San José, Costa Rica, since 1956

Harder Times Ahead for Tico Economy

Economists across the board have been predicting harder times ahead in the market for some time now.

The recent holiday season ended with a slowdown in overall sales, a sign that consumers were taking the experts’ advice.

Recent signs indicate that the Costa Rican economy is entering a recession.

Experts predict that economic growth for the first half of the year would show a deceleration due to a deteriorating global market, a contraction of credit and rising interest rates.

Last year ended with a 13.9 percent inflation rate, which represents almost a 4 point increase from the 2007 rate of 10 percent.

Aldesa, a consulting firm based in Costa Rica, considers that the drop in the price of raw materials in addition to a decrease of liquidity could facilitate an easing of inflation rate this year.

Eric Vargas, chief economic strategist for Aldesa, said his company considers the welfare of the Costa Rican economy is directly interwoven with the U.S. market’s wellbeing.

The United States is Costa Rica’s major exporter, and the current financial crisis in the U.S. has stalled construction, manufacturing and tourism here. U.S. tourists represent the majority of visitors to Costa Rica.

Aldesa also foresees that the growth rate could fall under zero during the first six months of the year and will most likely go on the positive side in the second half of the year.“

The principal risk is the major deepening of the recession in United States,” Vargas said.

Last November, Vargas said, the local economy was going through the toughest phase yet. He predicted that the difficulty will continue for the first six months of the year.

In the nation’s retail sector, experts predict just 3.5 percent growth compared to the sturdy annual average of the last 14 years of 4.5 percent.

The Central Bank predicts the depreciation of the colón versus the U.S. dollar to be around 6.4 percent for the next 12 months. However, some economists predict that the colon could drop 10 to 15 percent.

Last December, an effort by government officials to maintain a good level of liquidity within all the state banks was successful after the Legislative Assembly ratified a financial aid package in the amount of $117.5 million.

Banco de Costa Rica received $50 million, Banco Nacional received $50 million as well and the Bancrédito received $17.5 million.

Officials and economy experts hope this package could cushion the effects of the current financial crisis.

There was, however, some positive signs for this year.

The country was able to reduce the foreign debt from 55 percent to 40 percent of gross domestic product due to a controlled expenditure and improvements in tax collection, said Finance Minister Guillermo Zúñiga.

The finance ministry also reported a budget surplus at the end of November of about ¢97 billion.

According to Zúñiga, the country has enough capital to confront the current crisis while maintaining the ability to build more infrastructure, such as streets and schools.n


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