Costa Rica: A tale of two economies

June 8, 2012

From the print edition

“It was the best of times, it was the worst of times.” The opening lines of Charles Dickens’ “A Tale of Two Cities” are certainly applicable to Costa Rica’s position in the world economy right now.

Production has positive momentum, and the Central Bank sees Costa Rica on track for 4 percent economic growth in 2012 (TT, June 1). This will be less than the 4.2 percent of 2011, but more than the 3.8 percent that that institution projected at the start of the year, and two times the recently revised economic growth projection of 2 percent for the United States. 

After two slow years, foreign direct investment in Costa Rica increased to a record $2.1 billion for 2011, recovering past 2008 levels, according to a report by the Economic Commission for Latin America and the Caribbean. 

Yes, these are positive developments, but Costa Ricans have mixed attitudes towards the economic situation. On June 4, financial weekly El Financiero published mostly positive outlooks for business expansion in 2012 based on a survey of corporate business manager attitudes. But family breadwinners and small-business owners see the prices of fuel and interest rates going up, and feel an uptick in inflation. A steady diet of news showing an evermore dysfunctional government, culminating in a tax package fiasco in April, has also undercut confidence.

Even though there is good news nationally, Costa Rica is dependent on exports for its prosperity. So what happens in the world economy is important, and uncertainty outside Costa Rica’s borders sows doubt as to the sustainability of recovery from the 2010 downturn. International interest rates are at record lows, driven by money-printing by the U.S. Federal Reserve to try to stimulate the U.S. economy, combined with panic in Europe over Greece and Spain and the possible breakdown of the euro. 

The benchmark 10-year U.S. Treasury bond rates just hit a low of 1.45 percent on June 1, a rate which would have been considered impossibly low only a year ago. A 1.45 percent return on a 10-year bond will almost certainly be less than inflation. Investors are effectively paying the Fed to hold their money. 

With this kind of an interest rate environment, even conservative investors will look in new places to invest their money, like Costa Rica and its export companies or banks. Concerning the latter, El Financiero notes that “foreign credit is raining on the banks.”

Costa Rican Financial Institution Superintendency numbers show a 32 percent increase in foreign loans and lines of credit to Costa Rican banks, over levels of a year ago. This money has come from both traditional development-financing sources (the Inter-American Development Bank and the U.S. government’s Overseas Private Investment Corporation) and commercial lenders such as Citibank. What is unheard of is not just the amount of the loans, but the terms: interest rates between 2 percent and 6 percent, and 8-15 years to pay.  

The explanation for the relative lack of popular enthusiasm over these good foreign investment and bank credit numbers lies in the dual nature of Costa Rica’s economy: a dollar-based export-production machine for which companies can’t find enough qualified workers, and a more slowly growing colón economy in which local producers must fight for customers and credit. 

Can there be integration to share the export sector’s boom with the rest of the Costa Rican economy? Will the U.S. economy muddle through to better times, and will international markets hold together so that Costa Rica’s export boom can continue?

These are huge challenges, and Costa Rica has no control at all over what happens outside its borders. But so far in 2012, things are holding together. Depending on which part of the Costa Rican economy someone works in, maybe best and worst don’t apply, but it’s either good times or bad times for people who may live right next to each other.

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