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San José 2015 Blog: Costa Rica and the Region's Economic Outlook

(Image: Garrett Britton)

Thursday, June 25, 2015

Speakers:

  • César Arias, Director, Latin American Sovereigns Group, Fitch Ratings
  • José Rafael Brenes, CEO, National Stock Exchange of Costa Rica
  • Luis Mesalles, Associate Economist of the Central American Academy
  • Alberto Franco, Economist, Founder and Consultant, Ecoanálisis (moderator)

The first panel of the San José conference examined Costa Rica’s economic standing amid a weakening global scenario. Luis Mesalles, associate economist of the Central American Academy, kicked off the discussion with a presentation on the challenges and opportunities to boost economic growth. Mesalles showed how a decrease in commodity prices is benefitting the Central American country, leading to low inflation and a moderate external deficit due to lower imports. Notwithstanding, living costs are higher due to an increase in the value of the Costa Rican colón. At the same time, the economy is not growing fast enough to mitigate unemployment, which reached 10.1 percent in the first quarter of 2015. Foreign direct investment and exports—especially in goods and services, which account for 5 percent of the country’s GDP—should go up as the world economy recovers, offering a great potential for growth.

Next, César Arias of Fitch Ratings went into the strengths and challenges behind Costa Rica’s sovereign risk rate. The country—rated with BB—faces high fiscal deficit, weak growth, and a lack of austerity required to implement reforms, though it maintains a diversified export portfolio and a relatively good reaction to external shocks. Arias outlined four challenges for the country: low tax revenues coupled with high spending, political division, high interest rates, and currency exchange. Future ratings will depend on fiscal adjustments and their impact on the public debt. Also, skepticism over public finances and the course of the political economy overshadow the country’s economic stability.

In the same vein, the head of Costa Rica’s National Stock Exchange, José Rafael Brenes, presented on the financial opportunities in infrastructure, entrepreneurship and innovation, and integration with other markets through regional commerce—a key opportunity stressed by all the panelists. Additionally, he pointed out that long-standing government lending to public institutions, specifically the Costa Rican energy and public health institutes, is not sustainable long-term. “The country would require $23 billion to close the competitiveness gap,” he said. If Costa Rica does not close the gap, panelists estimated the country will face major economic barriers by 2017.

Moderator Alberto Franco of Ecoanálisis then asked the panel what the effects of external financing over local financing are. Melles explained that public capital inflows are turning the country an expensive one. The main problem is the deficit, which discourages economic growth. “We have an external deficit of 3 percent and a fiscal deficit of 6 percent,” said Melles, who added that the country must also resolve bottlenecks in education by increasing numbers of highly skilled workers, improving public management in infrastructure and attending to service needs, primarily in health. “The government needs to focus on removing obstacles and seizing the opportunities for growth,” concluded Mesalles.

Watch the full panel here: