Costa Rica: Business Environment & Risk Analysis
In this April 2018 update, IHS Country Risk looks at current key risks and forecasts for Costa Rica.
- The opposition-led Congress is likely to create legislative delays through 2018, as President-elect Carlos Alvarado seeks solutions to the burgeoning fiscal deficit
- Alvarado will push alliances in Congress to pass his legislative agenda, including fiscal and energy reforms
- The moderate success of an opposition outsider presidential candidate in the run-off election in April increases operational and policy risks for the incoming president
Business environment - strengths and weaknesses
- The government has a positive and open attitude to foreign investment.
- Costa Rica is politically stable and has relatively strong public institutions by regional standards.
- Skilled, educated, and multi-lingual labour is readily available.
- The legal system compares positively with the rest of Central America and levels of corruption are among the lowest in the region.
- A lack of agreement among political parties on how to address the rising fiscal deficit is increasing political and economic instability.
- Violent crime and drug trafficking are increasing steadily.
- Environmental activism is high which can delay project development.
- Frequent disruptions to cargo through major ports due to infrastructure project delays affect delivery schedules.
Country risk - overall statement
Costa Rica's political environment is generally stable with peaceful and transparent elections. Run-off presidential elections held on 1 April, between National Restoration Party (Partido Restauración Nacional: PRN) candidate Fabricio Alvarado and governing Citizens' Action Party (Partido Acción Ciudadana: PAC)'s Carlos Alvarado (no relation), resulted in a victory by PAC's candidate, who gained 60.6% of votes. The PAC first took office May 2014 under Luis Guillermo Solís, breaking a traditional duopoly of power between the National Liberation Party (Partido Liberación Nacional: PLN) and the Social Christian Unity (Partido Unidad Social Cristiana: PUSC) party.
The opposition-led Congress is likely to create legislative delays through 2018, as President-elect Carlos Alvarado seeks solutions to the burgeoning fiscal deficit
Carlos Alvarado of the governing Citizens' Action Party (Partido Acción Ciudadana: PAC) won the presidential run-off held 1 April 2018 with 60.6% of the vote against family values National Restoration Party (Partido Restauración Nacional: PRN) candidate Fabricio Alvarado (no relation). The president-elect will be sworn in 8 May. Both candidates competing in the run-off represented a significant disruption to traditional political powers, particularly the rapid rise in popularity of the PRN, which had held only a single seat in the Legislature before the 1 February 2018 legislative elections and presidential primaries. Discontent with the political class also was reflected in the congressional election results in which no single party obtained more than 19.9% of the vote.
The PAC's presidential win had been considered unlikely, as support for outgoing president Luis Guillermo Solís, and the PAC had been damaged by a deepening fiscal crisis, a corruption scandal involving alleged abuse of power by legislators, and an increasing homicide rate. Costa Rica's fiscal deficit closed at approximately 6% of GDP in 2017 and is forecast by IHS Markit to reach 6.7% by the end of 2018.
Outgoing president Luis Guillermo Solís' fast-tracked Law to Strengthen Public Finances has the backing of the International Monetary Fund and the World Bank but largely has failed to secure the necessary support from opposition parties for its approval before the change of government in May 2018. The bill proposes fiscal reforms including the conversion of the 13% sales tax to a value-added tax, expanding the encompassed products and services taxed; an increase from 8% to 15% tax for capital income and capital gains; public salary caps; and limits on government budget increases linked to government debt levels. Therefore, incoming President Carlos Alvarado will be forced to address the fiscal crisis during his first months in power, as well as govern within a severely restricted spending environment. However, the passing of a fiscal reform will be difficult given that the next president must work with a highly divided, opposition-dominated Congress.
From mid-2017, the corruption scandal known as the 'Cementazo' – over alleged irregularities in the approval of loans from state-owned Banco de Costa Rica in connection with Chinese cement imports – has led to accusations of influence peddling within all three branches of government. On 18 December 2017, a congressional commission released a report that claimed that the presidency showed a lack of impartiality in dealing with the case and recommended the suspension of duties and bans on public service for 17 officials including a presidential candidate, the former attorney general and the former finance minister. The case has damaged public perception of all the main political parties and has led to increase anti-corruption protest risks.
Alvarado will push alliances in congress to pass his legislative agenda including fiscal and energy reforms
Policy formulation in Costa Rica is relatively open and transparent. Legislation requires approval from the Legislative Assembly, which is made up of 57 deputies elected for four-year terms. Legislative proposals that require a qualified majority must be supported by at least 38 deputies. Effective 8 May 2018, the ruling Citizens' Action Party (Partido Acción Ciudadana: PAC), to be led by President-elect Carlos Alvarado, will hold only 10 seats in Congress, while the National Liberation Party (Partido Liberación Nacional: PLN) leads the opposition with 17, with the National Restoration Party (Partido Restauración Nacional: PRN) gaining 13 seats for a total 14 deputies. Given the persistent fragmentation of the Legislative Assembly, outgoing President Luis Guillermo Solís also has been obliged to negotiate with the other parties in order to pass legislation and has faced significant obstructions throughout his tenure.
Policies to address the ballooning fiscal deficit – which reached around 6% at the end of 2017 – have been Solís's main priority, as was the case for Laura Chinchilla's preceding government. Solís has sent numerous versions of his tax reform to the legislature, proposing to replace the 13% sales tax with a 15% value-added tax and increase capital gains tax from 8% to 15%. It successfully passed a corporation tax to fund security spending in March 2017, which the government forecasts will generate about USD82 million in state revenues annually. The PAC's minority in Congress has proven to be a stumbling block given the continued resistance from the PLN and PUSC, and it requires 38 votes to pass the reforms. Finance Minister Helio Fallas has argued that new tax legislation is required to lower the deficit in Costa Rica, which IHS Markit projects will reach 6.7% of GDP in 2018.
Overall, Solís has not fundamentally shifted Costa Rica's long-standing business-friendly policy stance, although he has given greater priority to environmental protection and social policy in an effort to shore up his support base. This was particularly evident in his decision in July 2014 to extend a moratorium on oil exploration until 2021. However, many large infrastructure projects, such as road expansions and the Dutch-led construction and management of a new container dock in the Caribbean port of Moín, Limón have faced delays and the construction sector has been affected by the sluggish economy. As an ally of the outgoing president, Alvarado is unlikely to make an immediate break with the PAC's currently policy direction. However, he has come out against the negotiation of new free-trade agreements, is against joining the Pacific Alliance, and has proposed to promote public-private partnerships for shared electricity generation as well as the use of natural gas as a means to transition to clean energies.
The moderate success of an opposition outsider presidential candidate in the run-off election in April increases operational and policy risks for the next president
Costa Rica's main opposition party is the National Liberation Party (Partido Liberación Nacional: PLN), which secured most of the Congressional election votes (19.49%) in the general election on 4 February 2018. However, the election results showed the PLN losing strength as its presidential candidate, Antonio Álvarez, came in third place with 18.6% of the vote. The main beneficiary of the election was the National Restoration Party (Partido Restauración Nacional: PRN) led by evangelical presidential candidate Fabricio Alvarado, who ran a campaign based on religious values and the reduction of the country's fiscal deficit. Fabricio Alvarado gained 24.79% of the vote in the election compared with Carlos Alvarado of the ruling centre-left Citizens' Action Party (Partido Acción Ciudadana: PAC), who received 21.76% of the vote. Carlos Alvarado won run-off elections held in April 2018, with 60.66% of the vote, and will assume office in May.
In general, the PLN is considered to hold positions across the political spectrum, making it difficult to class as right or left of the political centre. As such, the party draws popular support from across socioeconomic groups although its geographic representation comes largely from the coastal areas of Alajuela, Cartago, Guanacaste, and San José. It lost advantage to the PRN in Limón and Puntarenas. It has rejected the president-elect's invitation to contribute members to the executive but has not outright rejected the possibility of a cabinet post.
The second traditional party, the Social Christian Unity Party (Partido Unidad Social Cristiana: PUSC) has weakened since losing power in 2006. It was founded in 1983 by four opposition parties, and from that time formed the traditional opposition to the PLN when not in power itself. However, a series of corruption scandals involving three former Costa Rican presidents weakened its position. The PUSC has also obstructed the current government's agenda, mainly relating to a tax reform. The PUSC's presidential candidate Rodolfo Piza achieved fourth place with 16.06% of the vote on a platform promising to address the fiscal deficit by cutting spending and encouraging investment rather than introducing new taxes. However, the president-elect has advocated for a government of national unity based on alliances with other parties and has been backed by members of the PLN, PUSC, and Broad Front (Frente Amplio: FA). Legislators from both the PLN and the PUSC have been implicated in the 'Cementazo' corruption scandal involving influence peddling accusations for the approval of loans for Chinese cement imports.
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