The sale of INS, BICSA and BCR would be a “drop in the bucket” for the debt

QCOSTARICA (Semanario Universidad) Selling Banco Internacional de Costa Rica (BICSA) and Banco de Costa Rica (BCR), as well as 49% of the public insurer, the Instituto Nacional de Seguros (INS), does not seem to have much proven benefits, at least they were not given by the government of President Rodrigo Chaves, who assured that it would be a way out to pay the country’s debt.

In his 100 Day Report, Chaves said he would introduce bills to sell those assets, but the president did not specify how that process would be carried out or what his plan would entail.

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In his speech, Chaves indicated that “a key action is the sale of assets such as BICSA and BCR, which will give us new resources of around 2.8% of GDP. The sale of 49% of the INS can give the government 593 billion colones, or about 1.2% of GDP)”.

Read more: Costa Rica seeks to sell BCR and BICSA

In this sense, an article developed by Julio César Espinoza Rodríguez, Master in Development Economics of the Universidad Nacional (UNA), in the specialized journal Economía y Sociedad (Economy and Society) of July 2021, analyzed the maximum effect on the budget deficit that the announced sale of assets can generate.

The expert described that there are four ways to determine the value of public companies: one based on the balance sheet; the one that takes into account the income statements; those related to the value of assets and the profitability of the company; and, finally, those that include cash flow discounts over time.

Espinoza said BICSA’s equity in 2019 was $237 million, BCR $980 million and INS $1.829 billion.

Thus, if 100% of BICSA were sold, the impact on debt reduction would be 0.82%. With the full sale of RBC, the debt compensation would reach 3.39% and with 60% of INS (of which the Government proposes 49%) 3.80% would be covered, but it is likely that reductions will have to be made. operated.

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If that were the actual amount of the debt adjustment, it might seem tempting, but one should try to estimate what the direct effect on the budget deficit would be. To make this calculation, supposes the specialist, it would be necessary to suppose that all the companies are sold at the same time and under the same price reduction.

“Assuming that listed companies are sold at 100% of their value, the maximum at which the deficit could be reduced would be 1.25% of GDP. However, to assume that this is not realistic, given the financial situation of these institutions and that it has deteriorated due to the “COVID effect”, from which one could infer that the effect would not exceed 1 % of GDP,” the article explains.

These data show that, to promote an initiative of this nature, a detailed analysis and study of the gains it would generate, in terms of debt reduction and in contrast to the losses that the sale of these assets would mean for the country, would be needed.

On this subject, UNIVERSIDAD spoke to three economists to find out their position in the face of President Chaves’ announcement and, in the midst of nuances, the consensual conclusion specifies that it is early to decide on a proposal without specific studies ( unless they know), without having a clear plan on how it will be achieved and how the solidarity contributions that RBC and INS are making to the country will be resolved and the debt contribution would be negligible.

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“The question that should be asked of any politician who intends to sell, privatize, donate or alter a public good is: what is your opinion on the purpose that this institution serves and the analysis to know if it fulfills or not ? For example, if RBC fulfilled its role, how are we going to replace the work of this bank? What other institutions will? Or how are we going to guarantee the citizen that this social value will continue to be fulfilled? asked economist Leiner Vargas.

For Vargas, the President’s message is incomplete, since he does not say how, when and for what purpose the sales will be carried out, in addition, he described that this is a senseless action, since it causes stress in the financial system and could cause many people to come forward to change their entity activity.

“In short, the contribution that the sale of these assets would have would be very small for the enormous debt that we have, let’s say that it would take away 3 or 4 percentage points in the best case, ‘it’s a drop in the bucket,” the expert said.

For their part, economists Fernando Rodríguez and Welmer Ramos agreed that the impact of the sales would be minimal on the debt balance and, on the contrary, it generates an environment of uncertainty and concern in the economy.

Rodríguez pointed out that a more effective formula would be to energize the country with growth rates of 5% per year, which would make it possible to achieve debt reduction in a few years, that is, to take measures to revitalize the economy with other types of initiatives.

“The return generated by these institutions is greater than the interest that the government has to pay year after year. It’s like having a business that earns you 10% profit and you sell it to put the money into an investment that earns you 6%, that’s bad business,” Ramos added.

Read the original article in Spanish from Semanario Universidad here

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