Country Report Costa Rica October 2008

Outlook for 2009-10

• The government will focus on passing the final law required to bring DR-CAFTA into effect and on advancing its social programmes to cushion the poor from high food prices, and to improve housing for the poor.
• We forecast that the non-financial public-sector (NFPS) accounts will turn from a small (0.3% of GDP) surplus this year to deficits of 0.4% of GDP in 2009 and 0.6% of GDP in 2010.
• We forecast that GDP growth will slow to 2.5% in 2009 owing to a sharp deterioration of the external balance and the impact of high inflation on domestic consumption. We expect a recovery to 3.2% in 2010.
• 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 almost doubling in 2008, to 11.6%, owing to a booming import bill, we forecast that the current-account deficit will narrow in 2009-10 as the import bill decreases and exports recover in the latter part of the forecast period.

Monthly review

• The government is seeking another extension to the DR-CAFTA deadline following the rejection of the last implementation law by the constitutional court. This is likely to be accepted by the other signatory countries.
• The government's foreign policy has come under scrutiny following a scandal over the terms of bond sales to China.
• Given its domestic political problems and a worsening economic outlook, the government has reset its priorities to a social focus, in an effort to regain some political momentum in its last 18 months in office.
• The recapitalisation programme has helped the Central Bank deficit to fall; public debt has also fallen so far in 2008.
• The currency has remained stable following the maintenance of a more narrow exchange rate band.
• Economic activity held up in July, but manufacturing output has now fallen for three consecutive months.
• Booming imports led to a quadrupling of the current-account deficit in the second quarter. Import growth started to slow in the third quarter, but remained strongly above growth in export earnings.

Source: Country Report