Costa Rica: Risk Assessment
Country Risk Rating
Business Climate Rating
- Democratic institutions (since 1949)
- Best social indicators in the region: education and health
- Cutting-edge services and industries (pharmaceuticals, microprocessors) – attractive for FDIs
- Diversified trade, thanks to multiple trade agreements
- Tourism resources: hotels, national parks
- Weak public accounts
- Exposed to natural disasters
- Inadequate transport infrastructure
- Economically (FDIs, exports) and financially (banks) dependent on the United States
- Lack of skilled workforce / undeclared work
- High income inequalities
Increasing Growth Sustained by Domestic Demand
Following a disappointing growth rate in 2017, economic activity is expected to be more buoyant in 2018. Household consumption is expected to benefit from the wage growth seen in recent years, as well as from the moderation of food prices and the recent fall in unemployment (down from 9.7% to 9.1% between 2016 and 2017). Nevertheless, rising inflation – triggered by the earlier depreciation of the local currency, the colón – will put pressure on disposable income. Conversely, public investment is likely to be hit by funding constraints, forcing authorities to postpone or delay the completion of some infrastructure projects (such as the Port of Moin). The government seeks to attract foreign investors to sectors of tourism and infrastructure (e.g. construction of a new airport at San José), as well as cutting-edge technologies (microprocessors, electronics) by offering advantageous tax conditions in the country's free trade zones and by opening up the services sector. Public/private partnerships are being used increasingly frequently, especially to build transport infrastructure, including roads and railways. Despite the still-underdeveloped tourist facilities, a dynamic tourism sector would sustain activity, benefitting the construction sector in particular. Improved trade terms, together with favorable financing terms, will likely continue to encourage exports (notably of bananas, pineapples, and coffee), even though import growth will limit trade's contribution to growth.
Concerning Persistent Public and Current Account Deficits
Although fiscal consolidation has begun (better tax collection, operating cost reductions), the country's budgetary situation remains very worrying in a highly fragmented post-electoral context. Higher financing costs, as well as a persistent public deficit, will lead to another increase in public debt. Real improvement will depend on the adoption of a tax reforms to boost revenue (currently 13% of GDP) by replacing the current sales tax with a 13% VAT, curbing growth of public employees’ salaries and eliminating tax exemptions. This public finances fragility has led several rating agencies to downgrade Costa Rica's rating, with the delay in reforms only serving to increase the cost of future adjustments.
The current account deficit is expected to remain stable in 2018. The trade balance will likely widen slightly as the growth in exports of goods will not offset that of imports, mainly because of the modest oil price recovery (the third most-imported item) and the dynamism of domestic demand. The income balance is also expected to remain in deficit due to dividend repatriation by the multinationals established in the country. However, the services surplus is set to increase slightly, boosted by the rise in tourist visitor numbers, notably from the United States.
The current account deficit will likely be funded not only through FDI inflows, but also by portfolio flows, particularly via bond issuance. Meanwhile, downward pressures on the local currency, as well as the strong dollarisation of savings will force the central bank to draw on foreign exchange reserves so as to maintain the stability of colón. In anticipation, a credit line was obtained by the Central Bank from the Latin American Reserve Fund, bringing foreign exchange reserves to their highest level ever: 6.4 months of imports.
A Fragmented Political Landscape in a Context of Much-Needed Political Reforms
The February 2018 presidential elections, crystallized around the issue of same-sex marriage, saw the emergence of evangelical candidate Fabricio Alvaro (Partido de Restauración Nacional, PRN). Defeated in the second round by the ruling party candidate, Carlos Alvaro (Partido de Acción Ciudadana, PAC), the PRN nevertheless gained strong influence in the National Assembly. In this highly fragmented parliament (seven parties for 57 seats), the PRN occupies second place with 14 deputies, just behind the PLN (Partido de Liberación nacional, dominant until 2014, 17 seats), and before the PAC (ten deputies). In this politically fragmented context, the reforms initiated by the former government will likely be softened in order to find a compromise. The fight against crime and money laundering networks linked to drug trafficking, as well as the reform of public finances, is nevertheless set to remain one of the priorities of the new government.
The business climate will continue to be affected by infrastructure shortcomings (especially transport and telecommunications) and relatively high energy costs (electricity). In terms of international relations, the country has not yet decided whether or not to join the Pacific Alliance. Discussions with the OECD about the country's accession are still ongoing.