident. The Chamber of Exporters of Costa Rica (CADEXCO) said that the exports made in September 2018, compared to the exports of September 2017, have a signifi...

After being approved by Congress with 35 out of 57 possible votes, the Criminal Court had to evaluate the proposed tax reform. The magistrates decided with 11 votes of 16 present to reject it and urged the deputies to correct four points of the initiative, which in their opinion, affect the independence and functioning of the Judicial Power.

For the next few days, the Congress has two options: it could make the changes proposed by the Full Court or hold the second debate but it will need a qualified majority of 38 votes from the 57 deputies that make up the Legislative. That is to say, he would be obliged to get at least three more v...

On September 10, public sector workers began an indefinite strike to reject the tax reform promoted by President Carlos Alvarado. The main component of this reform is the transformation of the sales tax (equivalent to 13%), into a Value Added Tax (VAT) of the same rate, but that will include more products and services.

The unions, mainly in the education and health sector, blocked roads in different parts of the country. For this reason, access to fuel and transit to tourist areas has been affected. There have also been incidents of violence that have resulted in material damage to public infrastructure.

On September 3rd, the Costa Rican government announced a plan to stimulate private investment - both foreign and domestic - with an aim to boost economic growth and improve the country's competitiveness. The plan has four components: simplification of procedures, support for SMEs and entrepreneurship, employability, and investment in public infrastructure.

Congress is also discussing a tax reform project, called "Strengthening Public Finance." The main component of this reform is the transformation of the sales tax (equivalent to 13%) into a Value Added Tax (VAT) of the same rate but including more products and services...