Costa Rica – IHS Country Risk Insight
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IHS COUNTRY RISK Costa Rica – IHS Country Risk Insight 27 April 2018 IHSmarkit.com Summary . 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 next president Risk scores Structure and calculations Analysts determine scores based on qualitative guidance. Each score represents the average expected level of risk over the coming year, and each outlook represents the projected direction of risk trends after that 12-month period. Overall risk scores are calculated as equally weighted averages of the six aggregate categories – Political, Economic, Legal, Taxation, Operational and Security. Risk is scored on a 0.1-10 scale. The scale is logarithmic, with intervals of 0.1 magnitude. This range is split into seven bands, ranging from Low to Extreme risk. IHSTM COUNTRY RISK Copyright notice and legal disclaimer © 2018 IHS Markit. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, please contact IHS at [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328 300 (from outside North America). IHS Country Risk Insight | Costa Rica Business environment - strengths and weaknesses Strengths Weaknesses The government has a positive and open attitude to A lack of agreement among political parties on how to foreign investment. address the rising fiscal deficit is increasing political and economic instability. Costa Rica is politically stable and has relatively strong Violent crime and drug trafficking are increasing steadily. public institutions by regional standards. Skilled, educated, and multi-lingual labour is readily Environmental activism is high which can delay project available. development. The legal system compares positively with the rest of Frequent disruptions to cargo through major ports due to Central America and levels of corruption are among the infrastructure project delays affect delivery schedules. lowest in the region. 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. Detailed analysis 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 © 2018 IHS Markit 2 27 April 2018 IHS Country Risk Insight | Costa Rica 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