Fitch places Costa Rican banks on negative watch

Fitch Ratings has placed six Costa Rican banks and one Panamanian subsidiary on ratings watch negative (RWN).

The action comes as a result of its decision Thursday to put Costa Rica's long-term issuer default ratings (LT-IDRs) on RWN.

The ratings in question are the LT-IDRs, support ratings (SRs) and support rating floors (SRFs) of Banco BAC San Jose (BAC San Jose), Banco Davivienda (Costa Rica) (Davivienda CR), Banco de Costa Rica (BCR), Banco Internacional de Costa Rica, (BICSA), Banco Nacional de Costa Rica (BNCR), and Banco Popular y de Desarrollo Comunal (BPDC).

Fitch affirmed the short-term IDRs of BCR, BICSA, BNCR, BPDC and the foreign currency short-term IDRs of BAC San Jose and Davivienda CR in line with the sovereign short-term IDR.

"Costa Rica's IDRs reflects acute financing constraints facing the sovereign, which pose risks to its ability to meet budgetary obligations and debt maturities in the remainder of 2018, including a loan from the central bank (BCCR)," said Fitch when taking action on the sovereign rating last week.

"This comes against the backdrop of persisting uncertainty around lawmakers' ability to pass effective legislation to contain the country's high and widening fiscal deficits," it added.

The government, led by President Carlos Alvarado, continues to struggle to find the necessary votes to push through a major fiscal reform package with a supermajority, allowing it to bypass approvals from the courts, universities and other entities, some of which have already expressed opposition to the measures.

Meanwhile, street protests opposing the reform have now entered their 11th week.

"Fitch will review the rating in the next one to three months in light of the outcome of the pending fiscal reform legislation, its impact on the budget deficit and the government's financing situation. This review to resolve the RWN could result in a downgrade of one or more notches," said the agency.

Fitch noted that IDRs and national ratings of BCR and BNCR are aligned with the sovereign, reflecting the explicit guarantee and complete ownership by the Costa Rican government. According to the law, the state-owned banks have the guarantee and full collaboration of the state. Fitch also believes both banks have high systemic importance and a relevant and long-lasting policy role.

BAC San Jose and Davivienda CR's IDRs are rated above the sovereign rating based on the potential support they could receive from their respective shareholders, Banco de Bogotá and Banco Davivienda, both rated 'BBB'/stable, said Fitch.

BICSA's IDR and national ratings reflect the potential support it would receive from its shareholders. Fitch's assessment of BCR and BNCR's propensity to support BICSA reflects the material reputational impact that the default of this subsidiary would have on "its shareholders, its significant role in its owners' regional objectives and the unquestioned support track record".

Pictured: Workers from the public sector attend a vigil at Plaza de la Democracia during a strike called by the unions to protest against a tax reform project in San Jose, Costa Rica on November 7.