Costa Rica

Politics:

• Analysis

  Costa Rica politics: Quick View - Latest opinion poll puts Johnny Araya wel

  Event

  A survey conducted by Borge & Asociados during late November and early December indicates that Johnny Araya has a commanding lead over his rivals for the Partido Liberacion Nacional (PLN) primary election.

  Analysis

  Although 60% of those who plan on voting in the PLN primary, which is scheduled for April 21st 2013, remain undecided, Mr Araya holds a wide lead among those who have already made up their mind. Mr Araya's support, according to the opinion poll, stands at 65%, compared with 33% for Rodrigo Arias and just over 1% for Fernando Berrocal.

  This was the first major survey to be released after one potential candidate, Antonio Álvarez, gave his backing to Mr Araya, and former president Jose Maria Figueres (1994-98) announced that he was staying out of the race. Mr Álvarez's endorsement will provide a boost to Mr Araya from a younger demographic, whereas Mr Figueres's announcement reflects a debate within the PLN as to which candidate better represents the party's roots. Mr Arias represents a wing more closely aligned with the PLN's recent economically liberal generation of leaders, while Mr Figueres and Mr Araya are seen as closer to the party's left-leaning origins.

  As well as trailing in the polls, Mr Arias faces problems with his image: only 20% of those surveyed considered him honest (the figure for Mr Araya was 60%). Although his brother, Oscar Arias (who served as president in 2006-10 and 1986-90), has strong credibility and a favourable influence on voter intentions, 72% of those polled feel that Mr Arias is too dependent on him, reducing his prospects of winning the candidacy.

  With one month to go until the start of campaigning, and despite the positive opinion poll signals for Mr Araya's candidacy, both PLN hopefuls have the challenge of convincing more than half the potential voters. Mr Arias is likely to launch a strong campaign to strengthen his image and weaken that of his contender, while Mr Araya may focus on securing his position as an agent for his party's renewal. Neither is expected to seek the endorsement of the president, Laura Chinchilla, as the same opinion poll found that her backing would be harmful, given that 70% of those polled disapprove of her efforts in government.

  December 17, 2012

• Background

  Costa Rica: Political forces at a glance

  Political outlook: Political forces at a glance

  Laura Chinchilla of the Partido Liberación Nacional (PLN) took office as president for a four-year term in May 2010 after winning a convincing victory in the February 2010 general election. The PLN is also the largest faction in the Legislative Assembly with 24 members (out of a total of 57 seats), but has required alliances with other parties in order to control the legislative directorate-the body of legislators in charge of managing the agenda which is voted on every May 1st. As a testament to the fickleness of legislative politics in Costa Rica, the directorate has changed hands three times so far in the administration. As of May 2012 the directorate is controlled by the PLN in alliance with the leftist Partido Accesibilidad sin Exclusión (PASE) and the Partido Unidad Social Cristiana (PUSC), but this alliance is by no means permanent.

  As a testament to the increasing fragmentation of the legislature following decades of PLN/PUSC dominance, there are now five political parties with at least four seats in the legislative assembly, whereas in the 1990s no party aside from the PLN or PUSC had more than two. With no party capable of obtaining an easy majority, negotiation and lobbying will remain a critical aspect of policymaking in 2012-16.

  Distribution of legislative seats, Jun 2011
  Partido Liberación Nacional (PLN)	24
  Partido de Acción Ciudadana (PAC)	11
  Movimiento Libertario (ML)	9
  Partido Unidad Social Cristiana (PUSC)	6
  Partido Accesibilidad sin Exclusión (PASE)	4
  Restauración Nacional (RN)	1
  Frente Amplio (FA)	1
  Partido Renovación Costarricense (PRC)	1
  Total	57
  Source: Asamblea Legislativa.

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  June 27, 2012

• Structure

  Costa Rica: Political structure

  Official name

  Republic of Costa Rica

  Form of state

  Presidential democracy with a Legislative Assembly

  The executive

  The president ishead of state, elected for four years by universal adult suffrage; he or she appoints a cabinet, as well as the heads of public agencies and the Banco Central de Costa Rica (the Central Bank). Laura Chinchilla of the Partido Liberación Nacional (PLN) took office on May 8th 2010. Her term finishes in May 2014

  National legislature

  Legislative Assembly, a 57-member single chamber directly elected for a four-year term by universal adult suffrage. Its directorate is elected on May 1st of each year and is in charge of leading the debate during each annual legislative period

  Legal system

  Supreme Court at the apex of a subordinate court system; magistrates are elected by the Legislative Assembly for an eight-year term

  Elections

  Laura Chinchilla of the PLN was elected president for a four-year term in February 2010. Her term began in May 2010. Last mayoral elections: December 2010. Next elections: February 2014 (presidential and Legislative Assembly), February 2016 (mayoral)

  Main political organisations

  Government: Partido Liberación Nacional (PLN)

  Opposition: Partido Acción Ciudadana (PAC); Movimiento Libertario (ML); Partido Unidad Social Cristiana (PUSC); Partido Unión para el Cambio (PUC); Bloque Patriótico Parlamentario (BP); Partido Auténtico Herediano (PAH); Partido Renovación Costarricense (PRC); Partido Unión Nacional (PUN); Partido Accesibilidad Sin Exclusión (PASE); Partido Frente Amplio (FA)

  President: Laura Chinchilla

  First vice-president: Alfio Piva Mesén

  Second vice-president: Luis Liberman

  Key ministers

  Agriculture: Gloria Abraham

  Culture: Manuel Obregón

  Economics, industry & trade: Mayi Antillón

  Education: Leonardo Garnier Rímolo

  Environment & energy: René Castro

  Finance: Eduardo Ayala

  Foreign relations: Enrique Castillo

  Foreign trade: Anabel González

  Health: Daisy Corrales

  Housing: Irene Campos

  Justice: Hernando París

  Labour & social security: Sandra Piszk

  Planning & economic policy: Roberto Gallardo Núñez

  Presidency: Carlos Benavides

  Public security: José María Tijerino

  Public works & transport: Francisco Jiménez

  Science & technology: Eugenia Flores Vindas

  Tourism: Allan Flores Moya

  Central Bank president

  Rodrigo Bolaños

  December 13, 2012

• Outlook

  Costa Rica: Key developments

  Outlook for 2013-17

  • The government of the president, Laura Chinchilla, will continue to face low public support and strained relations with the opposition, complicating its ability to pursue its reform agenda up to the end of its term in 2014.
  • Despite its low popularity, the Economist Intelligence Unit expects the ruling Partido de Liberación Nacional (PLN) to win the 2014 elections, owing to disarray among the opposition, which may contemplate alliances.
  • The government's commitment to maintaining spending programmes will lead to an average fiscal deficit of 4.2% of GDP in 2012-13, before higher GDP growth and an increased tax take narrow the deficit to 0.9% of GDP by 2017.
  • A strong performance in the first half of the year will support GDP growth of 4.9% in 2012. GDP growth will moderate to an annual average of 4.3% in 2013-17, supported by solid investment.
  • Inflation will remain within the present target range of the Banco Central de Costa Rica (BCCR, the Central Bank) of 4-6% during 2013-17, assuming that global commodity prices do not rise above current forecasts.
  • The colón will remain strong in the short term (bolstered by a weakened dollar, and Eurobond inflows), depreciating gradually to C522:US$1 by end-2017.
  • The current-account deficit will remain high, at 5.9% of GDP by 2017, although it will be financed by inflows of foreign direct investment.

  Review

  • Various opposition groups are seeking to form coalitions for the 2014 elections, while the number of contenders for the PLN's nomination has dwindled to just two after a former president refused to run.
  • Electricity tariffs in Costa Rica have doubled over the last five years, but early attempts by the government to allow greater private participation in the sector have stalled in Congress, with little progress expected this term.
  • According to the Programa Estado de la Nación (State of the Nation Programme), Costa Rica experienced the biggest rise in wage and household income inequality in Latin America in 2000-10.
  • A new digital platform will make it possible to do the paperwork necessary to start a business online in just 20 days, compared with 90 days previously.
  • Economic activity in Costa Rica has expanded by 5.7% year on year in the first nine months of 2012, despite falling to just 1.4% in September.
  • Import spending growth fell to half its 2011 levels in January-September as exports received a boost from free-trade zones.

  December 13, 2012

Economy:

• Background

  Costa Rica: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	4.7	Population growth	1.6
  GDP (US$ bn; market exchange rate)	40,869.8	Real GDP growth	3.7
  GDP (US$ bn; purchasing power parity)	53,058b	Real domestic demand growth	3.7
  GDP per head (US$; market exchange rate)	8,630	Inflation	8.2
  GDP per head (US$; purchasing power parity)	11,203b	Current-account balance (% of GDP)	-5.3
  Exchange rate (av) C:US$	505.66	FDI inflows (% of GDP)	5.6
  a Actual. b Economist Intelligence Unit estimates.

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  Background: Costa Rica has a long tradition of political stability. A short civil war in 1949 paved the way for institutional reforms that led to a sustained period of rapid economic growth, resulting in significant improvements in human development indicators. However, performance since the debt crisis in the early 1980s has been mixed, as Costa Rica has struggled to define a new economic model. The country has succeeded in attracting investment in high technology, but income inequality and social tension have grown. An economic reform agenda has suffered severe delays, reflecting difficulties in achieving a consensus in a fragmented legislature.

  Political structure: The president, elected for a four-year term by universal adult suffrage, is the head of state. The executive is weak in relation to the 57-member unicameral Legislative Assembly. Re-election of the president and vice-presidents is permitted, but not consecutively. A political system historically dominated by the social democratic Partido Liberación Nacional (PLN) and the right-wing Partido Unidad Social Cristiana (PUSC) has become fragmented in recent years, with other parties now wielding increased power, thereby compounding difficulties of governance.

  Policy issues: Fiscal reform is needed to raise revenue, reduce public debt, improve monetary policy efficiency and increase potential GDP growth. Reforms are also needed to address deficiencies in the business environment, including patchy infrastructure, scarcely affordable financing and excessive red tape. The administration of the current president, Laura Chinchilla, is committed to capitalising on Costa Rica's entry into the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) and attracting foreign investment.

  Taxation: The overall level of taxation is relatively low and is dominated by customs, income and sales taxes. The sales tax rate is 13% and the top marginal income tax is set at 25%. Although tax evasion has fallen since 2006, it remains high. A long-delayed fiscal reform has been rejected twice during the current administration's term, after failing to obtain the necessary legislative backing, and so piecemeal measures have been implemented to reduce the fiscal deficit.

  Foreign trade: Export value growth has been rapid, owing to the dynamism of free-trade zones (FTZs) and strong demand for microprocessors from China. However, the import bill has expanded rapidly in recent years, causing the structural trade deficit to widen sharply as a percentage of GDP and the current-account deficit to widen also.

  Major exports 2011	% of total	Major imports 2011	% of total
  Maquila & zonas francas	51.4	Intermediate goods	51.1
  Manufactured goods	21.9	Consumer goods	19.2
  Bananas	7.2	Capital goods	15.9
  Coffee	3.2	Fuel	12.9
  Leading non-maquila markets 2011	% of total	Leading non-maquila suppliers 2011	% of total
  US	38.3	US	45.6
  China	6.7	China	8.4
  Netherlands	5.5	Mexico	6.7
  Panama	5.1	Japan	3.8

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  December 14, 2012

• Structure

  Costa Rica: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 13, 2012

• Outlook

  Costa Rica: Country outlook

  Costa Rica: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Costa Rica will remain one of the most politically stable countries in Latin America in 2013-17, helped by its long tradition of democracy (it has had a continuous democratic regime since 1949) and high levels of social stability. Nevertheless, the president, Laura Chinchilla, of the centrist Partido Liberación Nacional (PLN), faces a challenging political environment, with less than one and a half years of her term left. Ms Chinchilla has unprecedentedly low levels of public approval for a Costa Rican president, owing to a series of corruption scandals that have affected her cabinet, and has also been damaged by an unstable relationship with the opposition. The latter situation has already twice derailed her attempts to push forward a comprehensive fiscal reform--arguably the most important item on the government's agenda. Despite the demise in May of an opposition bloc that controlled Congress during the previous year and the subsequent introduction of a power-sharing arrangement that has given the PLN a tenuous majority in the legislature, Ms Chinchilla has struggled to pass legislation in recent months. Even some successes, such as the approval to issue Eurobonds, were initially challenged. This situation is likely to persist now that most parties are gearing up for the 2014 elections and will therefore be less keen on compromise with the government.

  ELECTION WATCH: Presidential and legislative elections are due in February 2014, with a new government taking office for a four-year term in May that year. Ms Chinchilla is unable to stand in 2014 as consecutive presidential terms are not allowed. Leading the PLN presidential contenders is Johnny Araya, the popular mayor of the capital, San José, who holds a widening lead over his rival, Rodrigo Arias. A former president, José María Figueres Olsen (1994-98), tipped as a likely candidate, recently announced that he would not run, leaving the race open to Mr Araya and Mr Arias. The centre-left Partido Acción Ciudadana (PAC) is the second-largest political party in the Legislative Assembly, but there are doubts over whether its popular former presidential contender, Ottón Solís, will run for a third time. Otto Guevara of the right-wing Movimiento Libertario has announced another run for the presidency. Lastly, the Partido Unidad Social Cristiana (PUSC), which was until recently one of the country's two main political parties (along with the PLN), has yet to recover from a series of corruption scandals surrounding two former presidents. Given the disarray of the opposition, it is unlikely that any party can successfully challenge the PLN single-handedly, and, as such, electoral alliances are being considered. However, it is difficult to envisage them as viable in practice, owing to the divergent ideologies of the opposition parties. The Economist Intelligence Unit's baseline forecast therefore assumes that the PLN will retain the presidency, despite the government's low levels of support.

  INTERNATIONAL RELATIONS: Costa Rica will continue to pursue trade-policy initiatives and efforts to attract foreign investment in tourism, manufacturing, services and infrastructure. It will also seek to diversify its export markets, with a particular focus on Asia, where a number of free-trade agreements (FTAs) have been ratified (with China), signed (Singapore) or are being negotiated (South Korea). An FTA with Peru was also signed recently, and a formal association agreement (which includes a free-trade component) with the EU was signed in late June 2012. Relations with the US will remain strong, supported by the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) and boosted by strong US investment in Costa Rica's high-technology sector. Costa Rica's relations with its northern neighbour, Nicaragua, were severely strained by a territorial dispute in 2010-11, but have since returned to normal. However, some lingering distrust of Daniel Ortega, the Nicaraguan president, who is seen as the instigator of the conflict, will remain.

  POLICY TRENDS: Costa Rica's business environment will remain relatively friendly, owing to strong institutions, policy predictability and a favourable attitude towards private investment. In the shorter term, however, the administration will face the challenge of still sluggish global growth and a troubled fiscal outlook, following its failure to pass a comprehensive tax reform. This will make it difficult to boost revenue to cover budgetary shortfalls and maintain higher social spending in accordance with the administration's commitments. On the positive side, the government should still succeed in promoting investment in high-end manufacturing and newly liberalised services, capitalising on the country's relatively young and well educated labour force, and exploiting the trade potential afforded by DR-CAFTA. DR-CAFTA will provide trade and investment opportunities not only with the US, but also with other Central American economies, as regional linkages strengthen.

  ECONOMIC GROWTH: Real GDP growth has surprised on the upside so far this year, reaching 6.5% year on year during January-June, but economic activity has begun to slow down since then, in line with our forecast for weaker second-half growth (monthly activity hit a low of 1.4% year on year in September). Despite the slower pace, we still expect full-year 2012 GDP growth to reach 4.9%, which would be the fastest rate since 2007. This will be followed by GDP growth of 3.7% in 2013 as base-year effects kick in. External risks are firmly on the downside, owing to the weak recovery in the US and the possibility of failing to resolve the country's so-called "fiscal cliff" situation before the beginning of 2013 (not in our baseline scenario). Additionally, continuing uncertainty in the Euro zone will weigh negatively should it feed through into US growth. Domestically, fiscal constraints will linger into the medium term, as will weaknesses in formerly vibrant sectors, such as construction (which has only recently begun to recover from a three-year slump) and, to a lesser extent, tourism. High unemployment, which a newly developed household survey has estimated at 10.2% at mid-2012, is also a debilitating factor, which does not appear to have significantly improved, despite the strong economic growth in the first half of the year. Poverty fell for the first time in two years in 2012, but remains high, and inequality has been widening over the past decade. This will put pressure on the government to avoid significant cuts in social services. In the longer term, however, the impetus from DR-CAFTA will lead to greater investment (particularly in the dynamic high-tech and business services sectors) and stronger export performance. As a result, GDP growth in 2014-17 is expected to average 4.5% per year, still well below the pre-crisis average of 6% in 2003-08, but more in line with the country's long-term growth potential.

  INFLATION: Consumer price inflation has remained at historic lows in 2012, but has begun creeping upward since mid-year, reaching 4.6% in October (from a low of 4% in July), while nevertheless remaining towards the bottom end of the target range of the Banco Central de Costa Rica (BCCR, the Central Bank) of 4-6%. These lows will be temporary, and expectations should be anchored at around 5% over the medium term, as the BCCR moves towards a formal system of inflation-targeting and a more flexible exchange-rate policy. There are risks to our baseline inflation forecasts, stemming from the possibility of weather-related disruptions to agricultural supplies and from further bouts of volatility in global commodity prices. Pressure from monetary aggregates is unlikely, as both broad money (M2) and private credit have been growing at less than half of their pre-crisis rates of 30-40% per year. Core inflation fell to 3.2% in October, suggesting that demand pressures from abroad are increasing.

  EXCHANGE RATES: In the short term, the colón will be exposed to global market turbulence, as well as to changes in local demand for US dollars in Costa Rica's highly dollarised economy (more than 40% of credit and deposits are denominated in US dollars). The colón has been close to the band floor (set at C500:US$1) since late August and current trends suggest that it will remain strong in the short term (we expect an end-2012 rate of C503:US$1), coupled with volatility arising from global developments. The Eurobond issues also carry a risk of strengthening the colón, given that inflows of up to US$4bn could enter the country over the next four years. We expect the colón to reach C522:US$1 at end-2017, with the main risk to our forecast being a flight to safety into US dollars in the event of another global shock. The BCCR plans a gradual move from the current crawling-band exchange-rate regime towards a managed float, although we now believe it will wait until global conditions become more stable before attempting to do this.

  EXTERNAL SECTOR: A large and growing structural deficit in goods trade will lead to a widening of the current-account deficit, from 5.4% of GDP in 2012 to 6.2% in 2014 after which it should fall to 5.8% by 2017. This structural deficit reflects the fact that a large proportion of Costa Rica's manufactured exports are import-dependent and the country lacks a domestic consumer goods industry, relying on imports to satisfy growing consumer demand. The trade deficit will also deteriorate in 2013-17 in light of worsening terms of trade, owing to Costa Rica's position as a net commodity importer. However, the services surplus will increase, partly because of tourism, one of the major sources of foreign revenue, but also as a result of growth in export-oriented business processing and information technology (IT) services. Costa Rica will continue to run structural deficits on the income account, as high profit repatriation by foreign investors more than offsets returns from foreign-exchange reserves. The transfers surplus will remain modest, reflecting comparatively low workers' remittance inflows, which are offset by outflows from resident Nicaraguan workers.

  December 01, 2012

• Forecast

  Costa Rica: Country forecast summary

  Country forecast overview: Highlights

  • The president, Laura Chinchilla, of the ruling Partido Liberación Nacional (PLN), will provide political and economic stability until the end of her term in 2014, but will face a challenging legislative environment. As a result, the government may still struggle to pass legislation, notwithstanding an improved legislative position stemming from the disbandment of an opposition bloc. Meanwhile, the political scene will be increasingly focused on the next legislative and presidential elections, which are scheduled for February 2014. Despite low popular support, the Economist Intelligence Unit expects the PLN to retain the presidency in 2014.
  • Ms Chinchilla's reform agenda has been constrained by the need to boost revenue, owing to the failure to pass a comprehensive fiscal reform. The government has been forced to adopt piecemeal measures in order to make a significant impact on reducing the fiscal deficit, which reached 4.1% of GDP in 2011. We expect the deficit to widen to 4.4% of GDP in 2012, before solid GDP growth and piecemeal tax measures bring it down to 0.9% of GDP by 2017.
  • GDP growth will rebound in 2012, to 4.9%, but it will remain constrained by weak US demand in the tourism sector and only modest improvements in credit growth in the medium term. In the longer term, manufacturing output will rise and the service sector is expected to expand. The Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA), which came into force in January 2009, will encourage greater investment in the medium term in key sectors such as insurance, telecommunications and, eventually, energy. Costa Rica will also benefit from increased foreign direct investment (FDI) from China.
  • Inflation will be significantly lower on average in 2013-17 (5.4%) than in 2004-08 (12.1%), because of weaker demand, as well as relatively well anchored expectations around the 5% target of the Banco Central de Costa Rica (BCCR, the Central Bank) and a more effective monetary policy. The BCCR will intervene to maintain the colón within the existing currency bands, before switching to a more flexible regime. The current-account deficit will remain high, but manageable, at an annual average of 6.1% of GDP in 2013-17, owing to a structurally large trade deficit and large profit outflows.
  • A relatively large public debt burden will keep real interest rates high, and structural weaknesses, such as a dependence on oil imports and the US economic cycle, will leave the Costa Rican economy exposed to external shocks. However, strong institutions and efforts to reduce red tape will encourage greater investment and diversification.

  

  December 14, 2012

View detailed map

Country Briefing

Land area

51,100 sq km; three major mountain ranges, central highland plateau and highland valleys, with lowlands along Pacific and Atlantic coasts

Population

4.3m (2011)

Main towns

Population in '000 (based on 2000 census)

San José (capital): 310

Alajuela: 233

Cartago: 132

Puntarenas: 106

Heredia: 104

Limón: 90

Climate

Tropical in lowlands, warm temperate on highland plateau and valleys

Weather in San José (altitude 1,172 metres)

Dry season, December-May; wet season, June-November. Hottest month, June (average daily temperature 24-29°C); coldest months, December-January (21-27°C); driest month, February (5 mm average rainfall); wettest month, September (305 mm average rainfall)

Languages

Spanish

Measures

Metric system

Currency

1 colón © = 100 céntimos. Average exchange rates in 2011: C506:US$1; C704:€1

Time

Six hours behind GMT

Public holidays

There are nine legal holidays: January 1st; April 11th (Battle of Rivas); Maundy Thursday; Good Friday; May 1st (1856 Campaign and Labour Day); July 25th (Annexation of Guanacaste); August 15th (Day of the Virgin Mary's Assumption to Heaven and Mothers' Day); September 15th (Independence Day); and December 25th (Christmas). There are two additional unpaid, optional holidays: August 2nd (Virgin Mary Queen of Angels, Patron of Costa Rica); and October 12th (Spanish discovery of the New World, called Día de las Culturas), both of which may be shifted to the following Monday

March 09, 2012