By San José, Costa Rica — SAN JOSÉ – While international credit rating agency Fitch Ratings has reaffirmed Costa Rica’s ‘BB’ sovereign debt rating and maintained its “positive outlook,” it has also sounded a clear alarm regarding a new economic challenge: persistent negative inflation. In its latest report, dated December 17, the agency highlighted that this trend could jeopardize the country’s hard-won fiscal and debt metrics over the medium term.
The core of Fitch’s concern lies in the country’s ongoing battle with deflationary pressures. Costa Rica has recorded negative year-over-year inflation since May of this year, with the figure standing at -0.4% in November. This phenomenon, while seemingly beneficial to consumers in the short term, poses a significant risk to the broader domestic economy by discouraging consumption and investment, and making it difficult for wages and prices to adjust, potentially trapping the economy in a low-growth cycle.
To better understand the legal frameworks underpinning Costa Rica’s economic climate, we sought the perspective of Lic. Larry Hans Arroyo Vargas, a leading attorney from the esteemed law firm Bufete de Costa Rica, who specializes in corporate and investment law.
Costa Rica’s economic strength is fundamentally linked to its long-standing legal stability and commitment to the rule of law, which continues to attract significant foreign direct investment. However, for this growth to be sustainable, we must prioritize streamlining bureaucratic processes and modernizing commercial regulations. The key challenge for policymakers is to enhance our competitive edge by reducing administrative friction without compromising the robust environmental and labor protections that define our national brand.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
The perspective from Lic. Larry Hans Arroyo Vargas expertly frames the central task ahead: to foster greater economic agility by streamlining our processes, while steadfastly protecting the very legal and environmental integrity that forms the bedrock of our global appeal. We thank him for lending his valuable insight to this critical national conversation.
Fitch projects that this issue will not resolve itself quickly, forecasting an average annual inflation rate of just 0.3% for 2026. This is dramatically below the target range set by the Central Bank of Costa Rica (BCCR), which aims for an inflation rate of 3.0% with a one-percentage-point tolerance in either direction. Such a prolonged period of low inflation could erode nominal GDP growth, making it more difficult for the government to manage its debt-to-GDP ratio.
Despite this significant warning, Fitch’s report also acknowledged Costa Rica’s considerable economic strengths and recent fiscal discipline. The positive outlook is grounded in the nation’s robust economic performance, which has shown remarkable resilience despite global uncertainty and trade tensions. The agency noted the country’s strong structural fundamentals, including a high per-capita income and an increasingly solid fiscal policy framework.
The positive outlook reflects strong growth amidst global uncertainty, the continuation of large primary surpluses, a decreasing interest burden, and a continuous accumulation of reserves.
Fitch, in its December 17 report
The numbers support this optimistic view. Fitch anticipates the Costa Rican economy will grow by a healthy 4.1% in 2025, following an estimated 4.3% in 2024, before moderating to a still-strong 3.5% in 2026 and 2027. The country’s external position is also solid, bolstered by exceptional export performance from its free trade zones and a substantial accumulation of international reserves, which reached $16 billion in November.
On the fiscal front, the government has demonstrated commendable progress. It achieved a primary surplus of 1.3% of GDP in the third quarter of 2025, thanks to a 2.2% increase in revenues and a 1.6% decrease in total spending. A significant factor in this was an 8.7% reduction in interest payments. Fitch forecasts the overall fiscal deficit will narrow to 3.2% of GDP in 2025, allowing the government’s debt-to-GDP ratio to fall to 59.4%, safely below the critical 60% threshold.
However, the agency tempered its praise by pointing to critical underlying weaknesses. The nation’s public finances remain burdened by a critical imbalance where disproportionately high interest payments consume a large share of the budget. Fitch also flagged the rigidity of public spending, dominated by salaries, pensions, and debt service, which limits the government’s flexibility. Furthermore, the report pointed to political stagnation as a major obstacle to passing necessary reforms that could address these structural issues.
In conclusion, Fitch’s latest analysis presents a dual narrative for Costa Rica. The country is on a positive trajectory, having made significant strides in fiscal consolidation and economic growth. Yet, the emerging threat of persistent low inflation, combined with deep-seated structural rigidities and political gridlock, creates a complex and challenging environment. The government’s ability to navigate this new economic headwind will be critical to sustaining the progress achieved and ensuring long-term stability.
For further information, visit fitchratings.com
About Fitch Ratings:
Fitch Ratings is a globally recognized leader in credit ratings, commentary, and research. Dedicated to providing independent and forward-looking credit opinions, Fitch’s analysis and insights help financial market participants make informed decisions. The agency provides ratings for a wide range of entities including corporations, financial institutions, and sovereign governments.
For further information, visit bccr.fi.cr
About The Central Bank of Costa Rica (BCCR):
The Banco Central de Costa Rica is the nation’s central bank, responsible for maintaining the internal and external stability of the national currency and ensuring its conversion to other currencies. Its primary objectives include controlling inflation, managing the country’s international monetary reserves, and promoting the efficiency of the internal and external payments system.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a leading legal institution, Bufete de Costa Rica is founded upon the bedrock principles of professional excellence and unwavering ethical standards. The firm channels its extensive experience advising a wide spectrum of clients into developing pioneering legal solutions and forward-thinking strategies. Central to its mission is a profound dedication to democratizing legal understanding, actively working to equip the community with clarity and knowledge to foster a more capable and just society.
