San José, Costa Rica, since 1956

Tico Financial Whiz Takes Your Questions

Eric Vargas, strategy manager of Aldesa, a long-standing Costa Rican financial consulting firm, recently fielded questions from Tico Times readers during an online chat at

Here are some excerpts:

Q: Is Costa Rica in a recession?

EV: We think so, many sectors started to contract a few months ago, such as construction, hotels and retail, and GDP seems to be contracting.

To what extent have these sectors been contracting? Can you give numbers? Construction is down 10.4 percent in the last seven months, manufacturing down 8.5 percent in nine months, hotels down 4.4 percent in eight months, retail down 1.25 percent in eight months.

What was the contraction for the last four months and is it accelerating?

The IMAE (a list of economic indicators) reading for the second quarter was minus 2.4 percent, for the third, minus 1.0 percent, and for October and November we have minus 3.8 percent. All rates are in annual terms.

How many North Americans (and others) will migrate to Costa Rica over the next decade and what opportunities and challenges does this present?

Costa Rica has a lot of advantages for attracting retirees from the U.S. and other countries, which could help support and develop industries such as healthcare and housing, but these trends will become evident in the medium to long run.

Could you talk generally about the real estate markets in Costa Rica and more specifically about housing? Is mortgage credit still available or has it softened? Are housing starts down?

Real estate markets should not be seen as generic. Market conditions differ depending on the location and type of activity. Mortgage credit, although it is still available, is nowhere near the levels of the past few years, so we do expect a softening of those markets more dependent on credit.

How would you define a recession? Is Costa Rica in one?

There is no universal definition of recession. Some economists use two consecutive quarters with negative GDP growth as a measure. Second and third quarters of 2008 have negative GDP readings, and monthly IMAE suggests the Costa Rican economy has been contracting since April.

How has the U.S. financial crisis affected Costa Rica?

The most important effect has been the slowdown in foreign direct investment, which we need to finance our current account deficit. Also, there is less credit available for Costa Rican companies.

I am interested in learning more about the Costa Rican economy. What materials would you suggest I read?

The Central Bank Web site ( has most economic indicators, as well as monthly bulletins explaining the official view of the economy. Private companies such as Aldesa also generate information (

How will the financial downturn affect tourism? Is there a difference between normal tourism and ecological tourism?

All kinds of tourism are exposed to the effects of the crisis, as long as consumers in developed countries cut back on their leisure spending.

The majority of tourists come from the United States. Aren’t we likely to see a drop in Americans coming to Costa Rica as the situation worsens in the United States, and so worsening tourism numbers here?

Definitely. Fewer Americans will come and tourism will probably contract this year. Recovery will be dependent on the evolution of the U.S. economy.

How long will it take for tourism to turn around?

Recovery will take time. The U.S. needs to get out of the recession. Hopefully, by the end of the year or 2010.… Tourism should remain one of the leading industries in Costa Rica. After the hard times produced by the international economic downturn, we expect this industry to recover and keep on growing.

Where do you think the colon is heading?

Discounting the effect of inflation, the colón has appreciated by 28 percent in the last three years, and this has led to a huge current account deficit. This deficit will be much harder to finance, given the international economic conditions, so we think the colón should depreciate in order to diminish the deficit and be able to finance it.

How would the change to one single currency, like the dollar, affect Costa Rica? Is it a good idea?

This would eliminate currency risk, but also monetary policy. This can be a big debate. Personally, I would rather a more flexible exchange rate as long as hedging instruments are made available.

How are the locally-owned small businesses doing? They are the largest employer.

Local businesses are feeling the pressure of the unavailability of credit and diminishing internal demand, so companies must prepare by not increasing inventories and maintaining adequate levels of liquidity.

Are any of the banks here in trouble? I see that HSBC is paying 2 percent more than other banks on CDs. This usually means they need capital desperately.

There are still no signs of serious trouble in our banking system. We didn’t have a strong securitization process of mortgages, so everything is reflected in the banks’ balance sheets. Mortgage delinquencies are still relatively low, but we might see them rise through 2009. There isn’t much liquidity. This is why banks are competing for cash, but we don’t see any particular problem with any big institution yet.

We have recently seen a couple of private banks receive an injection of capital from their mother institutions. Is this something we will continue to see as things get tighter on the economic front? How would this type of measure help customers interested in getting loans from these institutions?

Bank capitalization will ease some of the pressure of pent-up credit demand, but credit will likely remain constrained. Banks will be very cautious before extending new credit because they have to watch their liquidity levels; a large part of the additional funds will be held to confront a probable increase in delinquency rates.

Is it true the Central Bank will only guarantee bank accounts with cedulas attached to them?

In Costa Rica, there is no deposit insurance, so only the state-owned banks are directly backed by the government.

What are your thoughts on declining real estate sales here?

This is a consequence of less credit available and fewer foreigners buying right now. This industry can be cyclical as well, so for a period of time, we could see some weakness in sales.

Along with the decline in sales, do you also see a decline in real estate prices?

It will depend on the specific market and location, but the odds are for prices to be heading south, at least for some time.

It seems to me many of the real estate prices are remaining artificially inflated, as they were in the U.S. before the bubble burst.

Real estate markets take time to adjust. In the U.S., we also saw a big lag between falling sales and falling prices, but it is most likely that they will follow.

Do you see any areas holding their real estate values better than others?

The two biggest problems for this sector are excess supply and lack of credit. So value can be held where there has not been a construction boom, and where buyers are less in need of bank financing.

Under the current economic conditions, where would you invest your money?

Under current economic conditions, we prefer good quality bonds. We like sovereign bonds better than corporate. It always depends on the specific objectives you have and your risk appetite, but we don’t advise getting too aggressive yet.

What sectors do you think are best for investment mid- to long-term?

We like the technology sector. There are going to be a lot of cost-cutting technologies developed in the next years, and at some point, growth will come back, probably first in emerging economies.

How large is Costa Rica’s foreign debt?

Total debt is around $8.8 billion, roughly 35 percent of GDP, most of it private debt.

Should Costa Rica pass a stimulus package, similar to the one the U.S. is likely to pass, that cuts taxes and increases spending?

We need to be careful because, unlike the U.S., we cannot print dollars, and we cannot get financing as easily as the U.S. Treasury. Even though stimulus is required, we should not burden the economy with a lot of debt, and we should be aware not to increase the size of the current account deficit if we stop the economy from slowing down.

What are some recommended non-real estate investments non-resident foreigners can make?

The bond markets will show good opportunities. We recommend patience to be able to lock in good yields. We like dollar denominated, short- to medium-term, high-quality bonds.

There are small financial institutions such as Coopeservidores offering as much as 7 percent in dollars on a 12-month CD. Are these safe options for investment?

The general concept of risk-return and tradeoff applies here as well. Riskier issuers will have to pay higher yields. However, we can see big banks taking in funds at rates around 5 percent to 6 percent, so 7 percent is not so far off the charts.

How will the recent earthquake affect Costa Rica’s economy?

Factories and hotels have been seriously damaged, but recovery efforts might provide a stimulus sufficient to offset this effect. We do not expect the downturn to be worsened by this event. On the contrary, foreign help will provide some support for the economy.

Is there a concern that, with such limited liquidity and credit, the credit and aid being extended to the earthquake victims will reduce what can be used for other economic stimulus projects?

There will always be a trade-off. However, the most important thing is that available credit is directed to productive projects, and after the earthquake there is a great need for productive reconstruction. Monetary conditions will make it harder for most sectors, no doubt.

Which Costa Rican export has been hit hardest by the economic downturn, and why?

Probably the high-tech sector (such as Intel) has been one of the hardest hit due to its global exposure, but we should see weakness all across the board.

With the price of crude down to $40 a barrel, why does gas still cost over 90 cents a liter?

There is an important lag in local prices because of the official adjustment mechanisms (bureaucratic procedures). We should see more price reductions in the coming weeks.

Are small businesses being made aware of the financial situation directly, with suggestions on how to successfully overcome it?

Probably there hasn’t been enough advice out there for small businesses to deal with the crisis. There has been a bit of denial regarding the effects we would have in Costa Rica because of the global downturn. We are a small open economy, and we have to deal with the economic cycles, but some of us have been trying to send the message: It’s time to be conservative.

How well is Costa Rica prepared to manage potential growth in population from U.S./Canadian/European retirees? Is the infrastructure keeping pace?

This is one of the most important challenges for our economy. We need a more active participation of the private sector financing infrastructure projects. There has been a big effort but there is a lot more to do. In current conditions we can’t expect the government to fund all the country’s infrastructure needs.


Comments are closed.