Estudos Económicos
Costa Rica

Costa Rica

Population 5.0 million
GDP 12,039 US$
C
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 3.4 2.6 2.0 -6.0
Inflation (yearly average, %) 1.6 2.4 1.5 1.0
Budget balance (% GDP) -6.3 -6.0 -6.9 -9.2
Current account balance (% GDP) -2.9 -3.1 -2.5 -3.2
Public debt (% GDP) 48.9 53.7 57.1 66.0

 

(e): Estimate (f): Forecast

STRENGTHS

  • Democratic institutions (since 1949)
  • Best social indicators in the region: education and health
  • Services and cutting-edge industries (pharmaceuticals, microprocessors)
  • Diversified trade, thanks to multiple trade agreements
  • Tourism resources: hotels, national parks

WEAKNESSES

  • Unsustainable public accounts
  • Exposed to natural disasters
  • Inadequate transport infrastructure
  • Dependent on the United States, both economically (FDI, exports) and financially (banks)
  • Strong income inequalities

Risk assessment

A slow recovery brought to a standstill by the pandemic

While the end of 2019 saw the first signs of renewed dynamism in activity, the Costa Rican economy came to a halt in March 2020. The country seemed to be initially successful in containing the pandemic during the first wave, but the number of cases has been increasing since June when the  country gradually reopened. This has led the government to adopt a new strategy of alternating the opening and closure of shops and other activities, in order to avoid contagions while limiting the economic downturn. The external backdrop and the first containment measures imposed domestically for over two months have affected the key drivers of the economy. The border closure on 19 March led to a steep fall in tourism activity, with -50% year-on-year in tourism arrivals in March and nearly -100% in the four following months. The partial reopening to international flights in August 2020, in an uncertain global context, will not be enough to compensate for the losses. Revenues from tourism amounted to 7% of GDP in 2019, being one of the key growth drivers. In manufacturing, the blend between lower domestic and external demand hindered production in both the special and definitive regimes. Textile exports registered the sharpest decline, while the drop was weaker for the agricultural and medical exports. Over the period, unemployment has surged. It stood at 24% in June 2020, compared to 11.4% in September 2019, with under-employment at 20%.  The high level of unemployment will amplify the decrease in household consumption, which had already been observed in the first half of the year with the closure of non-essential activities. Nonetheless, disinflationary pressures should remain for the rest of the year and the course of 2021, resulting in an inflation rate lower than the central bank’s window of 2-4%. This has allowed it to maintain an accommodative stance, with three consecutive cuts in the leading interest rate in the first semester of 2020, bringing it to 0.75% in June 2020.

 

A pandemic that will widen existing fiscal and external imbalances

While the fiscal situation was already tense, the crisis only increased the pressure on government finances and borrowing costs. In June 2020, revenue collection fell by 11.6% compared to the same period in 2019. The government projects a deficit of 9.7% of GDP in 2020. General government and global public sector debt relative to GDP increased respectively by 7.2 and 8.5 percentage points compared to 2019. They stood at 62.8% and 79.7% of GDP in June 2020, respectively. This debt accumulation should continue because of increasing interest rates and greater public spending to fight the effects of the crisis. Such needs for public financing come with greater external financing needs. The contraction in imports, mainly due to a reduction in the oil bill, will not fully compensate the fall in goods exports (textiles, machinery, medical supplies to a lower extent) and in services exports (through tourism activities). This will result in a wider current account deficit. Usually, the current account deficit is financed through FDIs, which will fall in 2020 and 2021 given the depressed global environment.  The external financing gap should equal 2% of GDP after the authorization of approved multilateral lending. The country relies heavily on multilateral loans (IDB, BCIE and CAF) given the high interest rate it has to pay on the external market. During fall 2020, negotiations with the IMF started in order to obtain an Extended Fund Facility (EFF) of USD 1.75 billion (2.8% GDP), to fill this financing gap. This follows the emergency loan of USD 504 million from the IMF approved by congress at the end of August.

 

A fragmented political landscape will hinder reforms

The fragmentation of Congress is likely to slow the negotiations with the IMF and other external financing procedures. Indeed, a majority of two-thirds in Congress is mandatory to allow any external financing for the government. The presidential party of Carlos Alvaro Quesada (Partido de Acción Ciudadana, PAC) only gathered 10 seats out of 57. Compromises will be difficult to achieve. The business environment will continue to be affected by inadequate infrastructure (transport and telecommunications in particular) and relatively high energy costs (electricity).

 

Last updated: September 2020

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