Country risk reference rating: Level 5 (5/9)
Country Risk Outlook: Stable
◆Political Risk
Costa Rica is one of the countries with the most mature democratic system in Latin America. It implements a republic with the separation of legislative, judicial and executive powers. The constitution effectively guarantees the smooth replacement of securities.
The country’s crime rate is relatively low and the public security environment is relatively good. Costa Rica has a high degree of privatization and the possibility of nationalization in the future is very small. In addition, there are no special restrictions on the exchange of colones into U.S. dollars, and the use of U.S. dollars is very common in the country. Since 2013, in response to the increase in domestic demand for U.S. dollar financing, the U.S. dollar credit lines of Costa Rica’s state-owned banks have increased significantly. The central bank has cut interest rates and extended deposit terms to stimulate the growth of Colon’s credit and reduce arbitrage. This policy has begun to bear fruit.
Costa Rica’s foreign exchanges usually focus on promoting foreign trade and attracting foreign investment. The country maintains good relations with the United States, and the signing and implementation of the United States-Dominican-Central America Free Trade Agreement further promoted the development of bilateral relations.
◆Business environment
The Costa Rican government is expected to carry out a series of tax system reforms. Currently, businesses can obtain substantial tax exemptions under the provisions of the Free Trade Zone Act. However, the Costa Rican government is trying to introduce a new tax system for companies entering the free trade zone after 2015, and also plans to implement a 14% value-added tax to make up for the lack of public revenue. However, there are still uncertainties as to whether these fiscal reform measures can be successfully implemented.
Costa Rica’s economic development is largely due to the country’s ability to attract foreign investment to develop its key industries. At present, foreign direct investment is mainly concentrated in the service industry, manufacturing, real estate and commerce. The main investing countries are the United States, Panama, Spain, Mexico, Nicaragua, Italy, Colombia, Brazil and Venezuela. The United States accounts for 46% of Costa Rica’s total foreign investment. Except for certain areas, Costa Rica has no special restrictions on foreign investment and provides national treatment. Costa Rica has signed bilateral investment promotion and protection agreements with many countries. In October 2007, China and Costa Rica signed the Investment Protection Agreement, but so far the Costa Rica Legislative Assembly has not approved it and taken effect.
Judging from the four indicators of tax system, investment convenience, infrastructure and administrative efficiency, the Costa Rica government welcomed foreign investment in 2014. Costa Rica’s business environment is in a leading position in Central America, and a better market environment will attract foreign investment. Foreign capital continues to flow in and contribute positively to Costa Rica’s economic growth.
◆Economic Risk
Costa Rica has used the complete facilities and low tax policies of the free trade zone to attract a large amount of foreign investment, and is gradually transforming from a commodity exporter into a regional manufacturing center and a logistics and support service center for American companies. While this economic development strategy has boosted Costa Rica’s economic development, it has also increased the risk of external economic impacts.
In 2013, the country’s economy was generally stable, with an economic growth rate of 3.4% and a per capita GDP of US$10,148. In 2014, the U.S. economic situation will become clearer, which will bring positive spillover effects to Costa Rica. Exports, foreign direct investment and tourism revenue will increase. It is expected that economic growth will accelerate in 2014. Costa Rica is China’s ninth largest trading partner in Latin America. In 2013, the total trade volume between China and Costa Rica was US$6.11 billion, with China exporting US$1.00 billion and importing US$5.11 billion. China mainly exports textiles, steel products, automobiles, telephones, auto parts, clothing and clothing accessories, plastic products, televisions, and containers.
Judging from six aspects: macroeconomics, financial system, fiscal situation, international balance of payments, sovereign debt, and bilateral economy and trade, Costa Rica’s economy has recovered from the crisis and is showing rapid growth momentum as the U.S. economic situation becomes clearer. Currently, the continued expansion of the fiscal deficit is the main risk facing the country’s economy in the medium term.
◆Policy suggestions
In terms of macroeconomic development and business environment, Costa Rica has obvious advantages compared with other countries in Central America. In 2014, the Civic Action Party won the presidential election, and Costa Rica achieved a smooth transition of power. However, the main problem that the Costa Rican government still needs to face and solve urgently is to reverse the deterioration of the country’s financial situation and balance its balance of payments.
The Citizen Action Party is in power for the first time and will adjust relevant policies of the previous government. However, the political tradition of the two-party system has been broken, and its policy direction and effectiveness remain to be seen. Fiscal deficits and the resulting growing debt have become Costa Rica’s main economic risk. The fiscal deficit issue is directly related to Costa Rica’s economic development prospects and will also directly affect Costa Rica’s infrastructure construction and social security system.
Costa Rica’s infrastructure is relatively backward and it urgently needs capital to change this backward situation. Chinese companies can pay attention to relevant government development plans and policy measures to expand cooperation opportunities and development areas.