Country Report Costa Rica October 2009

Outlook for 2010-11

• The presidential candidate of the ruling Partido Liberacion Nacional (PLN), Laura Chinchilla, is set to defeat the main opposition candidate, Otton Solis from the Partido Accion Ciudadana (PAC) in the February 2010 elections.
• Ms Chinchilla will offer political and economic continuity in 2010-11 but will face difficult decisions on the public finances. The prospects of a PLN majority in the next legislative assembly, however, could make governing easier.
• Economic policy will centre, at least in 2010, on the Plan Escudo, an ambitious emergency economic stimulus and social protection plan.
• The fiscal balance will continue to deteriorate from a 3.2% deficit in 2009 to 3.8% in 2010, as government spending growth outweighs revenue growth. The fiscal deficit will narrow to 3% in 2010 as fiscal spending is gradually reduced.
• The economy will grow by 3.1% in 2010 in line with global—and particularly US—trends, but will slow down to 2.4% in 2011 as the US economy loses momentum, hitting private consumption and exports.
• Despite a sharp fall in 2009, inflation levels will remain higher in Costa Rica than in most other countries in the region, averaging 7.2% in 2010 and 6.7% in 2011.
• The current-account deficit will expand in 2010 to 3.4% of GDP, reflecting faster growth in imports than exports. The deficit will narrow slightly in 2011 to 3% as the economy slows down and imports fall.

Monthly review

• According to two recent opinion polls, Ms Chinchilla comfortably leads in voting intentions for the 2010 elections, reflecting in part a very good public image and a weak opposition.
• The PLN is headed for a larger than expected victory in the Legislative Assembly, which might give the ruling party a legislative majority in 2010-15.
• The approval of an extraordinary budget proposal and the 2010 regular budget face increasing opposition in the Legislative Assembly. Both bills seek to finance fiscal deficits with new debt.
• Second-quarter data published by the Central Bank indicated that GDP contracted by 2.4% (year on year), an improvement from the 4.5% contraction in the first quarter, but still a fall (of 0.8%) in seasonally-adjusted terms.
• Investment in the services sector expanded in the first half of 2009 despite the economic downturn and lower overall investment. Back-office support services have expanded their operations in Costa Rica in 2009.