By Michael J. Casey
Costa Rica is accelerating the introduction of a new value-added
tax and pursuing other overhauls aimed at improving governance and
spurring growth following a credit ratings downgrade last week by
Moody's Investors Service, the country's president said Monday.
But in an interview, President Luis Guillermo Solís warned that
his country's finances could be detrimentally affected if the U.S.
Federal Reserve too abruptly raises rates over the coming year. The
president was in New York to address the U.N. General Assembly and
meet with investors.
Mr. Solís, who assumed office in May, said the one-notch
downgrade of Costa Rica's rating from an investment-grade Ba1 to
speculative-grade Baa 3 should motivate the country's historically
divided legislature to forge a consensus for tax overhaul. Until
recently, Congress had resisted his government's efforts to
introduce a bill to migrate a selective 13% sales tax to a
comprehensive VAT at the same rate, which aims make it harder to
evade taxes and bring in an additional $555 million annually in
revenue. On Friday, three days after the downgrade, the government
started a dialogue with the legislature's 13 different parties in a
bid to overcome the logjam.
"One of the reasons why Moody's decided to downgrade us was
because the incapacity of governments in the past to agree with the
legislature for comprehensive tax reform," Mr. Solís said in the
interview.
In a statement accompanying its ratings announcement Tuesday,
Moody's took issue with persistently high fiscal deficits, which it
forecast would reach 5.8% of gross domestic product this year and
6% in 2015 in a continuing increase from 4.5% of GDP in 2009. The
deterioration has "materially worsened" Costa Rica's debt burden,
the ratings firm said, noting that government debt-to-GPP is
expected to rise to 40% this year, having been as low as 25% in
2008. The Moody's downgrade puts its rating on par with Fitch
Ratings' BB+, also one notch below investment grade, and a notch
above Standard & Poor's BB rating for Costa Rica.
Mr. Solís said that he is also determined to grow the economy
into a fiscally healthier state, highlighting $2.4 billion in
planned infrastructure expenditures over the next year. With
concerns rising that climate change-led reductions in water supply
will reduce Costa Rica's hydroelectricity supply from 90% of all
power generation to 70%, the government has plans to develop
geothermal power by tapping into the country's volcanic
activity.
To add a targeted two percentage-point increase in the country's
growth rate, bring unemployment down from 9% and poverty down from
20%, Mr. Solís's government is aggressively pitching to foreign
direct investors, talking up the benefits of a relatively
well-educated workforce in its traditional strengths such as health
sciences and high-tech manufacturing. This comes after some recent
exits by foreign companies, including chip maker Intel Corp., which
in the spring announced 1,500 job cuts in the country, and textile
maker Hanesbrands Inc., which said it would relocate its Costa
Rican unit to Vietnam.
Mr. Solis said Intel was building a research lab in the country
and that various other multinationals were also expanding
operations in his country, including consulting firm Accenture,
which on Monday announced it would create 330 new jobs in a new
financial services and accounting division in the country.
"We are tied into the current global scenario," he said.
"Companies come and go and we have to get used to that and we have
to compete in that context."
He is concerned, however, that tighter monetary policy in the
U.S. might disrupt his government's expansion plans.
"I hope that whatever happens it is done in such a way that it
doesn't impose on us the consequences of abrupt change," Mr. Solís
said of the impact of an expected Fed rate increase on Costa Rica
and other emerging-market economies. "We are trying to be sensible
about our own policies and it would be terrible if those
sensitivities are not supported by the United States and other
countries that have such tremendous impact on our economies."
Write to Michael J. Casey at michael.j.casey@wsj.com