Costa Rica : President-elect to inherit fiscal woes and challenge of eroding investor confidence
Event
Luis Guillermo Solís of the left-of-centre Citizen Action Party (PAC) landed 78% of the vote in the second round run-off of the Costa Rican presidential election held on 6 April. He triumphed over Johnny Araya of the ruling National Liberation Party (PLN), who had ceased to campaign following an unfavourable opinion poll in early March.
The PAC being a relatively new political force, founded in 2000, Solís benefited from public disenchantment with traditional politics as embodied by the PLN. In particular, Araya suffered from the association with incumbent President Laura Chinchilla, also of the PLN and highly unpopular due to public finance woes, rising inequality and corruption charges plaguing her administration.
Impact on country risk
On 8 May, President-elect Solís will assume office in turbulent economic times. First and foremost, there is a pressing need to address the unsustainable fiscal position. As of 2010, the failure to reverse stimulus measures applied during the 2008-09 economic crisis has entrenched large fiscal deficits and made for growing public debt.
Also, increased global risk aversion associated with gradual steps to a less accommodative US monetary policy has weighed on capital inflows into Costa Rica. In light of the sizable current account deficit, this has put downward pressure on the Colón – a detrimental trend given substantial liability dollarization among households and companies.
Moreover, mining disputes suggest that Costa Rica is struggling to combine eco- and business-friendliness, the cost of credit is high, and investors complain about expensive energy and subpar infrastructure. On 8 April, US computer-chip maker Intel announced that it is relocating the lion’s share of its Costa Rican operations to Asia.
The departure is likely to have a significant negative impact on economic growth and current account balance as the company represents a vital share of exports and foreign direct investment inflow. So the priorities for the new government are clear: fiscal consolidation and boosting competitiveness.
Solís has indeed pledged advancement on fiscal reforms, infrastructure development and anti-corruption initiatives, and Costa Rica will soon join the Pacific Alliance free trade bloc. Yet even though a pro-business and pro-market stance is thus expected to prevail, decisive policy-making will be hampered by fragmentation in the Legislative Assembly, where the PAC controls only 13 of the 57 seats.
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Sebastian Vanderlinden, Credendo Group
