Portfolio Strategy

June 4, 2021

The Big Idea

Costa Rica | Halting progress

Siobhan Morden | June 4, 2021

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.

Progress on Costa Rica’s public employment legislation has become critical for the country’s pending program with the International Monetary Fund. A final draft of the legislation is done and working its way forward. That might allow the legislation to focus on the next important item on the agenda: approval of the IMF loan itself along with a series of other sizable multilateral loans.

It has been slow and halting process. But the final draft legislation of Costa Rica’s important public employment bill is now scheduled for a first-floor vote between June 14 and June 18. This will represent an important commitment to the IMF program. The program set an end-of-May deadline for real progress on this front ahead of mid-October disbursement of funds. There were discussions on more than 350 motions since early March with a final draft last week. That draft then went for an 8-day review to those public institutions affected by the legislation, and the review concluded June 3. Then comes an important floor vote after two to three days of discussion that next heads to the constitutional committee for 30 days prior to a final second floor vote.  The draft legislation already underwent an important test with over two-thirds support for inclusion of the universities and municipalities. This suggests broad bipartisan support for a rigorous reform. The first vote will need to garner two-thirds support to reassure against risks of pushback from the constitutional court after an initial judiciary report of unconstitutionality.  The IMF program does not stipulate any specific criteria; however broader coalition support requires a rigorous reform.

The progress on the public employment bill may allow the legislature to shift attention to the next important item on the agenda: the approval of the IMF loan itself.  The deadlines are quickly approaching for approval of several multilateral loans including a $300 million CABEI loan, a $300 million World Bank loan (request for extension of June 15 deadlines) and the $1.778 billion 3-year IMF loan (initial disbursement of $583 million). There has been almost no progress on legislative approval of the $2.5 billion in external funding needs for this year waiting for delayed approval of $1.2 billion of loans above and another $1.3 billion in multilateral loans still under development.

Exhibit 1: Status of major loans to Costa Rica

Source: https://www.hacienda.go.cr/docs/604f73f23c0aa_PresentacionPlanEndeudamientoISem2021MinisteriodeHacienda.pdf

The multilateral issuance at 4.7% of GDP represents an important part of the 13.5% of GDP 2021 gross financing program. It also facilitates easier and cheaper access to domestic funding markets. The investor sentiment remains critical. High debt service cannibalizes the budget, and a high cost of funding undermines medium term solvency ratios.  The success of the IMF program has delivered a positive shock on lowering both the cost of funding and the rollover risk of a large funding program with 10-year CRC rates falling from 9.39% on January 5 to 8.12% on May 10 and a duration extension at the May 26 auction to 2036 maturities.  The cumulative local debt issuance at CRC1.72 trillion in 1H21 was near the CRC1.8 trillion target that included $600 million in multilateral issuance with depth and breadth in the local markets dependent upon the IMF as an anchor for investor sentiment.  The legislature will soon have to show support to the economic reform agenda as well as approve the IMF loan program to reinforce the virtuous circle on the carry returns.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539
siobhan.morden@santander.us

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