Costa Rica: Risk Assessment
Country Risk Rating
Business Climate Rating
- 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
- Unsustainable public accounts
- Exposed to natural disasters
- Inadequate transport infrastructure
- Dependent on the United States, both economically (FDI, exports) and financially (banks)
- Lack of skilled workforce; unreported work
- Strong income inequalities
A dull recovery attributable to domestic and external factors
In 2020, economic activity will remain well below its potential, despite a slight recovery from the sharp deceleration in 2019. The slower growth of the country's main trading partners, as well as the continued crisis in Nicaragua, which is limiting trade with the rest of Central America, will constrain external demand. Cooler growth in the United States, which accounts for more than a third of the country's exports, will weigh on sales of medical equipment, the main export product for the industries in special economic zones. Slacker worldwide activity is also expected to crimp tourism growth, although this will be partly offset by the increase in the number of flights and an aggressive promotional campaign by the Costa Rican Chamber of Tourism. The tourism sector should also continue to attract numerous investments, helped by the central bank’s accommodative monetary policy, after five successive rate cuts in 2019 (to 3.25% in December 2019). As the resources of local banks remain partly allocated to financing public debt, private investment will remain constrained, especially since the bond market is still largely dominated by government bonds. Household confidence is expected to rise after tax uncertainty was reduced by the adoption in 2019 of various measures provided for in the December 2018 law. This will pave the way for an increase in private consumption, which also stands to benefit as inflation is kept in the central bank's target window of 2%-4%. Fiscal consolidation efforts will further constrain public consumption, particularly in infrastructure, which will negatively affect the construction sector. The agricultural sector will continue to be highly exposed to climate risk and, for this reason, will be particularly volatile, affecting the production of bananas, sugar and coffee, the country's main agricultural exports. The ongoing tense social climate in connection with the austerity measures put in place by the government poses a risk to this scenario.
Slow consolidation of public finances
The public accounts feature a chronically high deficit. Revenues are insufficient to cover expenditure, with an ever-increasing share going towards servicing the country’s exploding public debt (38% earmarked in the 2020 budget). The 2020 budget is the first to include all the new consolidation measures adopted as part of the tax reform introduced in December 2018. In particular, the 3.9% increase in expenditure complies with the 4.6% limit set according to the debt-to-GDP ratio. The new budget is the first to be based on the value added tax introduced in July 2019, which will finance 16.9% of the total budget. With a budget plan that is 48% debt-financed, the country will again face severe financing constraints. As the domestic market is completely saturated, the government must issue bonds on the international market, but this requires the approval of Parliament, where the President has minority support. An initial request for USD 5 billion was rejected in the autumn by MPs, who only agreed to a USD 1.5 billion Eurobond issue. Accordingly, debt sustainability remains fragile.
In terms of the external accounts, the situation remains more favorable. The balance of services is in surplus thanks to tourism revenues (surplus of 9% of GDP in 2017) but insufficient to offset the deficit in goods. The latter is expected to increase following the recovery in domestic demand, which will push imports up. Agricultural exports (pineapples in particular) will be less buoyant, affected by climatic events and increased production in other countries, while international sales by companies established in the special export zones will be weaker, particularly in medical devices. External financing will continue to be covered through foreign direct investment. Foreign exchange reserves remain comfortable enough to cushion potential external shocks (6.5 months of imports in July 2019).
A fragmented political landscape amid the need for reform
Carlos Alvaro Quesada, representing the Partido de Acción Ciudadana (PAC), won the presidential elections of February 2018, beating out evangelical candidate Fabricio Alvaro of the Partido de Restauración Nacional (PRN). Given how fragmented Parliament is (seven parties share the 57 seats, with the PAC holding just ten), he will continue to have to compromise to carry out any legislative projects. The municipal elections in February 2020 will be the first electoral test for the President since his election, after two years of intense social conflict. The business environment will continue to be affected by infrastructure deficiencies (transport and telecommunications in particular) and relatively high energy costs (electricity).
In terms of international relations, priority will continue to be given to joining the OECD and to strengthening cooperation with China by opening new trade routes such as the Moin-Shanghai maritime link.