Months after passing a hard-fought fiscal reform package, Costa Rica is looking to return to the international debt markets.

The administration of President Carlos Alvarado is hoping the measures have calmed investors’ worries about the country’s fiscal health. The reform included long-delayed tax hikes and spending caps as the government looks to reinvigorate economic growth, which slowed to a five year low in 2018.

Even though the reform measures are still be implemented, many question if they will go far enough to ease the country’s burdensome debt levels. Economists and investors would like to see further action. Even the International Monetary Fund, which welcomed the reform package, says more steps are needed. But the current political climate makes that seem doubtful.

Costa Rica Finance Minister Rocío Aguilar sat down with LatinFinance recently to discuss the government’s economic outlook, the country’s debt strategy and the road ahead for what has traditionally been one of Central America’s most stable economies.

A lawyer with extensive experience in the financial sector, Aguilar previously served as General Superintendent of Financial Institutions and was a partner at Deloitte where she focused on financial services and infrastructure. Earlier she served as Comptroller General and technical secretary of the National Concessions Council.

The government managed to get its fiscal reform passed late last year after months of intense legislative debate. Do you think the reform goes far enough in addressing Costa Rica’s fiscal problems?

When we first proposed the reform, we understood it wasn’t enough. But it was necessary to start the process of consolidating Costa Rica’s finances. Although fiscal reform is a technical issue, it’s viability is a political issue. I think Costa Rica has put into place a reform plan that primarily focuses on the structural spending issues that have long been a problem and led to our current deficit and debt levels. This reform is focused heavily on controlling spending but also in generating new revenue.

Is the government considering any other measures? Some analysts have suggested the government should consider reducing public worker salaries. Others have mentioned the possibility of selling state-owned assets. How do you view those options?

We’ll see. I think the biggest challenge over the next year will be implementing the reform. The International Monetary Fund has backed the fiscal reform and also recommended some additional adjustments. They could be considered in the coming years. But we also need to get the economy growing at the levels we saw in recent years. Because if the economy doesn’t grow, our revenue won’t be enough to make the reform a success. But we also need to continue pressing ahead with an overall reform agenda that includes institutional reforms, particularly in terms of the size of our public sector workforce. We also need to strengthen our public-private partnership system. We have had a PPP law for years with successful results. But we have to have a consistent program.

Are you worried that the fiscal reform, which includes tax increases, will have a negative impact on economic growth?

It is going to have an initial impact. But without the reform, we would probably have an even bigger (negative) impact. But it’s important to begin to address the structural problems the country faces and that are holding it back from growing at the rates it has the capacity to grow. There are some short-term steps we can take to help offset the impact on the economy. The Central Bank is looking at ways it can help the financial sector. We also need to continue to aggressively attract investment.

Is there sufficient political consensus in case you do need to consider additional reforms?

I think one of the important changes that we’ve seen is that Congress, which is made up of a number of political parties, has learned to negotiate. Historically, Costa Rica has had a two-party system. But that began to change in the early 2000s, and it was difficult for the increased number of parties to reach agreement. But the parties have learned to negotiate. That is a very important development. And I think Congress has now shown it has learned that despite the different visions and ideas, it can reach agreement on the most important issues the country is facing. The government has invested a considerable amount of political capital in getting the fiscal reform approved. But we understood that it was necessary and a crucial part of this administration’s goal of leaving the country in better shape for the next government. The ongoing process of Costa Rica being accepted into the Organization of Economic Cooperation and Development (OECD) is forcing us to consider a number of reforms the country has been slow to undertake — institutional reforms, improving our competitiveness and our infrastructure.

The fiscal reform package included plans to issue up to $6 billion in bonds over the next five years. When do you plan to tap the bond market?

We have proposed a program that would include issuing $1.5 billion in the first year, $1.5 billion the second and $1 billion a year for the following years. It includes plans to issue eurobonds. This is going to be a priority for us in the second half of the year. We want to persuade Congress that it is important lawmakers approve a bond issuance plan for several years. Costa Rica still has a tradition of needing to seek congressional approval for each issuance.

Why are we looking at issuing in eurobonds? Because of the size of Costa Rica’s debt and the size of the local market in Costa Rica, the sovereign’s presence is crowding out the market.

There are fewer resources for other sectors of the economy and the government’s presence pushes up interest rates. We hope by issuing in eurobonds it will allow us to get lower financing rates and with longer maturities and in turn free up the local market. With the two bond issuances, plus a recently approved $500 million loan from CAF, we should have our 2019 financing needs covered.

Investors expressed concern about Costa Rica’s fiscal situation before the fiscal reform. What is your message to them now? Do investors have any lingering concerns that could impact your debt issuance plans?

Let me address this perhaps from a different perspective. I’m in regular contact with investors and I believe one thing we have achieved is that we have established our credibility with them. Among the comments I’ve heard: “When you guys say you’re going to do something, you do it.” That’s very important. And our credibility has been established because we try to provide clear information about our plans. Of course, there will always be a degree of uncertainty. Will Congress approve our bond program? Will we tap the market at the most opportune time? But again, I think establishing our credibility with the market has been a very important achievement for this government. And this is a government that is firmly committed to getting its fiscal house in order.

President Carlos Alvarado has outlined a plan for Costa Rica to become the first “carbon-neutral” country by 2050. What impact will the current economic challenges have on potentially achieving that green agenda?

The plan to do away with fossil fuel use sets a goal and a direction for the country. On that road, you will likely see challenges. But if you know the direction you’re headed, you won’t lose your way. If you look at Costa Rica’s history, we have made some bold decisions throughout time. When deforestation was a global problem, we had already started a process of reforestation. When the world was building up their armies, we abolished ours. And we took some of these tough decisions sometimes during complicated economic periods in our country. So I would say we can’t let short-term circumstances prevent us from seeing the bigger picture of where we want to go as a nation.