Country Report Costa Rica February 2009

Outlook for 2009-10

• The success of the government's policies to mitigate the economic downturn will be a crucial determinant of the ruling party's prospects in the February 2010 general elections. Rising unemployment will fuel social pressures.
• Economic policy will focus on the recently announced Plan Escudo, an ambitious emergency economic stimulus and social protection plan.
• Owing to the scope of the Plan Escudo we have made further revisions to our forecasts for the fiscal deficit, to 4% of GDP in 2009 and 3.8% in 2010 (from 3% and 2.7% in our December report), and raised our public debt forecasts.
• Global growth at purchasing power parity will fall to 0.2% in 2009, picking up to just 2.4% in 2010. Measured at market exchange rates, growth will contract in 2009 for the first time in 18 years.
• Revised 2008 data and a worsening domestic outlook despite Plan Escudo have prompted a further downgrade to our forecast for Costa Rican growth, to 0.5% in 2009 (previously 1.5%), before a recovery to 2.3% in 2010.
• An increase in the daily increase of the upper limit of the exchange rate band will allow more rapid currency slippage. We have revised our exchange rate forecast, from an end-2009 rate of C595:US$1 to C611:US$1.
• After a sharp deterioration in 2008, to 9.9% of GDP, the current-account deficit is forecast to narrow in 2009-10, to 4.6% of GDP in 2009 rising to 4.8% in 2010.

Monthly review

• Political parties have continued preparations to select candidates for the 2010 general elections.
• There has been progress in the first round of talks towards an FTA with China. A second round is scheduled for April in Beijing.
• The government has announced an ambitious economic stimulus and social protection programme, the Plan Escudo, which will focus on measures for businesses, the financial sector, employment and families.
• The fiscal surplus reached 0.2% of GDP in 2008, but revenue growth is already falling fast. The government funded the state bank capitalisation from the surplus, which would otherwise have reached 0.6% of GDP.
• The Central Bank has revised down growth assumptions for 2009, but these still appear optimistic. Preliminary revised annual data suggest that growth turned negative in the fourth quarter of 2008.
• The exchange rate band widened in January, with the daily change in the upper band of the crawling band raised to 20 centimos per day from six.

This report covers the following industry codes:
SIC Code: 53;59;22;48;47
NAICS Code: 44;313;517;48