Tight Credit Slowing Construction Projects
Experts in the construction industry estimate that about 80 percent of large-scale development projects along the northwest Pacific coast are on hold until the developers can find new lines of credit.
Most of these companies, however, are keeping their situation under wraps for now.“
Those that have already started are still happening, but those that haven’t started yet aren’t going to,” said Randall Murillo, director of the Costa Rican Construction Chamber.
The newest project to announce a delay is Thunderbird Resort, planned for Tres Ríos, east of San José. David Pirie, the company’s marketing manager, said their financing from within Costa Rica had been frozen, and they are seeking international funds now to continue the project. They hope to get the financing within three months.
With national banks tightening their credit lines, both large and small developments are feeling a squeeze, Murillo said.
About 20,000 people in the construction business are out of work right now, and that the number might double by January if construction keeps falling at the same rate, he said. (See related story below.)
“We (in the construction industry) are already feeling the first hits of the financial situation.”
The construction industry has been booming in recent years thanks to an explosion in hotel, home and condominium construction projects, pushed largely by increasing tourism and baby boomers shopping for retirement homes.
Other large projects recently delayed include the $800 million Punta Cacique development, financed largely by AOL founder Steve Case, and hotel and luxury housing projects by Regent and St. Regis on the Pacific coast.
The Union of Private-Sector Chambers and Associations (UCCAEP) released a statement this week announcing that national banks’ tightening of credit is having a direct effect on unemployment. The statement criticized the banks’ regulatory bodies.
“We need rapid and coordinated governmental action to avoid a social crisis that could be serious, lengthy and global,” said the UCCAEP President Manuel Rodríguez.
Banks say they must tighten up their loan qualifications to ensure they have enough liquidity at all times after several years of too-easy credit. If they lifted the requirements for how much money each bank needs to have in reserve, it’s possible that clients could lose confidence in the institutions and take out their money en masse, thus breaking the banks. Also, many of the larger-scale development projects have foreign lines of credit, which are suffering for reasons not related to Costa Rica’s relatively isolated financial system.
“They shouldn’t lower their standards for the level of sufficient patrimonial (reserves),” said Eric Vargas, strategy director at Aldesa, a financial advising company. “Definitely, the private sector is going to feel an important restriction in credit, and this is what is going to cause a recession. But it’s inevitable.”
Vargas said this painful process might help the country become less dependent on foreign money, which could help lower the trade imbalance.
A business manager for the Costa Rican Institute of Cement and Concrete, Roberto Ordóñez, confirmed that he thinks more than half of the large projects in the northwestern province of Guanacaste have been put on hold in the last two months, but he said the country could recover from these losses by focusing on building houses and office spaces.
Les Nunez, a Guanacaste real estate agent, said construction in the area is slowing, but that many projects were pre-sold so are still in the process of being built.
“Generally, some projects have been put on hold, like Cacique and the Regent, some of the real mega-projects. But those guys made the decision stateside based on the economy,” Nunez said. He added that difficulty getting water out to some of the projects is as serious as the unfriendly financial climates.
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