(Bloomberg) -- Costa Rica is poised to maintain the economic momentum that has made it a regional success story into 2024, as an improving fiscal outlook helps attract investment, according to President Rodrigo Chaves.
Chaves took office in 2022 promising to rein in spending and put the economy back on track after years of largesse nearly sparked a financial crisis in 2018. He now expects gross domestic product to expand 5% this year, rivaling Panama for the title of fastest-growing economy in Central America. And he sees more growth on the horizon amid declining debt levels, negative inflation and rising exports that have created an increasingly appealing climate for foreign businesses.
“People say Costa Rica is the bright spot in Latin America today in terms of stability, growth and macroeconomic performance,” Chaves said in an interview with Bloomberg News at the presidential palace in San José. “We have created a virtuous cycle of clearly responsible fiscal policy, a pro-business environment and companies are responding to it.”
In August, Intel Corp announced in that it will invest $1.2 billion into computer chip production in Costa Rica over the next two years. The US government announced in July that it will include the country in programs created by a new law to bolster semiconductor and chip production, and Chaves said his administration is now in further talks with the US to attract investments into cybersecurity.
Johnson & Johnson, meanwhile, said it plans to build a 200,000 square-foot plant to make orthopedics and heart rhythm solutions in what will be its biggest investment outside the US.
Foreign investment now accounts for 12% of gross domestic product, Chaves said, and has helped reduce the unemployment rate to just above 8% — a third of its pandemic peak.
To Chaves, those gains are evidence of his government’s commitment to a course correction that began after Costa Rica’s brush with all-out crisis five years ago, when the central bank was forced to issue an emergency loan to the finance ministry.
His predecessor implemented a series of new taxes and spending restraints while also inking a three-year deal with the International Monetary Fund that has helped slash public debt. Chaves has continued those efforts, with S&P Global Ratings saying in October that his administration has outperformed on its fiscal targets under the IMF program.
Chaves projects that the government’s fiscal deficit will end the year 2.5% of GDP, tying last year’s smallest spending gap since 2008. And while Chaves said his administration is considering a precautionary line of credit with the IMF once the current program ends in July 2024, it doesn’t see it as “indispensable.”
“This government has given all the evidence that we know how to manage macroeconomics, and we are completely committed to maintaining responsible management of the economy,” he said.
Read More: World’s Biggest Currency Rally Triggers Deflation in Costa Rica
Three major ratings companies have upgraded Costa Rica this year, and it is outperforming neighbors and peers on other key metrics as well.
While consumer price increases are now slowing across Latin America, Costa Rica has posted six straight months of negative inflation readings since June as energy and food costs fall.
The central bank has cut its policy rate to 6.25% from a peak of 9% in 2022, and the nation’s currency has gained 12% on the dollar over the past year — one of the world’s biggest rallies — amid the foreign investment surge and tourism and export rebounds.
“We have hit that sweet spot of negative inflation and high economic growth,” Chaves said. “At the end of the day, it’s because there hasn’t been a fiscal dominance of monetary policy in the slightest. The government has been absolutely responsible.”
Costa Rica’s government sold $1.5 billion in bonds in November and has authorization to return to markets in 2024. Chaves said a potential issuance next year will depend on global conditions, adding that its upcoming maturities are “more than well-financed.”
Still, not everyone is convinced the picture is as rosy as Chaves paints.
Unemployment has fallen in part because of a decrease in labor market participation, former central bank president Rodrigo Cubero said at an event in November. Tourism, while recovering, is still below pre-pandemic levels, he said.
S&P Global Ratings said real GDP growth may slow to an average pace of 3.4% between 2024 and 2026. There is a dichotomy between the country’s fast-growing export driven zones and more subdued growth in the domestic-oriented economy. Linking the two will be a key challenge, according to S&P.
Rising violence has also alarmed locals. Murders in Costa Rica have increased to a record 844 this year, surpassing last year’s total of 661, as drug gangs battle for territory. A November poll by the University of Costa Rica showed crime as the top concern among those surveyed.
Chaves said police have stepped up arrests this year in illegal drug and weapons cases, but that the judiciary releases suspects too soon. He cited a recent case in which a suspect shot at police officers with an AK-47, was arrested and released immediately by a court.
He called for harsher penalties for violent offenders.
“The only way to stop these gang wars is by jailing participants,” he said. “Our legal system and our laws are soft, lenient and protectionist of criminals.”
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