Moody s Ba2 / S&P BB- / Fitch BB 1 Economy: Agriculture 6%, Industry 21%, Services 73%

Transcription

1 Costa Rica Summary Moody s Ba2 / S&P BB- / Fitch BB 1 Economy: Agriculture 6%, Industry 21%, Services 73% Costa Rica has a diverse economy which includes tourism and service industries, high value-added manufacturing, and a wide variety of agricultural products. Benefitting from a relatively stable and peaceful society, Costa Rica also has strong institutions and one of Latin America s highest levels of education. These factors continue to be the backbone of the Costa Rican economy and help attract foreign investment needed to sustain historically high growth rates, especially in knowledge-intensive and value-added industries such as engineering and biotechnology. A democratic government has contributed to political stability, but it has also made it harder to move forward with much needed fiscal reforms. Costa Rica also has a very rigid structural deficit, as many expenditures are constitutionally and legally mandated and can only be changed by Congress. President Luis Guillermo Solis took office in May 2014 with a promise to address the fiscal deficit, but made little progress. The next window of opportunity for fiscal reforms may be after the next presidential elections in February Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 10,678 10,695 11,436 11,837 11,858 12,145 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank, Haver Analytics, IMF, Ministry of Finance 337

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency BBB Local Currency BBB BBB- BBB- BB+ BB+ BB BB BB BB Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Costa Rica 2010 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 338

3 Costa Rica Strengths Strong, Diverse Economy Costa Rica has a diverse economy which includes tourism and service industries, high valueadded manufacturing, and a wide variety of agricultural products. Costa Rica attracts a wide variety of tourists including those interested in ecotourism or adventure travel, such as surfing or water rafting. In 2016, the Costa Rica Tourism Board reported an estimate of 2.9 million visitors, 2 a high number relative to the country s population of 5 million. The service sector features various aspects including medical services, financial outsourcing, and call centers, attracting companies such as Amazon and Microsoft. On the manufacturing front, Costa Rica produces medical products for companies such as GlaxoSmithKline. Within its agricultural sector, Costa Rica offers several products including coffee, bananas, and sugar, although agriculture is not key focal point in comparison to other Central American countries. It terms of markets, exports are notably diversified, with none amounting to more than one-third of total exports. Costa Rica has transformed from an agricultural-based economy to a key regional manufacturing exporter. It has also attracted higher value-added industries, such as light manufacturing of medical devices and high-tech industries. High levels of investment in education and human capital have allowed the country to supply a well-qualified labor force, in turn, attracting foreign direct investment (FDI) and further diversifying the economy. Moreover, the country s goal is to attract even more advanced know-how industries such as biotechnology, engineering, and pharmaceutical. 3 Education Costa Rica s strong educational system played a key role in attracting value-add manufacturing companies, such as computer manufacturer Intel, pharmaceutical company GlaxoSmithKline, and consumer goods company Procter & Gamble. A large share of the population speaks English, making it easier for international companies to operate in Costa Rica than in other Latin American countries. Costa Rica is also home to INCAE, a leading Latin American business school that was started by faculty from Harvard Business School 4 The World Economic Forum s Global Competitiveness Report ranked Costa Rica at the top, in both business sophistication and innovation index in the region. 5 External Account The balance of payments is relatively solid as the current account deficit is typically more than financed by capital inflows, especially FDI. Costa Rica tends to run moderate current account deficits of around 4% of GDP. 6 This deficit mainly reflects a structural problem as tourism and other services only partially compensates for the trade deficit. This is a major cause for concern because FDI, portfolio inflows, and external loans tend to more than compensate for the current account deficit. Costa Rica has one of the highest levels of FDI in the region, which mitigates the risk profile of the country and supports the sustainability of the country s external sector. Low Inflation and Increased Central Bank Credibility Costa Rica s inflation rate has been in the single digits since 2009, a remarkable achievement considering that it had double-digit inflation for almost 30 years. Inflation is well controlled, as the central bank lowered the inflation targeting band from 4% (±1%) to 3% (±1%) in

4 Lazard Emerging Markets Debt Law and Corruption The judicial system appears fair, although sometimes slow in resolving cases. Though this does not entirely omit corruption, the corruption levels are low relative to other Latin American countries. On the 2016 Corruption Perceptions Index, Costa Rica ranked 3rd in the region, and 41 st out of 176 countries. 8 High Social Achievement Costa Rica has high institutional stability with some strong social indicators that have contributed to its fairly high growth rate. The country ranks high in a standard of living measure, while also maintaining the lowest poverty rate in Latin America at 20.7% of the population. High social spending is also a feature of the economy, with the government using almost 50% of its budget on health services, social assistance, housing, and education. In 2016, educational expenses accounted for 7.6% of GDP, the highest in Latin America and among OECD countries. 9 Peace Costa Rica is a relatively peaceful country, especially when compared to Guatemala and El Salvador, one of the main reasons it continues to attract large investments. Costa Ricans do not have an army, which is a source of pride for many residents. However, this reputation for safety is starting to deteriorate as crime has picked up. Like the rest of Central America, Costa Rica is part of a drug-trafficking route between South America and the United States. Though this has resulted in higher crime levels, it has had a limited impact on tourism. Rainforest A key pillar of growth is the country s abundant rainforest, contributing to the country s tourism rates. Costa Rica has the world s largest percentage of land preserved as national parks, with about 25% of the country s land protected. 10 Costa Rica is home to a total of 27 national parks, 58 wildlife refuges, and 32 protected zones. 11 Though it is a relatively small country, Costa Rica makes up for approximately 6% of the world s biodiversity. 12 Weaknesses High Fiscal Deficit The economy s major weakness is its high fiscal deficit, which is projected to increase from 3.4% of GDP in 2009 to 6.5% in This increases the country s vulnerability to negative external shocks and potentially compromises the country s inflation-targeting objective. The lack of strong political consensus on how to address the structural deficit has created negative debt dynamics. The two previous administrations tried, and failed, to pass fiscal reform. Currently, the Solis administration faces a divided legislature, with some constituents against raising taxes while others are opposed to cuts in public wages. 13 Major fiscal reform in the near-term seems unlikely as the 2018 election approaches. Rigid and Structural Deficit During the global financial crisis, Costa Rica stimulated its economy by increasing government salaries and pensions, which triggered a cascading effect and stretched the government s finances. 14 In the 2018 budget, 52% of expenditures are legally mandated, while 34% are required by the constitution thus, 86% of expenses cannot be changed without a major fiscal reform

5 Costa Rica Unsustainable Pension System Costa Rica s defined benefit plan (the IVM) covers two-thirds of the labor force (1.5 million workers) and currently has 165,000 beneficiaries. While the system has a cash surplus, the International Monetary Fund (IMF) estimates that it will turn into a cash deficit in the medium term due to a maturing system and aging population. This imbalance would require 1.5% of GDP adjustment to ensure actuarial equilibrium. 16 Though some measures have been taken, such as an increase of 1% to employee contributions in 2017, unless more radical changes are made, pension liabilities will continue to add to the fiscal deficit. The IMF has recommended major parametric changes such as raising retirement age to 70, cutting the replacement rate, and increasing the contribution rate. 17 Infrastructure An aging infrastructure, especially ports and roads, remains one of Costa Rica s main challenges. The main port, Limon Moin, is in need of significant investment, and new management may be necessary to improve efficiency. The government has tried to privatize this port with little success, as it is controlled by public unions that are usually opposed to changes. The roads, which are in poor condition, pose another major problem. With a fiscally constrained budget, the government has allocated almost zero funds to fixed capital investment, which is expected to be modest at 2% of GDP from 2016 to The World Economic Forum Competitiveness Report points out that Costa Rica s poor condition of roads, bridges, and general transportation infrastructure will ultimately impact its competitiveness. Bureaucracy Bureaucracy is another constraint on growth, contributing to Costa Rica s relatively low ranking on the World Bank s Ease of Doing Business Index. In 2017, Costa Rica ranked 61 out of 190 countries overall, and lagged in areas such as starting a business and protecting minority shareholders, where it ranked 127 th and 119 th, respectively. 19 Resolving insolvency and enforcing contracts are also areas where Costa Rica needs improvement. 341

6 Lazard Emerging Markets Debt Country Background Size 51,100 KM 2 (130th) Capital San Jose Population 4.9 Million Religion Roman Catholic 76.3%, Evangelist 13.7%, Jehovah s Witness 1.3%, Other 8.7% Median Age 31.3 Years Literacy Rate 97.8% Independence 15 September 1821 Political System Presidential Republic Government Leadership President Luis Guillermo Solis (PAC) Next Election 2018 Legislative Branch Unicameral Legislative Assembly Economy Agriculture 5.5%, Industry 21.5%, Services 73.0% Labor Force Agriculture 14.0%, Industry 22.0%, Services 64.0% Merchandise Exports Bananas, Pineapples, Coffee, Melons, Ornamental Plants, Sugar, Beef, Seafood, Electronic Components, Medical Equipment Export Partners United States 41.0%, Netherlands 5.8%, Panama 5.7%, Belgium 5.4%, Nicaragua 5.2%, Guatemala 5.2% Currency Costa Rican Colones (CRC) As of November 2017 Source: CIA 342

7 Costa Rica Country Timeline 1838 Costa Rica becomes fully independent President Rafael Angel Calderon Guradia, founder of the United Christian Socialist Party (PUSC), introduces liberal reforms, including recognition of workers' rights and minimum wages Six-week civil war over a disputed presidential election result Luis Alberto Monge (PLN) elected president and introduces harsh austerity programme. Meanwhile, Costa Rica comes under pressure from the US to weigh in against the Sandinistas in Nicaragua US-trained anti-guerrilla force begins operating following clashes with Sandinista troops Leaders of Nicaragua, El Salvador, Guatemala and Honduras sign peace plan devised by Oscar Arias Sanchez, who in turn wins the Nobel Peace Prize for the plan Energy and telecommunications workers strike over President Pacheco's privatization plans; teachers strike over problems in paying their salaries. Strikes prompt three ministers to resign Mounting concern over corruption as three former presidents Jose Maria Figueres, Miguel Angel Rodriguez and Rafael Angel Calderon are investigated over contractor payments Costa Rica switches diplomatic allegiance from Taiwan to China in a bid to attract Chinese investment. National referendum narrowly decides in favor of ratifying the Central American Free Trade Agreement (CAFTA) President Arias says Costa Rica to re-establish ties with Cuba, 48 years after they broken off in Former president Rafael Angel Calderon is sentenced to five years in jail after being convicted of corruption Costa Rica elects first woman president, Laura Chinchilla, who takes office in May Costa Rica-based Liberty Reserve, considered to be the world's biggest online currency exchange, is shut down after its founder is arrested on suspicion of money-laundering Luis Guillermo Solis wins presidential election The last of nearly 8,000 Cuban migrants stranded for nearly four months in Costa Rica, after Nicaragua refused them passage through its territory to reach the United States, leave for El Salvador as part of a pilot program agreed by Central American countries to allow them safe passage to the US. Source: BBC 343

8 Lazard Emerging Markets Debt Notes 1 As of December anuarios/ / /file.html accessed 27 November accessed 27 November INCAE Business School, accessed on 4 November 2014, recursos-servicios/historia-incae/lineatiempo.php. 5 accessed 27 November IMF WEO Outlook Data, October 2017, aspx 7 Banco Central reduce su meta de inflación de 4% a 3% para este año Banco-Central-reduce-meta-inflacion_0_ html accessed 20 November Corruption Perceptions Index 2016, Transparency.org, accessed on 27 November 2017, transparency.org/news/feature/corruption_perceptions_index_2016#table 9 accessed 27 November The National Parks of Costa Rica, Costa Rica Home Pages, accessed on 4 November 2014, costaricahomepages.com/places_to_go/national_parks.php. 11 Costa Rica National Parks, Costa Rica Infolink, accessed on 4 November 2014, 12 Environment, Embassy of Costa Rica in Washing DC, accessed on 8 December 2013, 13 Crisis fiscal quiebra la Asamblea Legislativa en dos bloques, accesed 21 November Maratón en los Salarios Públicos Minó Salud Financiera del Estado, Red Laboral, 13 September 2014, accessed on 4 November 2014, 15 El Presupuesto Nacional En Costa Rica PN_2018.pdfaccessed 27 November Costa Rica: Article IV Consultation, IMF Country Report No. 16/131, International Monetary Fund, May 2016, Release-and-Staff-Report accessed 27 November Costa Rica: Article IV Consultation, IMF Country Report No. 16/131, International Monetary Fund, May 2016, 19 Ease of Doing Business DoingBusiness/Documents/Annual-Reports/English/DB18-Chapters/DB18-Country-Tables.pdf accessed 27 November

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