major macro economic indicators
|2019||2020||2021 (e)||2022 (f)|
|GDP growth (%)||2.4||-4.1||7.5||3.0|
|Inflation (yearly average, %)||2.1||0.7||1.7||8.0|
|Budget balance (% GDP)||-6.7||-8.4||-5.2||-5.5|
|Current account balance (% GDP)||-1.3||-1.1||-3.2||-3.7|
|Public debt (% GDP)||56.4||67.2||68.5||70.0|
(e): Estimate (f): Forecast
- Democratic institutions (since 1949)
- Best social indicators in the region: education, health
- Services and high-tech industries (pharmaceuticals, microprocessors) attractive for FDI
- Diversified trade thanks to multiple trade agreements
- Tourism resources: hotels, national parks
- Weak public accounts
- Exposure to natural disasters
- Insufficient transport infrastructure
- Dependent on the United States in economic (FDI, exports) and financial (banks) terms
External conditions weighing on activity
While activity was dynamic during the first few months of 2022, the trend should shift towards a slowdown over the rest of the year. Less buoyant demand from the United States will affect exports of goods and services. Their main source of growth will be the production of medical instruments and supplies produced in the maquilas of the free trade zones, as well as agricultural production (pineapples, bananas). The recovery observed at the end of 2021 and the beginning of 2022 in the tourism sector is being undermined by the expected slowdown in activity in European countries and the United States, the main sources of tourist arrivals. This will affect the hotel and restaurant industry as well as private construction. On the demand side, support will come mainly from private consumption (64.6% of GDP in 2020) and investment (19.6% of GDP). However, both will suffer from the downturn in external conditions. The high price of imported raw materials and the depreciation of the colon will drive inflation, which will squeeze household budgets. The focus on purchasing power by the new president R. Chaves during his recent election campaign is not expected to result in increased support for households. Indeed, public spending will remain constrained by efforts to consolidate public accounts through major spending cuts. Price increases will be well above the central bank's target of 2 to 4%. In this context, the central bank should continue to tighten monetary policy. After a first increase in December 2021 of 50 basis points (bps), the bank hiked rates again in January (+50 bps), March (+75 bps), April (+150 bps) and July (+150 bps) to reach a rate of 5.5%. Further increases are expected before the end of the year depending on the evolution of inflation. This will have an impact on private investment via an increase in credit costs.
Fiscal consolidation at risk and current account deficit subject to external conditions
While the primary (i.e., non-interest) surplus was narrowly reached by the end of 2021 thanks to strong growth-related revenues in 2021, the slowdown in activity suggests a widening of the primary deficit in the absence of further public expenditure reduction measures. This will depend on whether President Chaves succeeds in passing his plan to increase tax revenues by ending many exemptions and overhauling the public employment law to further reduce the wage burden (50% of government revenues are spent on wages). If not, the 1% primary surplus target in 2023 agreed with the IMF may not be met. This could complicate the release of new tranches of financing under the Extended Fund Facility set up in March 2021 and recently extended to July 2024. This agreement provides the country with access to a cheap source of financing (out of a total of USD 1.77 billion, USD 569 million have been disbursed in the first and second instalments), replacing costly market borrowing.
In the face of high commodity prices, especially for hydrocarbons, the balance of goods deficit is expected to increase as the import bill rises. Exports of agricultural products and capital goods will not be sufficient to counteract this trend. With the slowdown in tourism, the surplus in services will be less of a shock absorber. The income balance will also remain in deficit due to the repatriation of dividends by foreign companies (mainly American), despite the fairly dynamic transfers of expatriates. Ultimately, this should result in an increase in the current account deficit. Still high FDI should be sufficient to finance this deficit. However, their lesser dynamism due to less attractive external conditions, and the outflow of capital from local pension funds to the US, will put downward pressure on the colon. This could force the central bank to intervene and thus weaken foreign exchange reserves, estimated at 3.3 months of imports at the end of 2021.
New president, but political landscape still fragmented
The 2022 presidential election was marked by the victory of an outsider, Rodrigo Chaves of the Partido Progreso Social Democrático (PPSD), over the candidate of the traditional PLN party, José Maria Figueres. Chaves anchored his campaign around lowering the cost of living, reducing unnecessary public spending, fighting corruption and lowering operational costs for businesses. Despite his victory, the low turnout creates a lack of legitimacy for R. Chaves, reinforced by the lack of a majority in the assembly. With 10 seats out of 57, the PPSD does not have the votes needed to pass its reform projects, forcing it to make compromises to form coalitions on a case-by-case basis. In this context, the President's wish for an overhaul of the public employment law, adopted in March 2022 by the new legislature after two years of procrastination, remains uncertain. On the international scene, after joining the OECD, the question of joining the Pacific Alliance, which includes Chile, Colombia, Peru and Mexico, has arisen. The new president has formally requested accession on 8 July 2022. R. Chaves sees it as a step towards the broader goal of rapprochement with Asia, and entry into trans-Pacific trade agreements. China is particularly coveted as a source of tourism and investment. Tensions with neighbouring Nicaragua, still in the midst of a political crisis, remain high.
Last updated: August 2022