## Costa Rica; Sovereign Asset and Liability Management - Scoping Mission

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**Canonical URL:** [Costa Rica; Sovereign Asset and Liability Management - Scoping Mission](https://www.imf.org/-/media/files/publications/hls/2023/english/hlsea2023007.pdf)

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### Background
- Mission: Monetary and Capital Markets Department mission visited San Jose from November 15–22, 2022 to support the Ministry of Finance (MoF) in preparing a framework for consolidated Sovereign Asset and Liability Management (SALM).
- Institutional progress: Commission for Sovereign Assets and Liabilities (CSAL) established in April 2021 for coordination of public debt management, cash management, and financial programming of the budget.
- Context: Costa Rica has a 36-month Extended Fund Facility (EFF) in place since March 2021 supporting reforms toward strong, inclusive, and sustainable growth.
- Mission output: A drafted Report intended to facilitate discussion on the scale, scope, and implementation of SALM in Costa Rica.

### Summary of Findings
- Rationale for SALM:
  - A comprehensive SALM framework enables analysis of the financial characteristics of the whole sovereign balance sheet, identification of sources of costs and risks, and quantification of correlations among those sources.
  - When applied to the consolidated public sector portfolio, SALM allows overall sovereign risk exposures to be effectively analyzed and managed.
- Implementation challenges:
  - Two primary challenges: (i) obtaining data on all sovereign assets and liabilities; (ii) institutional coordination because assets and liabilities are managed by multiple, sometimes independent, entities.
  - Despite challenges, SALM has been applied by numerous countries to manage currency risk, liquidity risk, asset allocation, and debt composition.
- Costa Rica’s balance sheet characteristics:
  - The mission analyzed balance sheets of five types of entities: (i) the budgetary central government; (ii) the social security system; (iii) the central bank (BCCR); (iv) the four largest state-owned enterprises (SOEs); and (v) the state-owned banks (SOBs).
  - The BCCR’s balance sheet has negative equity and significant USD assets and liabilities.
  - Most SOEs are in reasonably good financial health and can fund some investment from their retained earnings.
  - The SOBs are profitable and liquid, and reflect dollarization in the economy.
- Consolidated balance sheet observations:
  - The consolidated balance sheet remains incomplete, largely due to gaps in knowledge of the central government’s financial position (e.g., property, plant, and equipment).
  - SOEs, SOBs, and BCCR provide financial statements in line with international reporting standards, contrasting with gaps for the central government.
  - The consolidated balance sheet highlights risks to sovereign net worth given the wide range of entities owned and the potential for transmission of shocks among them in times of stress.
  - Presence of two sovereign debt issuers in the local market—the central government and the BCCR—fragments local currency issuance, impedes emergence of a government yield curve, and complicates financial sector development, a unified public debt management strategy, and monetary policy implementation.
  - Addressing multiple issuers could allow for a single public debt management strategy and aid monetary policy implementation; such a move would be neutral from the perspective of a public sector balance sheet and net worth.

### Summary of Recommendations
- Institutional coordination:
  - Broaden the scope of CSAL to include the BCCR as a permanent member to ensure policy and operational coordination with monetary authorities within a SALM framework.
- Financial reporting and transparency:
  - The government should consider broadening its financial reporting to include a statement of financial position, consistent with international accrual accounting standards, to improve risk management, support transparency, inform long-term fiscal policy, and improve stewardship of the government’s sizable asset base.
- Cash and liquidity management:
  - In collaboration with the National Treasury, CSAL should establish and monitor a framework for cash and liquidity management, including a liquidity buffer, building on the initiative to establish a Treasury Single Account (Caja Unica) for the budgetary public sector.
  - CSAL could begin to analyze system-wide risks such as rollover risk, contingent liabilities, and other shocks to the budget.
- Debt issuance and market development:
  - The MoF and BCCR should consider a realignment of their balance sheets so the government becomes the sole issuer of sovereign debt securities in Costa Rica to support securities market development, enable a unified public debt management strategy, and support monetary policy implementation; work should include potential transition pathways and timeframes.
  - Consistent with the Medium Term Debt Management Strategy and domestic debt market development, the MoF should continue reducing the FX exposure of sovereign debt.
  - Some SOEs are also aiming to reduce FX risk in the medium term; maintaining FX exposures without hedging opportunities could be costly.
- FX market and hedging:
  - Measures should be taken to develop a deep and liquid FX market as a precondition for providing hedging opportunities for market participants.
  - Planned liberalization of SOEs’ access to foreign exchange (via transactions with the private sector) and improved transparency (informing the market of all FX transactions, including OTC, carried out daily) are welcome developments.

*2023 International Monetary Fund HLS/23/07*

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_Source: https://www.imf.org/-/media/files/publications/hls/2023/english/hlsea2023007.pdf_