San José, Costa Rica, since 1956

Economy Weathers Global Pounding – So Far

The year started promising for Costa Rica, despite fears of a faltering economy in the United States.

The Central Bank’s reserves had reached an all-time high of $4.9 billion in April as the value of the colón gained on the dollar.

Inflation was at a manageable 10 percent, and the government was running a surplus. But the global financial crisis that exploded in September rocked 2008, as markets worldwide plunged and many nations scrambled to save their banks from collapsing.

Now, Costa Rica’s inflation is at a decadehigh, the colón has fallen in value, banks are counting on an infusion of millions of dollars in recapitalization from the government, and gross domestic product (GDP) growth continues to shrink.

While Costa Rica’s banking system avoided the exotic financial instruments that are at the root of today’s global crisis, the United States – the destination for about 40 percent of the country’s exports, and the engine that drives the country’s real estate and tourism industries – did not.

Because Costa Rica imports more than it exports, it relies on foreign investment to keep dollars flowing into the country. This past year, banks felt the crunch from a lack of dollars, and tightened their previously liberal credit lines. By year’s end, this reluctance to grant credit was beginning to be felt in many sectors and had economists predicting that Costa Rica will soon follow the United States into a recession.

Stunted Growth

In 2006, Costa Rica’s gross domestic product grew by 8.8 percent and in 2007, by 7.3 percent. This year, it grew just 3.5 percent, according to the Central Bank. The International Monetary Fund predicts Tico GDP to grow just 3.5 percent next year, too. Eric Vargas, strategy director at Aldesa financial advising firm, said that growth could drop below 2 percent if the recession continues in the United States.

Signs of slowing have been evident. In the past year, several large developments aimed at tourists and wealthy expats looking to retire have been postponed indefinitely. The $800 million Punta Cacique development financed largely by AOL founder Steve Case, hotel and luxury housing projects by Regent and St. Regis on the Pacific coast, and a Thunderbird Resort in Tres Ríos have been put on hold.

Construction chamber officials estimate that about 80 percent of projects in the booming northwestern province of Guanacaste are now on hold. About 20,000 people in the construction business are out of work as a result.

The delays are not caused only by frozen credit lines abroad. In October, the amount of credit awarded to the private sector by Costa Rican banks grew 10 percent less than during the same period last year. Banks, spooked by the lack of dollars in the local markets due to reduced direct foreign investment, upped interest rates on loans and slowed down their credit.

The Costa Rican govern ment is in the process of loaning $50 million each to Banco de Costa Rica and Banco Nacional, and $17.5 million for Bancrédito to help unfreeze local credit.

The IMF has said it would extend an unlimited credit line to Costa Rica. The World Bank and the Inter-American Development Bank have also granted $500 million in credit.

Buying PowerFalls

Economists hoped that lower gas prices would alleviate some of the country’s trade deficit, given that Costa Rica imports all of its oil.

Though gas prices fell significantly from a record-high in April, the price of Costa Rica’s imports continued to skyrocket in 2008. The trade deficit has increased 85.6 percent in the first 10 months, compared to the same period last year. Imports grew by more than 26 percent between January and September, while exports grew by just 5.5 percent.

The trade imbalance puts pressure on the exchange rate, which has stretched the upper limit set by the Central Bank this year. The exchange rate went from roughly 500 colónes per dollar at the beginning of 2008, up to 560. The monetary reserves have dropped, hitting a low for the year of $3.6 billion in October from efforts to buy up colónes to make them more valuable.

Despite the Central Bank’s efforts, inflation in November over the past year hit 16.3 percent, a decade-high. The average person’s real purchasing power is down by 2.4 percent for the year, falling 11 percent in September alone, even though the government approved a 6.58 percent increase for minimum wages in June. Costa Ricans struggled as inflation outpaced the interest rates on their savings accounts, as well as their paychecks.

Unemployment rose during the first eight months to 4.9 percent, just 0.4 percent more than last year, spurred by the closings of some big operations like the Hanes clothing assembly plant in Barreal, which at one point employed 800 people. VF Corp., the world’s largest clothing manufacturer and once Costa Rica’s largest clothing exporter, announced it would shut down its Costa Rican operations soon after. This not only increases unemployment, but lowers Costa Rica’s export quota.


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