Costa Rica

Costa Rica’s macroeconomic outlook was already fragile prior to the pandemic despite structural reforms. As part of its accession to the OECD, Costa Rica implemented key fiscal and structural reforms aiming at containing the high fiscal deficit, boosting medium-term growth prospects and lowering the high levels of unemployment. However, the growth outlook remained fragile, with real GDP growth averaging +1.5% over 2017-2019 amid a challenging external environment, natural disaster shocks and deteriorating investor sentiment, given the widening fiscal deficits.

Despite weakening domestic demand in the context of high inflation and rising interest rates, economic activity was supported by robust external demand, as the free trade zones continue to showcase double digit growth. As a result, a strong export performance and recovered tourism sector fueled the economy growing by +7.8% in 2021 and +4.3% in 2022. We expect that GDP growth will continue at +4.4% in 2023 and forecast that it will cool to +3.2% in 2024.

We expect inflation to fall to +2.8% in 2023, after it accelerated rapidly through 2022, peaking at +12%. The Banco Central de Costa Rica (BCCR, the central bank) is in the process of bringing down interest rates, having raised them to combat surging consumer price inflation in 2021-22. Its most recent statement indicated that it remained concerned about the risk of global oil prices delivering another supply shock and it will therefore take its time over monetary easing, even though consumer prices are firmly in deflationary territory. We expect the BCCR to keep its easing policy stance in 2024 and 2025 and returning the rate to a broadly neutral level, which we estimate at 3.25% by the end of 2025. We expect a restrictive monetary policy stance coupled with the easing of global commodity prices will result in a gradual convergence to the central bank’s inflation target of 3% by 2024. The main risk to our monetary policy forecast is an unexpected spike in global food or fuel prices, triggered by geopolitical conflict or by adverse weather conditions caused by El Niño, which would push up local inflation. This would force the BCCR to pause its easing cycle and could even prompt it to raise rates again as a last resort.

According to the 2022 Heritage Foundation’s annual Index of Economic Freedom survey, Costa Rica ranked 10th in Latin America, reflecting very strong scores with regard to government spending and monetary freedom while shortcomings in fiscal health, labor freedom and financial freedom.

Costa Rica’s strong political institutions, long democratic tradition and relative social stability support political stability. Fiscal reforms and external financing require Congress approval and Costa Rica has a track record of political gridlocks, which could hamper policymaking in the medium-term, especially as the proposed adjustment includes several contentious reforms. In early 2023, President Chaves secured parliamentary approval for the issuance of USD5bn in Eurobonds over the next three years, in exchange for relatively minor concessions. Efforts to improve the fiscal position will be the main source of political contention.