The ratings on Republic of Costa Rica reflect its stable political system and its high level of social development, along with the moderate decline in its public-sector debt in recent years. Constraining the ratings are the nation's monetary inflexibility, limited exchange-rate flexibility, and the risk of a sharp spike in public-sector debt in the event of sudden adverse exchange-rate movements. The combination of a high level of dollarization in the financial system and losses at the central bank limit the effectiveness of Costa Rica's monetary policy. As a result, Costa Rica has suffered from a higher inflation rate than most of its neighboring countries and trading partners. The nation's limited (but improving) exchange-rate flexibility continues to make for external vulnerability.
