Country Risk Service Costa Rica November 2012

Country Risk Service Costa Rica November 2012

Overview

The president, Laura Chinchilla, will provide political and economic stability, while a friendly business environment will be conducive to growth and investment. A legislative alliance with opposition parties will boost the government's chances of passing legislation, although this is still far from assured, owing to frictions with the opposition. The fiscal deficit will remain high (it reached 4.1% of GDP in 2011), forcing some degree of fiscal consolidation to compensate for the failure to pass a fiscal reform. Strong first-half GDP performance will result in 4.9% growth in 2012, after which the rate of growth will moderate. Inflationary pressure will be lower than in pre-crisis years, aided by an eventual commitment to inflation-targeting by the Banco Central de Costa Rica (the Central Bank), which will also seek to adopt a more flexible exchange-rate regime than the current system of crawling bands. Inflation expectations will be anchored at around 5% during the forecast period. The current-account deficit is expected to be 6.4% of GDP in 2017, compared to 5.4% of GDP in 2011, on the back of a larger trade gap, but it will be adequately financed through large inflows of foreign direct investment, which totalled US$2bn in 2011.

Key changes from last month

Political outlook

A long-discussed reform of the labour code was partly vetoed by the president, owing to opposition on certain key items.

Economic policy outlook

The fiscal deficit remained unchanged at 3.2% of GDP in the first nine months of 2012 after both revenue and spending rose by 9.7% year on year.

Economic forecast

Monthly economic activity decelerated to an 18-month low in August, with year-on-year growth of just 1.5%. In cyclically adjusted terms, month-on-month economic activity fell for the fifth consecutive month.

Please Note: Due to the Nature of This Report The Toc is Not Available