LatinFinance - March/April 2013 - Costa Rica Supplement - 11
Macro economy | Costa Rica
“We would like the government to raise its commitment to public
universities by increasing spending from 1.3% of our GDP to 1.5%
by 2015.”
Paying for education is part of the wider challenge of how to
fund Costa Rica’s social pact, she says.
The University of Costa Rica is updating its curriculum across
the board and is determined to increase its intake in the sciences,
says Bernal Herrera, vice president of academic affairs. The
university has already worked with medical equipment companies
on surveys, for example.
Existing costs are already putting pressure on strained public
finances. Education and security eat up almost 30% of the country’s
budget, says Ayales. With 75,000 teachers, education accounts for
half of government employment, he says.
Security remains a concern for both locals and foreigners. The
country’s president, Laura Chinchilla, was elected in part on a
dramatically, by 4%, through a combination of policies. We
cannot go much lower than the current 8% interest rate with
inflation at 5%.
The money raised from last year’s $1 billion international
bond issue helped bring down rates substantially as we didn’t
have to tap local markets. Costa Rica has a very low external
debt – about 5% of GDP – as we had not used external
financing for a long time. So we have space to issue overseas.
We used the Eurobond proceeds to finance our needs for two to
three months.
The president issued guidelines to banks to stop institutions
going from bank to bank and pushing up rates. At the end of
January, the central bank imposed credit ceilings on the banks.
We did not want to risk a credit boom for
which we will pay later. Credit was rising
about 20% last year.The new measures cap
credit growth at 12%.
Prudential measures and central bank
policy brought rates down. Nevertheless,
the premium is still high between Costa
Rica and abroad. That is why we have this
capital control draft law in Congress. It contains two measures.
First, it enables the central bank to increase the capital gains
tax from 8% to up to 38% on interest gains by non-residents
investing in local currency government bonds.
We wanted to increase the risk of such investment. After we
announced the law, dollar inflows fell to zero. We also introduced
a reserve requirement for investors in government bonds.
Investors in these bonds can be asked to deposit up to 25% with
the central bank. These measures may not be needed, but the
bank has to have these tools.
pledge to improve security. While indicators are getting better, the
enterprise is proving costly.
This year, the bulk of the 3,000 new positions to be created
in the government, across three ministries, will be in security,
but budget limitations mean space for long-term investments in
logistics simply don’t exist.
More spending could send the deficit – already more than
4% annually – spiraling out of control. Its trajectory is already
unsustainable, Ayales admits – even with fast economic growth and
significant efforts to rein in spending.
The cost of funding the deficit is already apparent: last year,
it led to a jump in interest rates that many see as contributing
to a surge in capital inflows. The colon, like many other regional
currencies, has appreciated too much, too quickly.
“If you ask nine out of 10 exporters their main concern about
Costa Rica, it is the currency,” says Sequeira. LF
Ayales: The law we presented to Congress is very clear that we
will not impose these measures retroactively. We did not change
the rules for those who had already invested in Costa Rica. The
US and Europe can change the rules of the game on interest
payments – and they do. We avoided this.
After these new measures, some investors have expressed
concern to me. But remember, this is a temporary measure. But
we are a new market and we have to protect our investors.
We might need more prudential measures from CONASSIF,
our national supervisory body. The reduction in spreads, our
capital controls and prudential measures should discourage
short-term inflows into government securities.
Some people say just cut the fiscal deficit, which is the root
of the problem. But it cannot be done
overnight. Raising taxes is hard and very
few people recognize the connection
between taxes and quality of life, prices
and inflation. We have failed to reform
taxes so far, but in every country passing
this legislation is difficult.
“We have to be realistic:
tax rates have to increase”
LF: Are you concerned that investors may nevertheless
take fright?
A Supplement
to
LF: What are your plans in the international bond
markets?
Ayales: We have spoken to our financial advisers, Deutsche Bank
and Citi, and we are discussing going to market in April or May.
I met with investors in October on a roadshow that took in Los
Angeles, New York, Boston and London. Investors were very
impressed by our story, but they all asked about the fiscal deficit.
Investors are monitoring our fiscal reform very carefully. This
affects country risk and has implications for our credit rating. We
are investment grade with one agency but not the other two and
we would like to be investment grade with all of them. We know
that we have to do something soon on the deficit or the market
might penalize us. LF
LatinFinance | March/April 2013
11
Table of Contents for the Digital Edition of LatinFinance - March/April 2013 - Costa Rica Supplement
Latin Finance - March/April 2013 - Costa Rica Supplement
Contents
Getting it right
Securing the future
Making the leap
Finding space
A hard currency
Trading up
Green credentials
LatinFinance - March/April 2013 - Costa Rica Supplement - Latin Finance - March/April 2013 - Costa Rica Supplement
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover2
LatinFinance - March/April 2013 - Costa Rica Supplement - Contents
LatinFinance - March/April 2013 - Costa Rica Supplement - Getting it right
LatinFinance - March/April 2013 - Costa Rica Supplement - 3
LatinFinance - March/April 2013 - Costa Rica Supplement - 4
LatinFinance - March/April 2013 - Costa Rica Supplement - 5
LatinFinance - March/April 2013 - Costa Rica Supplement - Securing the future
LatinFinance - March/April 2013 - Costa Rica Supplement - 7
LatinFinance - March/April 2013 - Costa Rica Supplement - Making the leap
LatinFinance - March/April 2013 - Costa Rica Supplement - 9
LatinFinance - March/April 2013 - Costa Rica Supplement - 10
LatinFinance - March/April 2013 - Costa Rica Supplement - 11
LatinFinance - March/April 2013 - Costa Rica Supplement - 12
LatinFinance - March/April 2013 - Costa Rica Supplement - 13
LatinFinance - March/April 2013 - Costa Rica Supplement - Finding space
LatinFinance - March/April 2013 - Costa Rica Supplement - 15
LatinFinance - March/April 2013 - Costa Rica Supplement - A hard currency
LatinFinance - March/April 2013 - Costa Rica Supplement - 17
LatinFinance - March/April 2013 - Costa Rica Supplement - Trading up
LatinFinance - March/April 2013 - Costa Rica Supplement - 19
LatinFinance - March/April 2013 - Costa Rica Supplement - 20
LatinFinance - March/April 2013 - Costa Rica Supplement - 21
LatinFinance - March/April 2013 - Costa Rica Supplement - 22
LatinFinance - March/April 2013 - Costa Rica Supplement - 23
LatinFinance - March/April 2013 - Costa Rica Supplement - Green credentials
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover3
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover4
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