Ekonomske analize
Costa Rica

Costa Rica

Population 5.0 million
GDP 11,729 US$
B
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2016 2017 2018 2019 (f)
GDP growth (%) 4.2 3.4 2.6 1.9
Inflation (yearly average, %) 0.0 1.6 2.4 3.0
Budget balance (% GDP) -5.3 -6.3 -6.0 -6.3
Current account balance (% GDP) -2.3 -2.9 -3.1 -2.7
Public debt (% GDP) 44.9 48.9 53.7 57.6

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Democratic institutions (since 1949)
  • Best social indicators in the region: education and health
  • Services and cutting-edge industries (pharmaceuticals, microprocessors) attractive to FDI
  • Diversified trade, thanks to multiple trade agreements
  • Tourism resources: hotels, national parks

WEAKNESSES

  • 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; undeclared work
  • High-income inequalities

Risk assessment

Weakened growth due to external and domestic factors

Growth will be weaker than expected in 2019, in part due to the slowdown in global activity and the resurgence of domestic social tensions in the second quarter of the year. Slower growth among main trading partners and the prolonged crisis in Nicaragua, which limits trade with the rest of Central America, are constraining external demand. In addition, the July implementation of the first tax measures adopted in December 2018 will drag on domestic demand, with household confidence falling in anticipation of their implementation. Notably, the new VAT applies to a large majority of goods and services, whereas the former sales tax only applied to goods. Moreover, business confidence remains low, limiting investment, with 62% of companies believing in the first quarter of 2019 that it was not the right time to invest. The government's heavy dependence on domestic financing should also prolong the crowding out effect of private investment, as the bond market is still largely dominated by government bonds. Public consumption will continue to be constrained by the size of the public deficit. In this uncertain context, the central bank has adopted a more accommodating monetary policy since the beginning of 2019, with four successive cuts in its key rate, which was equal to 4% in July 2019. Private credit stimulus measures were also implemented, including a reduction in legal liquidity reserves for banks. Agriculture, construction, and trade will be the main sectors affected by the economic slowdown. The El Niño weather phenomenon and the fall in pineapple and sugar prices on international markets are weighing on agricultural production, while construction is suffering from falling investment and trade due to low household confidence. The return of social tensions in June 2019 around education and public employment reform projects poses an additional risk to activity in the event of prolonged strikes, as was the case in autumn 2018.

 

Alarming state of public finances could affect external accounts

The public accounts feature a very large structural deficit. Revenues are insufficient to finance the sharply increasing expenditures, with an ever-growing share going towards servicing the country’s exploding public debt. The social security system is especially fragile. Without reform, revenues will be lower than total expenditure from 2023 onwards, making it necessary to tap into reserves that will otherwise run out by 2030. After many previous attempts broke down due to the lack of political agreement, a much-contested initial tax reform was approved in December 2018, allowing for an interest rate reduction on international markets. Under the new fiscal rule, increases in current expenditure will be linked to changes in the debt-to-GDP ratio, and no project will be approved without financing. However, further reforms are expected, particularly in the area of public employment, to ensure the sustainability of public debt in the long term. However, the situation remains fragile despite the issuance of USD 1.5 billion of eurobonds adopted by the Assembly in July 2019 for 40% of the state's payment obligations over the year, putting the rest on the domestic market.  

 

The external accounts are in better shape. The balance of services shows a surplus thanks to tourism revenues (surplus of 9% of GDP in 2017), although these are not high enough to balance the deficit in goods. Nevertheless, the latter should decline thanks to weaker activity, which led to a decrease in imports in the first half of 2019. Agricultural exports will be less buoyant, affected by climatic events and increased production in other countries (of pineapples in particular), while international sales by companies established in special export areas will continue to grow, particularly for medical devices. The country's external financing remains secured by FDI. Foreign exchange reserves remain comfortable enough to cushion potential external shocks (6.5 months of imports in July 2019). Nonetheless, a deterioration in the internal situation could have a negative impact on this external outlook.

 

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 the parliament is (seven parties sharing 57 seats of which the PAC holds just ten), President Quesada  will have to male compromises to carry out any legislative projects. In this context, the fight against crime and money laundering rings linked to drug trafficking, as well as the reform of public finances, will remain priorities for the government.

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, the priority will continue to be OECD membership, as well as the establishment of free trade agreements with China and following the adoption of the agreement with South Korea in the first quarter of 2019.

 

 

Last update : August 2019

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