Country Report Costa Rica August 2008

Outlook for 2008-09

• The government will focus on passing the laws required to bring DR-CAFTA into effect and is confident this can be done well before the October deadline.
• The government will also prioritise a programme to cushion the poor from high food prices, and to encourage farmers to increase plantations.
• We have made downward revisions to our forecasts for GDP growth, to 3.5% in 2008 and 2.5% in 2009 (down from 4% and 3.1% in our July report) owing to the impact of high inflation on domestic consumption.
• Following publication of a 12-month inflation rate of 14.2% in July, we have made an upward revision to our forecast for inflation, to 14.9% at end-2008 and 9.5% at end-2009 (up from 11.9% and 8.9%).
• We forecast that the Central Bank will manage a controlled real depreciation of the colon following a spell of volatility. However, the currency may be subject to greater pressure to weaken given a deteriorating external balance.
• The current-account deficit will almost double in 2008, owing to strong first-half demand, high oil imports and weakening export growth. With just 35% of the deficit forecast to be financed by FDI in 2008, reserves will fall.

Monthly review

• The minister of housing has announced that he will resign on August 20th to allow an investigation into alleged misuse of funds to take place.
• There has been further progress in the passage of laws to enable DR-CAFTA to come into operation, with the final telecoms bill passed in August. Only two laws now need to be passed before the deal can be implemented.
• An FTA will start to be negotiated with China once DR-CAFTA is operational.
• Although the fiscal surplus strengthened in June, revenue growth slowed.
• Monetary policy has been tightened further, with the Central Bank reference rate rising by 1 percentage point in each of July and August, to 10%.
• The Central Bank has intervened to calm currency volatility, bringing about a 17% fall in foreign reserves between April and July.
• A weakening external sector led to a slowdown of GDP growth in the first quarter. Investment drove demand-side growth of 5.7% and construction supply-side growth.
• Continued high food costs led to monthly inflation of 2.1% in July, bringing the 12 month rate up to 14.2%.

Source: Country Report