U.S. Economy a Shadow Over C.R.

February 1, 2008

The Central Bank on Thursday released a pessimistic outlook on the Costa Rican economy, projecting that a slowdown in the United States economy will have a direct effect on Tico fortunes.

The bank is predicting that growth this year will shrink to 3.8%, while growth for 2009 is projected at 4.9%.

By comparison, gross domestic product in 2007 grew 6.8%, the bank said.

Central Bank President Francisco Gutiérrez pointed out that last quarter growth in the United States was a thin 0.6% and many other indicators point to a slowdown and possible recession there.

“We can’t try to isolate ourselves from what happens in the United States economy,” Gutiérrez said, “especially an economy like Costa Rica’s that exports 50% of its production and that basically 50% of its exports go to the U.S. market.”

The Central Bank is also projecting a slowdown in foreign direct investment this year to $1.63 billion, from 2007’s record high of $1.88 billion. Continued soaring oil and commodity prices are also expected to continue to have an impact in the next two years.

“The advantages of our (economic) openness were very clear when the North American economy was growing a lot,” Gutiérrez said. “But this time we’re confronting the effect of a deceleration.”

The bright spot, Gutiérrez said, is that the Costa Rican economy is perhaps better positioned than ever to deal with an economic slowdown.

In terms of public finances, the government finished 2007 with a surplus for the first time in half a century. Foreign debt as a percentage of GDP is at an all-time low, and the International Monetary Fund recently publicly applauded the strength of Costa Rica’s fiscal health.

“The difference from other periods when the international economy slows down is that this time Costa Rica is facing it with many fewer vulnerabilities than in past years,” Gutiérrez said.

Along with its projections on the fortunes of the Costa Rican economy, the Central Bank reaffirmed its commitment to fight inflation, announcing a 275 base point (or 2.75% ) cut in a key interest rate.

With U.S. dollar interest rates low, colón interest rates relatively high, and the colón appearing strong against the dollar, the danger has been that foreign investors switch short-term investments to colones,Gutiérrez said, which pushes up inflation.

Cutting the interest rates is one way to deter that phenomenon, while another would be to allow the colón to appreciate by lowering the bottom limit on the colón-dollar exchange rate. (See analysis on Page 18.)

Gutiérrez said further changes in the interest rate or changes in the exchange rate could be on the horizon this year, but that depends on how inflation rates react to the bank’s policies.

The Central Bank’s goal for 2008 and 2009 is to lower inflation to 8% and 6%, respectively, plus or minus 1%. Last year’s inflation was 10.64%, thanks partly to the high price of oil and grains on international markets.

 

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