Ripples from the U.S. mortgage crisis could rock the Costa Rican economy, if certain precautions are not taken, according to one economist.

Luis Mesalles of the Central American Academy warned that Costa Rica could continue to see falling exports, weak foreign investment and greater volatility in the financial sector as a result of the country's close ties to the shaky United States economy.

A slowdown in the local real estate market and housing construction could be an ominous sign.

“We could see a little of what happened in the United States,” Mesalles said during a press conference at the Radisson Hotel in San José yesterday.

Foreclosures are still on the rise and home prices are plummeting across the United States. Banks are reluctant to give credit, freezing economic growth. And investors burned by portfolios loaded with subprime loans hesitate jumping back into the housing market.

Analysts point to the subprime mortgage crisis as a contributing factor to a possible U.S. recession.

As the superpower's economy shrinks, so does Costa Rica's. Exports to the United States already fell by 4.6 percent in the first quarter of 2008, with a 40 percent fall alone in textiles.

Mensalles warned that a weakening U.S. economy could mean shrinking direct foreign investment. Fewer dollars could create high demand for the currency. Investors would then dump their colones and dive for dollars, decreasing the local currency's value.

Such a scenario played out last week when the average exchange rate jumped by 15 colones at public and private banks.

Costa Rica needs to take some basic steps to avoid a future economic pitfall. Overall, Mensalles said, the country needs to increase its productivity and redirect public funds toward infrastructure and education.

The economist also suggested accelerating the negotiation of regional trade agreements and the Legislative Assembly's passage of laws to implement the Central American Free-Trade Agreement with the United States.