Investing Here: Play it Safe, Experts Say
Though the country’s investment climate hasn’t changed much in the past few years, several important economic decisions could be made this year with consequences that are hard to predict, meaning that potential investors might want to hedge their bets with short-term options.
In particular, the future of the tax plan under consideration in the Legislative Assembly, a bill to transfer the Central Bank’s debts to the Finance Ministry, and plans to alter the devaluation system for the colón make long-term investments particularly uncertain this year.
According to Dennis Mora, investment advisor at brokerage house Financiera Desyfin, the key for newcomers to the country who are looking to build investments here is to take it slow.
“Don’t bring all your money here at one go,” he told The Tico Times, emphasizing that it’s important to get to know the country first and make investing here “a gradual process… In Costa Rica there are possible changes that could affect investments.”
People with most of their investments abroad should keep their home-country advisor appraised of their activity here so that person can ensure the investor has a well-balanced portfolio overall.
The country’s regulatory authorities are taking steps to help potential investors educate themselves. New efforts from the Superintendency of Securities (SUGEVAL), which supervises the stock market – the Superintendency of Financial Entities (SUGEF) regulates all banks and other financial institutions – are helping people from Costa Ricans to foreigners, novices to brokers, learn more about the various options here, according to SUGEVAL head Danilo Montero.
SUGEVAL is redesigning its Web site, increasing its production of investor materials and organizing events such as seminars and an annual Investors’ Fair to increase awareness of good investment practices, Montero told The Tico Times. However, resources in English remain limited, making it important for people with limited Spanish to seek additional advice in a country where a wide range of investment options, and also of scam artists, can be found.
Investors should make full use of the available regulatory agencies, and preferably a financial advisor, before making any sort of investment, according to government officials. Scam artists abound and seek out those stricken with the so-called “sunshine syndrome” – the tendency for recent arrivals to be lulled by their new lifestyle into thinking they do not need to take the same precautions here that they would back home.
Focus on the Present
According to Mora, a change in Costa Rica’s money-exchange policy could have a significant impact on investments here, especially those made in colones. (Almost all options except foreign debt bonds, which are available only in dollars, can be purchased in either dollars or colones, and sometimes euros.) Because of this, he recommends not only short-term investments, such as government bonds or shortterm mutual funds, but also making those investments in dollars.
The Central Bank, which sets monetary policy for the country, announced late last year that it is considering a change from Costa Rica’s decades-old crawling peg devaluation system – which, this year has the colón devaluing against the dollar by an average of ¢0.13 per day, for a total planned devaluation of 6.6% by the end of 2006 – for a more flexible system (TT, Jan. 27).
It’s not yet clear when this might happen, or exactly what the new system would entail. According to Mora, it’s equally uncertain how the change would affect the colón, with some analysts predicting Costa Rica’s currency would devalue more quickly if the crawling peg system were abandoned, and others arguing it would increase in value.
For these reasons, dollar investments are safer for now, particularly for those who plan to rely on the income from their investments – though people who won’t be dependent on that income, and have extra funds with which they’re willing to take a chance, colón investments offer a greater profit,Mora said.
The other important change on the table is the bill to transfer Central Bank debts to the Finance Ministry. This move is tied to the tax plan the Legislative Assembly is discussing, the future of which is unclear following a decision by the Constitutional Chamber of the Supreme Court (TT, March 31). The tax plan would generate additional revenue for the Finance Ministry, allowing it to take on the bank’s debts.Without the fiscal reform, the transfer might be impossible.
Should these two steps come to pass in the near future, however, the Central Bank would be able to stop issuing colones to cover its debts, and inflation would likely drop from its current high rates (14.07% in 2005, and an estimated 11% for this year) –another important change for investors, Mora said.
What’s Out There
So, with these factors in mind, what options are out there? Though investors here can choose from debt bonds to mutual funds, long-term, lowyield investments to relatively quick payoffs, the array of options here remains modest, Superintendent Montero said.
“There’s a whole range, from options for people who need money relatively soon, to medium- and long-term (investors),” he said. However, “the Costa Rican market is very, very small. Almost all Latin American, and especially Central American, markets are small when it comes to stocks – much more limited than what an investor would find in the European or U.S. markets.” Mora agreed.
“The (investment) market in Costa Rica is pretty small and underdeveloped,” he said, adding that 95% of the movement in the Costa Rican market comprises government debt bonds. The idea of an investment portfolio – a collection of different investments that, ideally, is varied and well-balanced – is relatively new in a country where most people still choose one kind of investment and stick with it: either quick, lucrative investments or less profitable, but safer, government options.
Government debt bonds are emitted by the Central Bank and Finance Ministry, available in both short- and long-term. Private-sector debt bonds and stocks are also available, thought Mora said he doesn’t recommend investing in stocks, since the market is not very profitable and the number of companies offering stocks is decreasing. The regulations and paperwork demanded of companies make it difficult for them to make timely decisions about the stocks they offer, and many companies are finding it costly to offer stocks, he said.
More attractive are investment funds, also with short- and long-term options, and Real Estate Investment Trusts (REITs or fondos inmobilarios), publicly traded companies that buy and rent out real estate and distribute the profits among its investors. These long-term funds, which generally require a commitment of three years or more, have become increasingly popular since their introduction in Costa Rica in 1999 (TT, Nov. 19, 2004).
Many foreigners choose to invest in real estate itself. This is a lucrative option, particularly in the northwestern province of Guanacaste – Mora said he does not recommend real estate investments in San José, where the market is slow or even stagnant.
However, it’s even more important for real-estate investors to do their homework, since in Costa Rica, real estate is an entirely unregulated industry, with no government agency keeping a watchful eye.
External debt bonds, or bonos de mercados emergentes, are another long-term option that work like U.S. Treasury bonds and are emitted only in dollars.
No matter what path investors choose, it’s important to get all the information possible for making a decision – and the first step for that is to check in with the available regulatory entities. In order to publicly solicit investments in Costa Rica, a company must be incorporated as a “Sociedad Anónima” (S.A.) and registered with SUGEF or SUGEVAL, both dependencies of the Central Bank. Their Web sites, www.sugef.fi. cr and www. sugeval.fi.cr, provide current information about registered companies, their audited financial statements and the investments they offer. (To learn more about the National Stock Market, visit www.bnv.co.cr.)
According to Montero, the SUGEVAL Web site redesign, taking place this year, will create sections that are easier for run-of-themill investors to use and understand, while maintaining access to more detailed information for more experienced investors or advisors. “Today, it’s a page that has a ton of information, but it’s very complicated to use,” he said.
Free seminars open to the public are held every three months on various investmentrelated themes, and the Investment Fair that took place for the first time in November with more than 1,500 people in attendance, are designed to increase public consciousness about investment. The first seminar of this year, which took place March 28, dealt with REITs.
Montero said these efforts are, to his knowledge, the first of their kind in Latin America, where conferences for brokers or advisors are common but activities for “the most important player, the investor” are not.
SUGEVAL also has an increasing amount of materials available in English on the Web site, and investors can speak to bilingual operators at the superintendency’s Information Center (243-4700). However, many materials, such as forms and company’s financial statements, are only available in Spanish, posing an extra challenge to non-Spanish speakers. Mora said this often leads foreign investors to put their money into property rather than stocks or bonds.
“It’s almost an act of faith – one has to trust,” said Mora, adding that Desyfin plans to translate forms and other materials into English.“It’s a problem, a serious limitation.”
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