Costa Rica: Risk Assessment


Country Risk Rating

A4 A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.

Business Climate Rating

A3 The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.

Strengths

  • Democratic institutions (since 1949)
  • The region's best social indicators: education and health
  • Cutting edge industries attractive for FDIs
  • Diversified trade thanks to multiple trade agreements
  • Tourism resources: hotels, national parks

Weaknesses

  • Exposure to natural disasters
  • Inadequate transport infrastructures
  • Economically and financially dependent on the United States
  • Weak public accounts
  • Lack of skilled labor/undeclared work

Current Trends

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Moderated growth in 2016

Growth is expected to remain muted in 2016 because of the weakening of foreign trade. The resilience of the local currency, the Costa Rica colon, against the dollar is eroding the competitiveness of the country’s exports - particularly of agricultural products - relative to its peers in the region. Agricultural production could also decrease as a result of the "El Niño" weather phenomenon if it were to materialize. Activity in the United States, which has a significant impact on the country by virtue of its predominant position in trade, tourism and capital flows, should nevertheless benefit the tourism and construction sectors. Private consumption is likely to remain resilient thanks to the still moderate inflation level, which is boosting households’ real purchasing power. The continuation of the accommodating fiscal policy and the increase in government spending - especially on investment - should also help boost domestic consumption. The opening up of services (tourism and telecommunications) to foreign investors under agreements signed with the United States and the European Union is expected to attract new FDI. Inflation should increase somewhat as a result of the increase in local demand, despite the persistently low level of energy prices.

Persistent fiscal and current account deficits

In 2016, the government is likely to continue its accommodating fiscal policy in order to stimulate activity. In particular, it is planning to increase investment spending on infrastructure and to increase loans granted by the development banks, mainly intended to finance SMEs. Other initiatives have been also announced with a view to attracting investments, such as a reduction in the time needed to obtain construction and environmental permits. Even though the business community has welcomed these measures, it is uncertain how they will be financed. The government is essentially counting on its tax reform plan to increase its revenues. This plan provides for the introduction of a 15% VAT intended to replace the current sales tax (13%), as well as the elimination of tax exemptions (healthcare services in particular). However, his tax reform is not new (it was mentioned already in 2012, but has never been confirmed) and could fail again because of the lack of consensus within the political class. Accordingly, the country will probably continue to run up debt, which has grown continuously over the last five years. The current account deficit is expected to increase under the effect of growth in imports while manufacturing exports (microprocessors in particular) are likely to remain affected by the closing of the Intel factory and agricultural exports by the decline in competitiveness linked to the resilience of the local currency. Despite the persistently low level of the oil price (the country is a net importer), the heavy dependence on imports of consumer goods and intermediate goods aimed at factories in the free zone should increase the trade deficit. The services balance, in contrast, should benefit from the increase in the number of US visitors. The income balance will probably remain negative because of the repatriations of dividends by multinationals established in the country and the transfer deficit should remain modest. The inflow of funds from emigrant workers will still be counterbalanced by the outflow of funds from Nicaraguan workers living in the country. The upswing in activity in the United States (the largest investor in Costa Rica) should nevertheless boost FDI, which finance most of the current account deficit.

The absence of a majority continues to slow down the implementation of reforms

The president, Luis Guillermo Solis from the center-left party PAC, in power since 2014, is struggling to get his reform program passed. His party actually has only 20% of the seats in the legislative assembly and the opposition is very hostile to changes. That could make it more difficult to adopt corrective tax measures and to fight against urban crime and against the development of money laundering networks linked to drug trafficking, and slow down the plans aimed at improving the institutional framework.

The business environment will remain affected by the shortfall in infrastructure (especially transport and telecommunications) and the relatively high cost of energy. In terms of international relations, the country is in the process of formalizing its accession to the Pacific Alliance (economic community with four member states: Chile, Mexico, Peru and Colombia). In April 2015, the OECD Council decided to start discussions with Costa Rica with a view to accession.

Source:

Coface (09/2016)
VERY LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK


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