Country Report Costa Rica November 2008

Outlook for 2009-10

• Costa Rica will not be immune to the international financial crisis, with export demand and inward investment set to fall sharply in 2009-10, which will raise political and social pressures.
• Some respite will be brought by implementation of DR-CAFTA, which is expected to come before end-2008.
• The economic policy focus will turn to measures to support economic growth and the adoption of measures to increase monetary policy efficiency.
• Worsening prospects for revenue growth in 2009-10 have led us to make a downward revision to our forecasts for the fiscal deficit, to 1% of GDP in 2009 and 1.2% of GDP in 2010 (from 0.4% and 0.6% in our October report).
• We have made sharp downward revisions to our forecasts for exports, imports and investment in 2009 given the deterioration in the global outlook. Tough financing conditions will lead to negative investment growth in 2009.
• As a result, overall GDP growth is set to slow to in 2009, to 2.2% (previously 2.5%), before recovering to 3.2% in 2010 as global demand stages a gentle recovery.
• 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.
• After a sharp deterioration in 2008, to 12.4% of GDP (up from our October estimate of 11.6%), the current-account deficit is forecast to narrow in 2009-10, although it will remain at a high level of 5.4% in both 2009 and 2010.

Monthly review

• On October 8th Laura Chinchilla, the vice-president and acting minister of justice, stepped down from her official posts in order to campaign to be the presidential candidate of the ruling PLN.
• The constitutional court has now passed the final DR-CAFTA implementation bill, meaning that the deal should come into operation by end-2008. There has been some progress in trade talks between Central America and the EU.
• Congress has ratified a free-trade agreement with Panama.
• The pace of growth of tax revenue has started to slow, although the public-sector accounts strengthened further over the first nine months of the year.
• GDP growth slowed in the second quarter, owing mainly to a sharp fall in export volume growth (to 0.3%) and continued strong growth in import volumes. Export earnings fell in four of the first eight months of the year.

This report covers the following industry codes:
SIC Code: 60;59;1;39
NAICS Code: 52;44;11;31