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.

The recovery from the pandemic shock has been timid: Real GDP growth rebounded to +7.8% in 2021, after a contraction of -4.1% in 2020. Looking ahead, we expect growth to reach +2.9% in 2023. Weak investor sentiment and difficulties in financial conditions will persist as external demand declines because of recession risks in Europe and the US. That said, we expect net exports to keep contributing to growth ahead while import growth slows. International tourism will also support exports.

We expect inflation to be substantially above the central bank’s inflation target (+4%) at+6.4% in 2023 after a low inflationary environment in 2021 (+1.7%) when slow growth limited pressures on prices. The Banco Central de Costa Rica has completed a monetary-tightening cycle, with the policy rate rising to 9% in October from 1.75% in February 2022. We expect it to keep rates steady onwards to promote confidence in the light of tighter global financial conditions, and then start an easing cycle in H2 2023.

Costa Rica’s business environment ranks fourth in Latin America and 74th globally, according to the World Bank Doing Business survey. In terms of the payment of taxes, access to credit, electricity, control of corruption, regulatory quality and rule of law, Costa Rica outperforms most of its regional peers. However, its fiscal difficulties could weigh on investors' risk perception in the longer run.

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. The presidential elections in May 2022 created a path towards weaker governability and the implementation of President Chaves’s pro-market agenda is constrained, with few obtained seats in the legislature. However, the main issues affecting the business environment do not stem from political tensions but instead arise with the difficulties of running a tight fiscal policy and worsening economic conditions in a context of high CPI inflation and elevated interest rates.