Country Risk Rating

C
A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high. - Source: Coface

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

Weaknesses

  • Unsustainable public accounts
  • Exposed to natural disasters
  • Inadequate transportation infrastructure
  • Dependent on the United States both economically (FDI, exports) and financially (banks)
  • Lack of skilled labor, unreported work
  • Major income inequality, low redistribution due to limited government revenue (13% of GDP)

 

Current Trends

A recovery undermined by the drop in tourism and fragile public finances

After being hit by a deep recession in 2020, activity in Costa Rica will not rebound strongly in 2021. Domestic demand will remain constrained as fragile public finances limit the government's investment capacity. Household consumption (over 60% of GDP) will be curbed by high unemployment and underemployment rates, which have declined only very gradually since the economy began to reopen at the end of July 2020. Despite the announcement by Amazon in April 2020 that it needed to fill 2,000 jobs in the country to staff call centers serving European customers, the unemployment and underemployment rates reached 23% and 26% of the labor force respectively in August 2020, against 12.4% and 12.5% at the beginning of the crisis. Deflationary pressures will remain strong in this context, with oil prices still low, prompting the central bank to extend its accommodative policy in an effort to bring inflation back within its target window of 2-4%. Despite this, private investment is expected to remain sluggish overall, affected by the global climate of uncertainty and domestic political tensions. The medical equipment and materials sectors, as well as customer service call centers, will be alone in attracting foreign investment, as investors turn away from tourism. Competition between the government and the private sector for access to domestic financing is also likely to make it more difficult for local firms to invest. While foreign demand should remain buoyant for medical equipment produced in the free trade zone maquilas, demand for textiles and clothing produced by companies subject to the ordinary system will continue to suffer from the moderate recovery in U.S. demand. Finally, the tourism sector, whose revenues represented 7% of GDP in 2019 and which has been a mainstay of growth in recent years, should continue to be severely affected by the low number of visitors in 2021 while health concerns persist. An uncontrolled resurgence of the pandemic either locally or among major trading partners could adversely affect this scenario.

Critical public finances and a widely opposed solution

Despite the fiscal responsibility law passed in late 2018, the government has failed to turn around the public finances, which worsened with the pandemic in 2020. After a collapse in revenues in 2020 (-11.5% compared to 2019), the situation is expected to improve only marginally in 2021. With the interest burden now very heavy (13.5% of GDP), the deficit is expected to remain extremely high, despite a 5.3% decline in primary expenditure, i.e. excluding debt service, in 2021. The strategy of replacing expensive commercial debt with loans from multilateral donors has been only partially successful. Attempts to negotiate with the IMF to obtain a USD 1.7 billion Extended Credit Facility have so far met with a wave of opposition in the streets, with criticism of the austerity measures included in the project, forcing the government to end talks in October 2020.

The financing requirement for the public accounts is accompanied by financing needs for the external accounts, with the trade deficit set to grow. Imports are poised to increase as the economy and manufacturing production recover, while simultaneously, exports of goods, despite being driven by medical equipment and machinery, and agricultural products (pineapples, bananas), could recover more slowly. With the tourism sector still convalescing, the traditional surplus in services will be less able to absorb part of the deficit in trade in goods and in income due to profit repatriation by foreign investors, leaving the current account still heavily in deficit. FDI, which in normal times comfortably finance smaller current account deficits, will not be able to cover the financing requirement, increasing the need to secure multilateral loans. This, coupled with a higher risk premium related to political tensions in the country, should continue to put downward pressure on the colon.

Plummeting popularity and a divided Congress

While President Carlos Alvaro Quesada, who was elected in April 2018, saw his popularity peak in the spring after his skillful handling of the first wave of the pandemic, popular support waned thereafter as case counts rose in late spring (26% favorable opinion rating at the end of August 2020). The opening of negotiations with the IMF and the potential implementation of austerity measures then caused his popularity to plummet, with protesters blocking roads and highways around the country. Since his party, Partido de Acción Ciudadana, holds only ten of the 57 seats in parliament, any loan negotiations with multilateral donors are likely to prove very difficult.

On the international scene, full membership of the OECD should finally be achieved at the end of 2020, after a drawn-out process. Relations with neighbor Nicaragua, which is still in the midst of a crisis, will continue to be tense.

Source:

Coface (02/2021)
Costa Rica