The story of Costa Rica is that of a successful one, especially considering the region that it is located in an area with a history of violence within Central America. From Panama & Colombia to the south and Honduras & Nicaragua to the north, Costa Rica in affect has avoided this violence and correspondingly has political stability resulting in an attractive high standard of living for its 4.576 million citizens. Costa Rica’s economic history has been based around agriculture, although over the last 20 years, the country has now diversified into tourism and high technology exports.
POLITICS: very stable society and politically sound country. Independence was obtained from Spain in 1821. Since the revolution in 1948-49, democracy and peace have remained. The Costa Rican government has a long-standing commitment to economic growth and social development as it is a well-known welfare state. The government is implementing free enterprise policies such as privatizing sectors of the economy including electricity, telecommunications and the insurance industry and has formalized important free trade agreements to expand growth policies.
ECONOMY: mild recession from the global financial crisis of 2008-09. It is an open market economy as strong foreign direct investment ‘FDI’ inflows into electronics industries for re-export of high tech micro-chips, software and in demand call center employment based in Costa Rica has helped to support a relative high standard of living for Latin America. During the 1990’s, the Costa Rican economy blossomed as it opened up to FDI with annual GDP growth of 4.5 percent and tourism becoming its most profitable industry. Extreme poverty in Costa Rica affects 5 percent of the population while 15 percent live below the poverty line. A key area of concern to the health of the economy is the continuation of the liberal social policies in place. In short, they are expensive resulting in national debt as free health care and generous social security benefits are provided. The country is following growth strategies with the implementation of the Dominican Republic – Central America Free Trade Agreement (DR-CAFTA) that came into passage in January 2009. Strong investment inflows are helping to offset structural challenges specifically as the country is a net oil importer along with its social program outlays.
Economic Statistics
Total GDP as measured by purchasing power parity stands at $51 billion USD (2010) with corresponding GDP per capita at $11,300. GDP when measured by market prices stands at $35.7 billion USD. GDP growth rates include year 2012 estimated at 4.1 percent of GDP, 2011 at 4 percent, 2010 at 4.8 percent and 2009 fell at 1.3 percent. Inflation quotes include 2012 projected at 6.8 percent, 2011 at 5.3 percent (January 2011 to October 2011 at 4.93 percent). Year 2010 unemployment came in at 7.3 percent. High domestic interest rates are attributed to Costa Rican moderate-high debt levels. The fiscal deficit came in at 5.5 percent of GDP for year 2010; the current account deficit is forecasted at a 4.8 percent of GDP. Strong foreign direct investment (FDI) levels for 2011 at 4.6 percent of GDP. Public sector debt stands at 40 percent of GDP (2010). Remittances are at 2 percent of GDP.
POSITIVE: high literacy rates and high education levels are important in attracting FDI, very good telecommunication service, self-sufficient in hydropower for electricity; life expectancy is good at 79 years, U.S. Free Trade Agreement, DR-CAFTA trade agreement, low crime within Central America, relative low taxation levels. CONCERN: net oil importer, history of sovereign debt default last taking place in 1982, infectious disease – dengue fever, bureaucracy – legal contracts, large public debt.
BANKING SYSTEM: sound. Central Bank of Costa Rica holds net official reserve assets of $5 billion USD (2011) representing 4.1 months of import coverage of good & services of which is a stark improvement since 10 years ago. The authorities have a targeted inflation range for 4 to 6 percent. December 2010 prime lending rate is high at 17 percent.
REGIONAL: United States, Nicaragua, Panama
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KNOWLEDGE: Eco-Tourism
Costa Rica has a reputation as a tourism-dependent economy by protecting the environment. A pristine environment is paramount for future prosperity. A key platform of national policy is to balance economic growth and the environment. In 2002, then President Abel Pacheco took power with an aggressive platform to putting ecotourism front and center of Costa Rica’s economic future. The government has since put a halt to all oil and mining exploration, cancelled a Canadian mining firm exploration contract and has also stopped any offshore oil drilling plans. As a developing country, tourism in 2010 alone accounted for 2.1 million tourist arrivals; it is the nation’s largest foreign exchange earner at over $2 billion USD per year.
CURRENCY: ISO symbol ‘CRC’, colon, Costa Rican colon. At time of review on November 21, 2011, the Costa Rican colon had an exchange value of 502.32 CRC to 1 USD and/or 676.72 CRC to the Euroland euro (EUR). The currency exchange rate regime follows a free float with a currency exchange rate band tied to the US-dollar (USD). The colon has traded stronger in valuation over the last couple of years unlike previous years where steady consistent depreciation took place year after year to the USD. The USD is the unofficial parallel currency.
CURRENCY HISTORY: historical exchange valuations include year 1997 at 232 CRC (‘colones’) to 1 USD, 1998 at 257, 1999 at 286, 2000 at 308, 2001 at 329 and year 2002 at 343, February 4, 2003 at 382 CRC, year 2006 at 511.3, 2007 at 519.5, 2008 at 530.4, 2009 at 573.2, and 2010 at 513.
CURRENCY FORECAST: inflation risks. Costa Rica’s traditional industry of coffee production has noticed a dramatic increase in global coffee prices over the last eight years, the high tech sector is in demand due to the high quality workforce provided by Costa Rica. The tourism outlook remains positive as Costa Rica is looked upon as a very desirable and safe destination to travel as global tourists may avoid high security risk regions and travel to beautiful places like Costa Rica.
BankINTRO.com’s 12 months currency forecast for the Costa Rican colon is for short-term appreciation to the USD then to again depreciate by 2013. However, currency risks rankings have increased particularly with Costa Rica’s precarious debt situation tied to a generous welfare system and risk for balance of payments difficulties. UPDATED: November 21, 2011
