Costa Rican President Carlos Alvarado marked his first anniversary in office on May 8 by proclaiming that the country’s economy is finally on the mend after a grueling battle to get a fiscal reform package through the National Assembly late last year. It was quite an accomplishment, considering his four predecessors failed to make any economic headway.

But even as reform measures continue to be implemented, a chorus of analysts, economists and investors warn that the package might not be enough to overcome Costa Rica’s fiscal deficit and burgeoning foreign debt. The International Monetary Fund (IMF), while welcoming the reform, described it as a good first step.

Alvarado’s government is now considering its options. There have been tentative discussions of deeper spending cuts and higher taxes. Adding urgency to the deliberations is the country’s deteriorating fiscal outlook. In recent months, Fitch, Moody’s and S&P Global have downgraded Costa Rica’s debt and issued negative outlooks.

But the prospect of another political impasse has tempered expectations. “The government has used up a lot of is political capital getting the fiscal reform passed,” says Thomas Jackson, emerging market sovereign analyst with Oppenheimer.

Costa Rica is a bit of an economic anomaly. The country’s economy is expanding at a healthy clip – up nearly 3% last year. And its appeal as an oasis of stability in an sometimes turbulent region has attracted a steady flow of investors. Though down slightly from the previous year, net foreign direct investment was 4% of the country’s estimated $58.5 billion economy in 2018, according to S&P Global.

But the country suffers from a chronic fiscal deficit, equivalent to 6% of GDP in 2018, up from 5.3% two years earlier. Just as alarming, central government debt was 53.5% of GDP last year, up from 40.9% in 2015, according to the IMF. That makes Costa Rica the third most indebted nation in Latin America, after Argentina and Brazil. Yet Argentina remains mired in recession, while Brazil is emerging from a crippling economic downturn.

“Costa Rica is uncommon,” says Gabriel Torres, senior credit officer at Moody’s sovereign risk group. “This kind of fiscal crisis normally happens when a country is hit by some kind of economic shock, a recession that lasts for a few years, but Costa Rica has had growth for many years.”

After two years of surpluses, the budget slid into deficit in 2008 in the midst of the global recession. But successive administrations have failed to agree on a remedy. The political indecision reflects the fact that no party has had a majority in the 57-member National Assembly since the 1990 elections. And opposition parties have dominated the legislature since the start of the decade, making it difficult to cobble together coalitions for reform of any sort.

Making matters worse, when the competing parties could agree, they responded with policies that widened the deficit and debt, such as a sharp increase in public salaries, without generating more revenue.

“Costa Rica has very high development indicators, a good track record of democracy, but political gridlock over many years has put pressure on the fiscal front, leading all the way to liquidity concerns,” says Carlos Morales, director of Latin American sovereigns at Fitch.

That’s why the package that was adopted at the end of last year was greeted as a breakthrough. It was “monumental,” says Oppenheimer’s Jackson. “It was two decades in the works and it was definitely a huge success for the government, but it is still in its infancy and investors are pretty much waiting to see the implementation and how that goes.”

The centerpiece of the legislation is tax reform. The sales tax will be replaced by a value-added tax (VAT) in the second half of 2019. The rate remains at 13% but includes many more items. “The sales tax was archaic. The value-added tax not only allows us to include services, but it provides better mechanisms for supervision,” says Deputy Welmer Ramos, a former economy minister and member of the President Alvarado’s ruling Partido Acción Ciudadana (PAC), who sits on the National Assembly’s budget committee.

The package also introduced a 15% capital gains tax and a 20% levy on companies with gross annual income of at least 106 million colones ($178,000). There are also two new income tax brackets for individuals: 20% for workers earning at least 2.1 million colones and 25% for those making more than 4.2 million colones.

While these measures will take time to generate more revenue, one reform has already produced results. A tax amnesty provision that ended in March helped generate much needed revenue at the start of the reform. “The fiscal results from the first quarter, with revenues up 15% year over year and outpacing expenditure growth, is coming mainly from the tax amnesty,” says Jackson.

The government estimates that all these tax measures could eventually increase tax revenue by around $900 million, or 1.5% of GDP.

As for spending, incentive pay and bonuses for employees in the public sector will be capped at 25-30% for those with master’s degrees and 10-15% for bachelor’s degrees. In the past, these increases could go as high at 60%. And instead of automatic annual pay raises, employee compensation will be based on performance reviews. Lastly, there will be a cap of eight years’ worth of wages for a severance payment, if the employee is terminated without cause.

The package also authorizes the government to borrow from multilateral institutions and issue new bonds. The plan allows for $6 billion in new bond issues: $1.5 billion in 2019 and 2020, and another $1 billion a year for the next three years.

It had already received loan commitments for around $800 million from multilaterals in the first quarter of the year. In April the National Assembly tentatively agreed to a $1.5 billion eurobond issue. Deputy Ramos says the proceeds would be used to retire existing debt, with lower rates and longer payment periods.

While the IMF projects that the additional borrowing will push Costa Rica’s government debt to 61.5% of GDP by 2023, it says debt will decline in subsequent years.

Although the IMF has recommended additional fiscal measures, further reforms are far from guaranteed.

Some analysts recommend additional cutbacks in public employment compensation. The government could raise the new VAT to 15% from 13%. Another option is to consider the sale of public assets, according to Ravi Balakrishnan, who led the IMF team that recently evaluated Costa Rica’s economy.

“The government still has sizable financing needs in the near term,” says Balakrishnan. “Even under a full and timely implemented reform, the central government debt ratio is still projected to reach 61.5% of GDP in 2023.”

But the prospect of even higher taxes is a non-starter with the opposition Partido Unidad Social Cristiano. “There will not be more taxes. There is no way. We have to make Costa Rica less expensive by lowering the cost of financial intermediation, energy and construction materials,” says Deputy Pedro Muñoz, the party’s representative on the National Assembly’s economic committee

Muñoz says any new reforms should be aimed at easing costly regulatory burdens, especially in the energy sector. The IMF has also raised questions about energy costs, the highest in Central America.

He says the government’s new “decarbonization plan” to eliminate fossil fuels by 2050, championed by First Lady Claudia Dobles, will only add to the country’s fiscal challenges as companies and households are forced to invest in clean energy alternatives. “No one is opposed to lowering carbon emissions to stop climate change, but this plan does not consider the economic costs,” says Muñoz.

As both parties continue to duel, many analysts doubt anything concrete will emerge. Says Oppenheimer’s Jackson: “Taking on more reform is difficult to imagine right now.”