Election boosts Costa Rica’s “rising star” path toward investment grade

Costa Rica’s recent election outcome strengthens the country’s path toward investment grade by lowering governance and execution risk. While the macro framework remains unchanged, improved governability makes continued market friendly and reform oriented policies more likely, reinforcing the credibility of the existing fiscal and institutional framework.

Last Sunday, Laura Fernández Delgado won the presidency outright in the first round with approximately 48.5% of the vote, while her ruling Sovereign People’s Party (PPSO) secured 31 of 57 congressional seats – the first time since 1990 that one party took both the presidency and control of the legislature in Costa Rica. A simple majority was achieved, but still short of the 38‑vote qualified majority, preserving checks on constitutional or radical policy changes.

Early policy signals: continuity and improved delivery

Initial messaging from the president‑elect aligns closely with our expectations Importantly, Fernández’s tone has been less confrontational than the Chaves administration, suggesting fewer institutional clashes and a smoother policy process – an underappreciated credit positive that strengthens policy credibility. The election outcome therefore does not change already improving economic fundamentals for Costa Rica; rather, it makes the positive credit story more credible.

Costa Rica already enters this new administration from a position of strength:

• Growth: Real Gross Domestic Product (GDP) growth expected to be 3.6% in 2026[1], driven by manufacturing and resilient Foreign Direct Investment (FDI) despite external headwinds.
• FDI: Structurally high at around 5% of GDP[2], well above regional peers and anchored in free‑trade zones.
• External balance: A benign current account deficit, fully funded by FDI.
• Fiscal position: Primary surplus of roughly 1–1.3% of GDP, with debt-to-GDP ratios on a gradual downward path toward the high‑50s (Figure 1).
• Inflation and policy: Inflation remains low to negative; monetary conditions are still perceived as restrictive domestically but are likely to ease as funding shifts away from over‑reliance on the domestic market.

Early policy signals point to continuity:

• The fiscal rule[3] remains the anchor of macroeconomic stability, with continued primary surpluses and declining debt‑to‑GDP ratios.

• Eurobond authorisation (congressional approval of the issuance of Eurobonds) and improvements to the external debt approval framework are emerging as near‑term priorities.
• Respect for the institutional autonomy of the central bank has been clearly reaffirmed.

What the election materially improves is the speed of policy delivery. Fernández’s first round victory and the PPSO’s simple majority meaningfully reduce legislative gridlock and institutional friction. This lowers political and execution risk, a key constraint previously highlighted by credit rating agencies, without altering the country’s market friendly economic framework.

Improved credibility of positive credit story

In summary, we believe the most important credit implications are:

• A higher probability of Eurobond issuance authorisation, reducing reliance on domestic funding and mitigating crowding‑out risks.
• Improved debt‑management flexibility, with more predictable access to external markets, supporting lower interest costs and a longer debt maturity profile.
• Lower governance and execution risk, reducing political noise around the fiscal framework – an important positive for the ratings trajectory.

While structural reform progress is likely to remain gradual, improved governability makes reform more feasible and enhances the credibility of existing institutions.

The Fernández victory does not transform Costa Rica’s already positive credit story, but it materially improves its credibility. By lowering political risk and strengthening confidence in policy execution, the election appears to reinforce Costa Rica’s medium-term path toward investment grade.

We have upgraded our view on Costa Rica’s ability and willingness to implement credit positive policies. Market pricing already reflects that Costa Rica is headed in this direction towards investment grade. However, in clear positive ratings stories, investors often over reward momentum as upgrades materialise, as shown by our analysis and experience over the years.

Rising stars emerge in EM

We therefore expect a gradual compression of risk premia (related to the government’s ability to create and execute policy), further supported by supply-demand tailwinds as investment grade status attracts new investors. This would eventually place Costa Rica alongside “rising stars” EM investment grade peers, such as Paraguay and Oman.

The improvement in Costa Rica therefore highlights the continued upgrade in quality taking place across EM. Combined with a still attractive yield backdrop and a constructive growth outlook, this reinforces EM as an asset class we believe offers attractive investment opportunities. When compared with the risk return profile of US high yield, EM sovereign hard currency debt is not only compelling but increasingly attractive, supported by stronger fundamentals and improving credit trajectories. For investors seeking portfolio diversification, the asset class may potentially serve as a high quality alternative that preserves yield while offering meaningful credit improvement over time.

Footnotes

[1] Source: Bloomberg median growth estimates, as at 4 February 2026.
[2] Source: Macrobond, as at 4 February 2026.
[3] Costa Rica’s fiscal rule, enacted in 2020 via Law 9635 (Law on Strengthening Public Finances), is a budgetary mechanism designed to control public debt by capping year-over-year growth in government expenditure based on the country’s debt-to-GDP ratio and average nominal GDP growth.

^* Execution risk for governments refers to the danger that policy, programme, or project implementation fails to deliver intended outcomes due to operational, financial, or political obstacles.

^** Risk premia represent the expected additional return (excess return) an investor requires for holding a risky asset rather than a risk-free one, compensating for potential losses.

Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Risk premia represent the expected additional return (excess return) an investor requires for holding a risky asset rather than a risk-free one, compensating for potential losses.

Sovereign: Typically refers to debt issued by a national government. Sovereign bonds are backed by the country’s creditworthiness and ability to repay.

Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.