Costa Rica

Robust performance, but mind the fiscal vulnerabilities

BB1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD57.4355bn (World ranking 74, World Bank 2016)
Population 4.86mn (World ranking 119, World Bank 2016)
Form of state Presidential, representative democratic republic
Head of government Luis Guillermo SOLIS Rivera (PAC, center-left)
Next elections February 2018, presidential and legislative
  • Stable, enduring democratic framework
  • Favorable business and legal conditions compared to the rest of Central and Latin America
  • Comfortable foreign reserves, covering between 4 and 5 months of imports and moderate external debt
  • Dynamic tourism sector
  • High dependency on US (trade, foreign investment in a few large companies, and tourism)
  • Large fiscal deficit which requires tax reform to raise the low structural revenue base. As a result, the public debt-to-GDP ratio rises rapidly

An attractive investment destination with a positive growth outlook

Costa Rica’s GDP growth rate has been among the most dynamic in the Latin American region. The economy expanded by +4.3% in 2016 and should grow by +3.8% in 2017. The output gap is closed by now, as the economy should continue growing at +3.8% in 2018 and +3.9% in 2019. Favorable global and local financial conditions and a positive terms-of-trade shock (low oil prices) have supported activity.

While inflation plummeted with the sharp decline in oil prices, it has swung back to +1.6% in 2017. It should increase to +2.9% in 2018 and stabilize at +3.0% in 2019. This, along with the will to follow the US Fed’s momentum, explains the gradual monetary tightening: policy rates rose by 275 bps since April 2017, to 4.5%.

Two factors explain the robust growth outlook. First, the moderate energy import bill supporting private consumption and net exports. Then there is strong external demand. The acceleration of the US economy, Costa Rica’s first trade partner, should help offset Intel’s withdrawal from the country.

Costa Rica’s business environment ranks 5th in Latin America, and 62nd globally, according to the World Bank Doing Business survey. In terms of access to credit, electricity, control of corruption and rule of law, Costa Rica outperforms most of its regional peers. Hence, it is a very attractive destination for foreign investment, notably in the tourism sector, which accounts for 7% of total GDP.

Risks stem from fiscal vulnerabilities

Costa Rica’s external position is rather comfortable. Foreign exchange reserves cover around 4 to 5 months of imports. The current account deficit is financed to a large extent (134%) by foreign direct investment flows. It is expected to stabilize at -4.0% going forward. This should allow external debt to gradually decrease back to 2014 levels (around 35% of GDP). While a diversification strategy has been initiated, the country remains exposed to the volatility in commodity prices.

Perceived risks stem from fiscal vulnerabilities. Public debt-to-GDP ratio is on a sharp rise. In 2014, it stood at 38.3%. It could surpass the 50% mark in 2018. The fiscal deficit should exceed -6% in 2017, as attempts to pass a holistic tax reform ran into political opposition. Only minor fiscal adjustments (e.g. to pensions) have partially limited damages. Elections in February 2018 should be a disincentive to further fiscal consolidation.

 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 37%
1
41% United States
Netherlands 5%
2
13% China
Belgium 5%
3
7% Mexico
Guatemala 5%
4
3% Guatemala
Nicaragua 4%
5
3% Japan

Trade structure by product

(% of total)

Exports Rank Imports
Electrical machinery, apparatus and appliances, n.e.s. 22%
1
12% Electrical machinery, apparatus and appliances, n.e.s.
Vegetables and fruits 22%
2
9% Road vehicles
Professional and scientific instruments, n.e.s. 11%
3
7% Petroleum, petroleum products and related materials
Miscellaneous edible products and preparations 5%
4
6% Telecommunication and sound recording apparatus
Miscellaneous manufactured articles, n.e.s. 5%
5
5% Miscellaneous manufactured articles, n.e.s.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Georges Dib

Economist for Latin America, Spain and Portugal

georges.dib@eulerhermes.com 

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