Costa Rica

Costa Rica's fiscal trajectory has been the country's reform success story. Public debt has declined from a peak of ~73% of GDP in 2022-2023 to just below 60% in 2026, anchored by the fiscal spending rule in force since 2020 and sustained primary surpluses. The IMF's May 2026 Article IV review confirmed the Flexible Credit Line arrangement – a stamp of macroeconomic credibility reserved for strong performers.

However, three vulnerabilities persist. First, roughly two-thirds of public debt is dollarized, exposing the fiscal position to currency risk in a stress scenario. Second, the spending rule constrains public investment precisely when infrastructure gaps are most binding – a tension the new government inherits without clear resolution. Third, tax revenue mobilization remains structurally weak; the OECD recommends expanding tax bases, but political appetite for tax reform under a market-friendly administration appears limited.

On the corporate side, insolvency data for 2026 is limited and there is no indication of systemic stress. However, the tariff shock creates differentiated risk: firms operating within free trade zones enjoy fiscal incentives and global client diversification, while domestic SMEs exposed to US demand and those in the informal/agricultural economy face margin compression with limited fiscal support. The financial sector is stable, with manageable NPLs and sound capitalization, but competition between the Treasury and the private sector for domestic financing could tighten credit conditions if external shocks materialize.

Costa Rica's structural attractiveness rests on a robust legal framework, political stability and a well-educated labor force. FDI continues to flow into high-value manufacturing, shared services and life sciences – sectors that have made the country a nearshoring beneficiary in the post-pandemic period. The OECD's April 2026 Competitiveness report confirms "significant infrastructure gaps across nearly all modes of transport" as the binding constraint.

The productivity gap with OECD peers remains wide. Domestic firms operate at far lower efficiency than FTZ multinationals, reflecting regulatory complexity, slow bureaucratic processes and an education system that struggles to produce the skills the dynamic sectors demand. Youth unemployment remains elevated, creating a paradox: labor shortages in high-skill segments coexisting with underemployment in traditional sectors.

The environmental dimension is evolving from strength to risk. President Fernández's first legislative package included revival of the Crucitas open-pit gold mining project and signals toward scaling back fossil fuel exploration bans. Illegal gold mining networks are already operating in the area, making it partly a governance issue, but the move tests Costa Rica's "green brand" internationally, with potential reputational implications for tourism and ESG-sensitive investors. The energy sector, while a global renewables leader, faces modernization challenges and vulnerability to climate shocks as drought forced rationing in 2024 and may hit again in the next quarters.

The February 2026 election delivered a first-round victory for Laura Fernández (Chaves' handpicked successor) and the first single-party parliamentary majority in Costa Rica since 1990 with 31 out of 57 seats. More remarkably, outgoing president Rodrigo Chaves was appointed Minister of Presidency and Finance in the new cabinet – an unprecedented concentration of executive continuity that blurs the constitutional term-limit principle. International human rights observers have warned about potential erosion of checks and balances.

The security agenda dominates the policy horizon. Costa Rica averaged 2.5 homicides/day in 2023 (record 17.2 per 100,000), driven by drug transshipment networks. The rate has eased to 1.9/day in H1 2026, but Fernández campaigned on a Bukele-style "mano dura" platform: mega-prison construction, state of emergency in gang-controlled areas, expanded cargo scanning at ports. The judiciary is already clashing with the executive over separation of powers. If the approach tilts toward authoritarian overreach, it risks undermining the very institutional quality that distinguishes Costa Rica from regional peers and attracts FDI.

The deeper structural tension is between Costa Rica's democratic, green, services-led identity and the harder, more extractive, security-first direction the new political consensus is pushing. The country has the institutional resilience to manage this transition, but the margin for error is narrower than at any point in recent decades. For investors, the risk is gradual institutional erosion that reprices the country's governance premium.