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Cablegate: Costa Rica: Prudent Debt Management

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PP RUEHWEB

DE RUEHSJ #0811/01 2671702
ZNR UUUUU ZZH
P 241702Z SEP 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 1234
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS SAN JOSE 000811

SENSITIVE
SIPDIS

DEPT FOR WHA, WHA/CEN, WHA/EPSC, EEB/IFD/OMA AND EEB/IFD/ODF;
PLEASE PASS TO TREASURY: SSENICH

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV PGOV PREL CS
SUBJECT: COSTA RICA: PRUDENT DEBT MANAGEMENT

1. (U) SUMMARY: The Arias administration has increased spending on
infrastructure, education, health, support for workers, and the
judiciary, not only in absolute terms, but also as a percentage of
the total budget. As spending in these line items increased, they
were offset by a decline in the percentage of the budget spent on
debt payments. Despite the economic crisis and former Finance
Minister Zuniga's request for 20 percent across the board budget
cuts, international financial institution (IFI) representatives from
the International Monetary Fund (IMF) and Inter-American Development
Bank (IDB) expect spending in priority areas to continue, albeit at
a slower pace. The decline in debt payments is likely to stall
however, as the crisis has compelled the administration to take on
more debt as revenues fall. End Summary.

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INVESTING IN SOCIAL AND PUBLIC WORKS PROGRAMS
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2. (U) An analysis of the government of Costa Rica's (GOCR)
2007-2009 period reveals a notable increase in spending on
infrastructure, education, health, support for workers, and the
judiciary as a percentage of the total budget. The increases are
remarkable when compared to budgets of the previous administration
(2003-2006 budgets) and in light of the fact that an estimated 90
percent of the budget consists of mandated expenses and debt
payments.

Ministry or Percent of total budget Difference
Budget Item 2003-2006 2007-2009
(average) (average)
Education 19.7 24.6 4.9
Public Works 3.5 5.3 1.8
Judiciary 3.7 4.6 0.9
Health 1.7 2.4 0.7
Labor 1.1 1.9 0.8
Finance 1.1 1.7 0.6
Public Debt 50.4 38.3 -12.0

3. (U) In education, the greatest increases came in funding for
university education, followed by secondary education, and auxiliary
and general education services. Over the same time period, spending
on non-university post-secondary education dropped by almost three
percentage points as the emphasis switched to university education.
This change began in 2006 with the last budget prepared by the
Pacheco administration and continued through the Arias
administration.

4. (U) For public works, capital expenditures for highways posted
the largest increase. The pattern of increasing expenditures is
expected to continue through at least 2010 since the IDB's USD 850
million infrastructure loan was recently approved. The 2009
extraordinary budget, presented to the National Assembly on August
31, includes individual road projects from the loan.

5. (U) Increases in health, labor, finance, and the judiciary
flowed mostly to general services in each of the ministries. A
further breakdown showed the increase funded mostly wages and
salaries in the judiciary, goods and services in finance, and public
sector transfers in health and labor.

---------------------------------------
THE RATIO OF PUBLIC DEBT DECREASES. . .
---------------------------------------

6. (U) The decrease in the percentage allocated to public debt
payments cannot be wholly attributed to the Arias administration, as
it is partially the result of less borrowing during previous
administrations. Although debt had been declining as a percent of
the budget and as a percent of GDP through 2008, it was not possible
for the administration to maintain the trend in the face of sharply
declining revenues.

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. . .AS DEFICITS INCREASE
-------------------------

7. (U) In a presentation to market participants in August, Director
of Public Credit Juan Carlos Pacheco Romero noted that revenues
declined by 8.3 percent in the first half of 2009 (1H2009) compared
to 1H2008, while expenditures increased by 22.1 percent in
comparison to the same time period. This resulted in an accumulated
deficit of USD 350 million, which has been entirely financed through
domestic debt issuance. Pacheco estimated that domestic debt would
finance the combined public sector 2009 budget deficit (4.8 percent
of GDP, 19 percent of the budget), but that the country will have to
draw on a USD 500 million loan from the World Bank to finance not
quite half of the 2010 budget deficit.
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INTERNATIONAL FINANCE INSTITUTIONS SIGNAL APPROVAL
--------------------------------------------- -----

8. (SBU) The IMF's mission chief for Costa Rica Andreas Bauer
stated that he encouraged the GOCR to draw on the World Bank loan,
as the increased domestic debt issuance was likely to begin to
strain the domestic market. Bauer noted that although spending
increased by 22 percent, this was lower than the 30 percent increase
called for in the 2009 budget. A main risk to economic recovery was
the continued under-execution of the 2009 budget, especially
continued under-execution of investment expenditures. He noted that
the increase in expenditures was due largely to current
expenditures, particularly to increased public salaries. Such
salary expenditures will be difficult to reverse once the crisis
abates. He said the IMF expected a combined public sector 2009
deficit of 4.8 percent of GDP, assuming that spending on capital
expenditures would increase in 2H2009.

9. (SBU) IDB resident representative Fernando Quevedo noted that
the IDB's 2006-2010 country partnership strategy's priorities had
not been revised based on the economic situation. Although he
expressed some disappointment with the length of the process to gain
National Assembly approval on loans, he stated that operations were
relatively on track and the GOCR still placed a high priority on
infrastructure improvements.

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2009 AND 2010 BUDGETS
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10. (U) The Finance Ministry presented the extraordinary 2009 and
the regular 2010 budgets to the National Assembly on August 31 and
September 1, 2009. The administration plans to fight the economic
slowdown through explicit deficit spending as the Finance Ministry
requests the National Assembly's approval of debt financing for
ordinary expenses as well as approval of the 500 USD million World
Bank loan. The extraordinary 2009 budget revision confirms the
under-execution evident in 1H2009, but partially balances that with
additional infrastructure spending in the port city of Limon
financed by the World Bank. The 2010 budget deficit, projected to
be 20 percent of the budget and 5 percent of GDP, is similar to
2009's budget deficit. The budget itself represents a 12.23 percent
increase in local currency terms over 2009. While continuing to
emphasize social and infrastructure spending, it also contains a
notable 26.7 percent budget increase for public security.

BRENNAN

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