Economic Analysis
Costa Rica

Costa Rica

Population 4,851 million
GDP per capita 10 904 US$
A4
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

   2014 2015 f)  2016 (f) 2017 (f)
GDP growth (%) 3.7 4.7 4.3 4.0
Inflation (yearly average) (%) 4.5 0.8 0.7 2.6
Budget balance (% GDP)  -6.0 -5.8 -5.7 -5.3
Current account balance (% GDP) -4.7 -4.0 -4.5 -4.5
Public debt (% GDP) 39.3 42.4 44.5 46.9

 

(e) Estimate (f) Forecast

STRENGTHS

  • Democratic institutions (since 1949)
  • Best social indicators in the region: education and health
  • Services and cutting edge industries (pharmaceuticals, microprocessors) attractive for FDIs
  • Diversified trade thanks to multiple trade agreements
  • Tourism resources: hotels, national parks

WEAKNESSES

  • Exposure to natural disasters
  • Inadequate transport infrastructure
  • Economically and financially dependent on the United States
  • Weak public accounts
  • Lack of skilled labour/undeclared work

Risk assessment

Stable growth in 2017 sustained by investment

Growth will remain stable in 2017. External trade will be less buoyant due to stagnating exports, associated with sluggish activity in the United States, the country's major trading partner. At the same time, imports will post increases in response to the still low oil price. Investment will sustain activity, thanks to continued public investment projects on the one hand, and on the other, due to the expected increase in FDIs: progress on port and motorway infrastructure will continue in 2017 after the delays recorded in 2016. Moreover, the preferential fiscal conditions within the free-trade zone, as well as the opening up to foreign companies of the services to businesses industry will act as additional incentives for FDIs.
Inflation is expected to rise in 2017: the effects of the accommodative monetary policy aimed at limiting the disinflation observed in 2016 are expected to materialise in 2017. The depreciation of the Costa Rican colon will thus lead to imported inflation, so the Central Bank could tighten monetary policy by raising key rates in 2017.

 

Persistent fiscal and current account deficits

In order to halt the upward trend of public debt, the government introduced a restrictive fiscal policy in 2016. Fiscal consolidation currently appears to be supported by efforts on tax collection, in particular through the imposition of measures to combat tax evasion. The government is relying, in particular, on its tax reform programme to boost its revenues. This involves the introduction of 15% VAT to replace the current sales tax (13%), as well as the elimination of tax exemptions (health services in particular). However, these tax reforms are not new (they were already tabled in 2015, but never validated). The government and the opposition are apparently in agreement over the need for fiscal consolidation, but finding a compromise on how to achieve it will be difficult. This means adopting the fiscal reforms will be done very slowly.
The current account deficit is also likely to remain stable. Ongoing weak oil prices (3rd largest import item) combined with the strong dependence on consumer goods and intermediate goods intended for factories in the free-trade zone will result in a widening trade balance deficit. The income balance will continue to run a deficit, because of dividend repatriation by the multinationals based in the country, while the transfer deficit is expected to remain modest. The inflow of funds from emigrant workers will still be offset by the outflow of funds from Nicaraguan workers living in the country. Nonetheless, the balance of services will improve slightly, due to increased US visitor numbers.

 

The absence of a majority continues to slow down the implementation of reforms

In power since 2014, President Luis Guillermo Solis from the centre-left party, the PAC, is struggling to get his reform programme passed. His party actually has only 20% of the seats in the legislative assembly, the presidency of which will return in 2016-2017 to the opposition, who are proving very hostile to the changes. This could make it more difficult to adopt corrective tax measures and to combat urban crime and the development of money laundering networks linked to drug trafficking, and slow down the plans aimed at improving the institutional framework.
The business climate will continue to be affected by inadequate infrastructure (especially transport and telecommunications) and the relatively high energy costs (electricity).
With regard to international relations, President Solis has not yet decided on whether to join the Pacific Alliance (economic community whose member states are Chile, Mexico, Peru and Colombia), in view of the wider public debate. Effectively, he is waiting for the results of an inter-ministerial consultation before deciding. Discussions with the OECD with a view to the country's accession are still ongoing.

 

Last update : January 2017

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