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) - attractive for FDIs
- Diversified trade thanks to multiple trade agreements
- Tourism resources: hotels, national parks
- Exposed to natural disasters
- Inadequate transport infrastructure
- Economically (FDIs, exports) and financially (banks) dependent on the United States
- Weak public accounts
- Lack of skilled workforce / undeclared work
- High income inequalities
Stable Growth Sustained by Domestic Demand
Despite the ongoing monetary policy tightening, growth is expected to remain buoyant in 2018. Household consumption is expected to benefit from the wage growth in recent years, as well as the moderation in food prices, and the recent fall in unemployment (down from 9.7% to 8.5% between March 2016 and July 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 (as in the case of the Port of Moin). The government wants to attract foreign investors to sectors of tourism and infrastructure (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 such as roads or railway lines. Despite the still underdeveloped tourist facilities, a dynamic tourism sector will sustain activity, benefitting the construction sector in particular. Improved trade terms, together with favorable financing terms, will continue to encourage exports (notably of bananas, pineapples and coffee), even though import growth will limit trade’s contribution to growth.
Persistent Public and Current Account Deficits
Although fiscal consolidation has begun (better tax collection, operating savings), the country’s fiscal position remains worrying. 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 (13%) with a 15% VAT, and the abolition of tax exemptions. Nevertheless, adoption of the reforms is subject to the February 2018 election timetable and the difficulties in obtaining political consensus on implementation.
The current account deficit is expected to remain stable in 2018. The trade balance will widen slightly as the growth in exports of goods will not offset that of imports, mainly because of the modest oil price recovery (the 3rd 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 will increase slightly, boosted by the rise in tourist visitor numbers, notably from the United States. The current account deficit will be funded not only through inflows of FDIs, but also portfolio flows, particularly through bond issuance. Meanwhile, the strong dollarization of credit will force the central bank to intervene so as to maintain the stability of colón, by drawing on foreign exchange reserves.
Continuity of Reforms Despite a Change of Government
The February 2018 parliamentary and presidential elections could result in a center-left government led by the National Liberation Party (PLN). Like its predecessor, this new government is likely to be faced with fragmented parliamentary representation. The reforms, initiated by the previous government, are expected to continue, although with downwards-revised tax measure targets so as to arrive at a compromise. The fight against criminality and money laundering networks linked to drugs trafficking will, however, still be one of the new government’s priorities.
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.