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 3.85 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: President Abel Pacheco since May 2002 oversees a 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 goernment is implementing free enterprise policies such as privatizing sectors of the economy including electricity, telecommunications and the insurance industry.
ECONOMY: open market economy as strong foreign direct investment ‘FDI’ inflows into electronics industries with global chip giant Intel Corporation out of the United States making a large contribution. Intel alone represents 30 percent of exports as the Costa Rican microchip factory was put into production in 1998. 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 20 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 Costa Rica’s huge public debt at 55 percent of GDP (equivalent to $9 billion USD in market prices) as free health care and generous social security benefits are provided. President Pacheco has an ambitious goal of reducing the budget deficit to zero by 2006, is this attainable? Will tourism growth offset President Pacheco’s decision to levy a Presidential decree banning open pit mining, where will the future wealth generation take place to pay for the Costa Rica’s social benefits system? Flat economic growth for Costa Rica is projected in 2003 -04 partly due to the public sector not functioning well.
Economic Statistics
GDP is at $31.9 billion USD (2001) as measured by purchasing power parity, GDP/capita as $8,500 USD. GDP when looked using market prices is at $15.5 billion USD or equivalent to $3,800 USD/person. GDP growth 1999 at 8.2 percent, 2000 at 1.7 percent, 2001 at 0.3 percent while 1986 to 1999 averaged 5 percent annual growth. Inflation for 1999 modest at 10 to 11 percent, inflation 2001 at 12 percent while inflation averaged from 1997 to 2001 at 10.5 percent. Year 2000 unemployment at 5 percent. High domestic interest rates is attributed to Costa Rican moderate-high debt levels. The fiscal deficit came in at 4.2 percent of GDP for year 2000, 4.7 percent for 2001. In addition, the current account deficit which ran at 5 percent of GDP from 1997 to 2000 are further lingering difficulties.
POSITIVE: disinflation, 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 77 years. CONCERN: net energy importer - oil for transportation, history of sovereign debt default last taking place in 1982.
BANKING SYSTEM: tends to favour inefficient state banks, further bank reform is required. During December 2002, a massive banking fraud was unfolding with the Costa Rican investment firm Ofinter S.A. in San Jose where reportedly upwards of $600 million USD fraud has taken place with allegations of money laundering. Central Bank of Costa Rica holds gross official reserves of $1 billion USD (2000) representing 1.8 months of import coverage which has flucuated between 1.5 to 2 months over the last few years. There has been an increase in foreign currency loans, particularly the US-dollar although a declining USD will help mitigate this exchange risk.
REGIONAL: United States, Nicaragua, Panama
In many ways, Costa Rica’s economic perfomance mirrors that of the United States as the US is its largest export market. More recently, the United States is negotiating with Costa Rica a statement in boosting trade between the two nations and for implementation of the Central America Free Trade Agreement (CAFTA) expected to be completed by year-end 2003. In addition, Costa Rica has signed free trade deals each with Mexico and Canada. Nicaragua which is situated to the north and borders Costa Rica is an area of concern as illegal immigration into the much higher standard of living Costa Rica is prevalent as 500 thousand Nicaraguans presently work in Costa Rica. The standard of living in Nicaragua is one-sixth that of Costa Rica. Panama located on Costa Rica’s southern border is a country with a similar standard of living with a vibrant banking and financial services industry. Overall, the immediate region has had a long history of conflict and instability.
KNOWLEDGE: reputation as a tourism-dependent economy by protecting the environment. A pristine environment is key for future prosperity. A key platform of national policy is to balance economc growth and the environment. In 2002, President Abel Pacheco took power with an aggressive platform to putting ecotourism front and centre 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 2001 alone accounted for over 1 million tourist arrivals, it is the nation’s largest foreign exchange earner at over $1 billion USD/year.
CURRENCY: ISO symbol ‘CRC’, colon. At time of review on February 4, 2003, the Costa Rican colon had an exchange value of 382 CRC to 1 USD. The colon is managed under a crawling exchange rate peg band set at 6.6 percent in year 2000. The exchange rate is adjusted daily based on the differential between inflation in Costa Rica and its main trading partners - successful policy.
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. The colon has depreciated significantly in the approximate amount of 20 percent over the previous 14 months versus a declining US-dollar. If compared to the Euroland euro, this figure would be closer to 40 percent decline for the Costa Rican colon for year 2002.
CURRENCY FORECAST: a slowing very competitive global chip production will roll back output for Intel coupled with a flat United States economy, these events will impact Costa Rica’s balance of payments position negatively. Further, Costa Rica’s large domestic debt at 55 percent of GDP (2002) and fiscal deficit difficulties raises questions about the sustainability of Costa Rica’s generous welfare state. Other short term challenges include a glut of bananas on the global market and higher world oil prices will likely hurt the colon in the short to medium term. Surprisingly, Costa Rica’s traditional industry of coffee production has noticed a dramatic increase in global coffee prices in January 2003, this may offset the declining technology exports. The tourism outlook is mixed as Costa Rica is looked upon as a very desireable and safe destination to travel as global tourists may avoid high security risk regions and travel to beautiful places like Costa Rica.
Although the USD is presently depreciating to a trade weighted basket of currencies, the one year forecast for the Costa Rican colon is for continuing depreciation versus the USD but at a slower pace within the managed exchange rate peg. BI.C’s 12 months currency forecast for the Costa Rican colon is at 410 CRC to 1 USD assuming 10 to 12 percent inflation. However, currency risks rankings have increased particularly with Costa Rica’s precarious debt situation tied to a generous welfare system and balance of payments difficulties. Costa Rica’s currency is now exposed to a greater level of currency depreciation risk over the next 2 years, caution remains. Over the long term, once Costa Rica can correct the macro-economic deficiencies and increase its net reserve position, the the colon may then move to a floating exchange rate regime. UPDATED: February 4, 2003
