Study Says CR Economy At Risk From U.S. Woes

December 14, 2007

A study by the National University (UNA) has sounded a warning about the health of the Costa Rican economy.

Pointing to the stagnation of the United States economy and increasing domestic and foreign debt, Henry Mora, dean of the Social Science Faculty, said the study seeks to foster “an environment of caution.”

“A lot of (the economy’s) accomplishments have a very weak foundation,” Mora said Wednesday, noting that many of Costa Rica’s apparently healthy macroeconomic numbers hide uncomfortable realities.

The elephant in everyone’s living room is the slowing U.S. economy, Mora said. Mass defaults on subprime mortgages are simultaneously shaking the country’s finance sector and beginning to burst the 15-year real estate bubble.

A recession there appears to be on the way. Sooner or later, Mora said, its effect will be felt in Costa Rica, because much of the country’s growth in the last few years has come from exports to the U.S., Costa Rica’s principal trading partner.

The slowing up north may already be having an effect here. Export growth this year has leveled off at a little over 14%, lower than last year’s 16%.

Meanwhile, the growth of Costa Rica’s gross national product this year has slowed to about 6.5% – a good rate, but significantly slower than last year’s more than 7%. Indeed, production growth in eight of

the 12 industries surveyed by the UNA study from January to September had slowed. The main exceptions were construction, retail and hotels.

Despite that slowdown in growth, consumption in Costa Rica has skyrocketed in the last two years. Imports for the 12-month period ending in January 2005 were up about 5%.During the 12-month period ending this September, however, imports had increased by about 20%.

“How are (Costa Ricans) funding such an explosion in spending?” Mora asked. “By getting in debt.”

Domestic, private sector borrowing was up by 15.8% during the 12-month period ending in September.

And while Costa Rica’s foreign, public debt is largely offset by the amount of foreign investment entering the country, Mora noted that more than half of that foreign direct investment is from foreign entities buying up existing Costa Rican companies.

 

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