Population 4.666 million
GDP 44.884 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
4.7 |
4.2 |
4.9 |
4 |
|
Inflation (yearly average) (%)
|
5.7 |
4.9 |
4.4 |
5.1 |
|
Budget balance (% GDP)
|
-5.2 |
-4.1 |
-4.3 |
-3.9 |
|
Current account balance (% GDP)
|
-3.5 |
-5.3 |
-5.4 |
-5.8 |
|
Public debt (% GDP)
|
42 |
45 |
47 |
50 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Democratic institutions (since 1949)
- The region’s best social indicators: education, health
- Developed industry (1/4 of GDP) attractive for FDI
- Diversified trade thanks to multiple trade agreements
- Hydroelectric production covering electricity needs
- Tourism resources: hotels, national parks
WEAKNESSES
- Exposure to natural disasters
- Inadequacy of infrastructures
- Economically and financially dependent on the United States
- Weak public and external accounts
- Lack of skilled labour/undeclared work
- High interest rates
Risk assessment
Growth dependent on the American economy and the technology sector
In 2013, Costa-Rican growth is expected to reflect the expected slight downturn in the United States, which accounts for 40% of exports and represent 45% of the country’s international tourist clientele. Tourism could stall, like exports of agricultural products (1/4 of sales), chiefly bananas, pineapples and coffee. Conversely, integrated circuits, biotechnological products and medical equipment, which constitute 40% of sales are expected to chalk up good performances as are business services. Household consumption and business investments are expected to hold up, benefitting from good income and credit growth.
Weakness of public accounts
Although slightly down, the public deficit will remain big enough to result in a further increase in debt. Fiscal revenues represent only 14% of GDP and are insufficient to fund spending which is concentrated on civil service wages, social transfers and interest payments. Social security (la Caja Costarricense de Seguro Social), responsible for pensions and sickness benefits, has seen its deficit grow in recent years with the crisis, higher management costs, undeclared work and late payments by the state. A reduction of this deficit is underway, based on improved management and a cut in sickness benefits. Public debt has to a large extent been underwritten by resorting to domestic savings, competing with private sector investment needs leading to high interest rates. To alleviate this pressure, the authorities plan in future to make use of international markets.
Current account deficit largely funded by foreign investments
The large trade deficit (at 12% of GDP) is mainly due to the import of oil products (50% of the deficit) and consumer goods. Costa-Rican industry (a quarter of GDP) is specialised in the assembly and transformation of components or commodities into products generally intended for export. Besides high tech production, this includes textiles, chemicals, foodstuffs and plastics. Revenue exchanges are also in deficit because of profit repatriation by foreign companies. The sums remitted by Costa-Rican emigrant workers are partly offset by those sent out by Nicaraguans present in the country. In contrast, the services trade is largely in surplus because of tourism revenues and makes it possible to limit the current deficit. This deficit is largely funded by foreign direct investments, particularly from the United States (60% of the total) and concentrated on the free-trade areas. The opening of the telecoms, energy and insurance sectors following the conclusion of trade agreements is associated with their growth and diversification. External debt amounts to only 27% of GDP and has essentially been taken out by the private sector.
The local currency, the colon, can move freely against the dollar within a fluctuation range. But, apart from the 2008-2009 period, it has remained on the floor of the fluctuation range, at 500 to 1. Despite the external deficit and inflation of between 4 and 5%, felled by dearer exports and wage pressures linked to the lack of skilled labour, there is a tendency for it to appreciate because of capital inflows. The central bank does not seem ready to let the currency move more freely. Despite a clear fall, about a third of the financial system’s assets and commitments are still in dollars. Aspirations are curbed by the differential between credit rates in colons (from 17 to 30%) and in dollars (7 to 9%), which can be explained by history of the colon’s devaluation until 2006.
Legislative paralysis not threatening institutional strength
President Laura Chinchilla, whose popularity is falling over the issues of corruption and cuts in social spending, is finding it difficult to obtain the support of the Congress. The government agreement between her centrist Partido de la Liberación Nacional (24 seats out of 58) and two other movements is weakened by the prospect of elections in February 2014, However, the opposition is split. The long awaited fiscal reform was rejected and that of the labour market blocked. Its adoption would have been good for an already above average business environment. The country has lodged an application for membership of the OECD.
