Costa Rica

Unfavourable external conditions will weigh on business

In 2023, economic activity remained buoyant. With the recovery in tourism, exports (41% of GDP in 2022), particularly services, have sustained growth. The hotel and catering, transport and construction sectors performed particularly well. Growth should, however, weaken somewhat in 2024. It will be affected by worsening external conditions, being particularly vulnerable to the slowdown in the US, which absorbs around 44% of exports and provides over 50% of tourists. Domestic demand will continue to underpin growth, following the momentum of 2023, but at a more moderate pace. This will follow the continued improvement in labour market conditions (the unemployment rate fell below 10% in the second quarter of 2023, from its peak of 20% in 2020). Furthermore, while the impact of inflation on real income (down by around 9% in 2022) has moderated private consumption (63.5% of GDP in 2022) in 2022, this trend will fade in 2023-2024, as real wages have returned to growth. After peaking at 12.1% in August 2022, inflation declined rapidly, reaching negative rates in mid-2023, down to -3.3% in August. This deflation was accompanied by a more accommodating monetary policy on the part of the BCCR (Banco Central de Costa Rica), which gradually lowered its main interest rate in 2023 from 9% in February to 6.5% in July. Although inflation is expected to accelerate again to its target of 2-4% in 2024, monetary policy could still be cautiously eased. Investment (around 18% of GDP in 2022) should drive growth, while Costa Rica still enjoys a solid reputation with international investors and was the latest country to join the OECD in May 2021. Free trade zones will continue to attract FDI, to the benefit of tourism and high-tech industries. In addition, the introduction of incentives in February 2023 will help attract foreign investors outside the Greater San José Metropolitan Area, where almost half the population resides. Among other things, these 11 new measures will extend the free-zone regime to new regions and new high-potential sectors (food industry, agricultural input companies, health, tourism services, etc.).

Continued fiscal consolidation alongside the IMF

The budget deficit had fallen over the previous two years, in line with the programme agreed with the IMF, but increased in 2023 due to higher debt servicing (5.1% of GDP). It will switch back to its previous trend in 2024 as the government pursues fiscal consolidation. In this respect, the implementation of the public employment reform that was voted in 2022 will enable the government to reduce public spending and thus save an average of 1% of GDP per year over the first five years of implementation. The primary surplus, which excludes interest, should still exceed the target defined with the IMF (1.3% of GDP) in 2023 and 2024. Public debt, 28% of which is external and 38% denominated in USD, will remain on a downward trajectory.

The current account deficit moderated in 2023 in the wake of the recovery in tourism and a smaller trade deficit. Although affected by the Costa Rican colón's appreciation against the US dollar, exports - mainly medical devices (35%) - remained buoyant. At the same time, a lower oil bill helped reduce the weight of imports. The current account deficit will shrink only moderately in 2024, probably as a result of unfavourable external conditions. Tourism will continue to contribute to the widening surplus on services (around 10% of GDP). The trade deficit will remain stable (5.7% of GDP), while hydrocarbon prices will remain high. The primary income deficit will remain high (6% of GDP), reflecting high external debt servicing. The current account deficit will continue to be financed mainly by FDI flows.

Relatively stable political environment

The 2022 Presidential election was marked by the victory of an "outsider", Rodrigo Chaves, the centre-right candidate of the new Social Democratic Progress Party (PPSD). His second year in office was characterised by high voter popularity (57% positive ratings in September 2023 according to the CIEP-UCR public opinion poll), with the country's economic conditions having improved markedly (lower inflation, stronger fiscal position). With the PPSD party winning only a minority of seats (10 out of 57) in Congress, it relied on ad hoc alliances with right-wing parties to govern. Since October 9, 2023, the PPSD has only one member of Congress: Luz Mary Alpízar, the party President. The PPSD executive committee decided to suspend nine of its 10 legislators on the grounds of double militancy. The nine deputies had publicly expressed their support for the new Aqui Costa Rica Manda (ACRM) party, created in August 2023 on the initiative of Rodrigo Chaves' main allies in the upcoming municipal elections in February 2024. This will not change the dynamics of the ruling bloc, as the nine independent deputies will continue to support the President. In terms of foreign policy, Costa Rica maintains strong economic ties with the US, its main trading partner, as illustrated by the Central American Free Trade Agreement (CAFTA). In addition, the fight against crime and drug trafficking, as well as the challenge of growing migration in the region, will remain two common objectives. The massive migratory flow from Venezuela, through Panama, and towards the US (+55% of entries through the southern border between July and August 2023), raises social, budgetary and health concerns. The government declared a state of emergency on 26 September, 2023. Negotiations to join the Progressive and Comprehensive Trans-Pacific Partnership Agreement (PTPGP) and the Pacific Alliance are likely to accelerate. Tensions persist with Nicaragua over control of the border river San Juan.

Last updated: October 2023