Country Forecast Costa Rica December 2012 Updater

Country Forecast Costa Rica December 2012 Updater

Overview

The president, Laura Chinchilla, will provide political and economic stability, while a friendly business environment will be conducive to growth and investment. Frictions with the opposition will constrain the government's ability to pass legislation, particularly now that most parties have begun gearing up for the 2014 elections where the Economist Intelligence Unit expects the ruling Partido de Liberación Nacional (PLN) to win despite currently low popular support. The fiscal deficit will remain high (it reached 4.1% of GDP in 2011), forcing some degree of fiscal consolidation to compensate for the failure to pass a fiscal reform. Strong first-half GDP performance will result in 4.9% growth in 2012, after which the rate of growth will moderate. Inflationary pressure will be lower than in pre-crisis years, aided by an eventual commitment to inflation-targeting by the Banco Central de Costa Rica (the Central Bank), which will also seek to adopt a more flexible exchange-rate regime than the current system of crawling bands. Inflation expectations will be anchored at around 5% during the forecast period. The current-account deficit is expected to be 5.9% of GDP in 2017, compared to 5.4% of GDP in 2012, on the back of a larger trade gap, but it will be adequately financed through large inflows of foreign direct investment (FDI), which totalled US$2bn in 2011.

Key changes from last month

Political outlook

Various opposition groups are seeking to form coalitions for the 2014 elections, while the number of contenders for the PLN's nomination has dwindled to just two after a former president refused to run.

Economic policy outlook

Electricity tariffs in Costa Rica have doubled over the last five years, but early attempts by the government to allow greater private participation in the sector have stalled in Congress with little progress expected this term.

Economic forecast

Economic activity in Costa Rica has expanded by 5.7% year on year in the first nine months of 2012, despite falling to just 1.4% in September.

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