MUMBAI (Thomson Financial) - Fitch Ratings said it has affirmed Costa Rica's long-term foreign and local currency issuer default ratings at 'BB' and 'BB+' respectively with stable outlooks.
The ratings agency also affirmed Costa Rica's short-term IDR at 'B' and country ceiling at 'BB+'.
Costa Rica's ratings are supported by its dynamic economy, stable and democratic political system, relatively favourable social indicators, and modest and declining external debt burden, Fitch said.
However, Costa Rica's relatively weak albeit improving monetary and exchange rate policy framework, as well as structural weaknesses in public finances continue to constrain the ratings, Fitch said.
Though international liquidity has improved over the past two years, it remains fragile in the context of Costa Rica's large current account deficit and high level of financial dollarization, the ratings agency said.
Over the past year, the Central Bank of Costa Rica (BCCR) has allowed greater exchange rate flexibility to adopt an inflation targeting regime in the coming years. However, Fitch notes that monetary policy is fraught with challenges due to the limited exchange rate flexibility.
Fitch added that while inflation and financial dollarization have come down somewhat in this early phase of the transition, the BCCR is expected to 'miss' its inflation objective of 8 pct for 2007 and needs to improve its inflation-fighting credentials.
The ratings agency said although the recent approval of the DR-CAFTA (Central American Free Trade Agreement) by the Costa Rican electorate yielded a positive result, it remains uncertain whether Costa Rica's Congress will be able to approve the enabling legislation required for full implementation of DR-CAFTA in a timely manner.
Implementation of DR-CAFTA, continued solid fiscal performance, and further progress on reducing inflation would contribute to improving Costa Rica's creditworthiness, Fitch said.