Prosperous Costa Rica must rely on its debt

Costa Rica stands out in turbulent Central America: decades of democracy and political calm have paid off with great prosperity, an enviable welfare state and generous salaries in the public sector.

But Covid-19 has brought a toll. As the economy contracted 4.5% last year and the important tourism sector fell 40%, a debt burden approaching 70% of gross domestic product has proved unsustainable, binding the President Carlos alvarado to implement long-awaited reforms and go to the IMF’s ceiling for a $ 1.8 billion loan.

Alvarado told the Financial Times he has the votes in Congress to pass a bill to curb the public sector payroll in weeks. “There is a sense of necessity,” he said. “It is urgent to have this approved”.

He believes that an agreement on restructuring the public sector wage bill in which more than 2,000 people earn more than the president will pave the way for a congressional deal on the IMF loan.

There have been street protests against the deal with the IMF and the wage bill, which has seen a rocky turn in Congress, where Alvarado holds less than a fifth of the seats. But as he nears his final year in office, he sees the debt problem as one of his major legacies.

“In an age of so much populism, I’m on the opposite side of the spectrum, doing what’s right, not what’s populist,” Alvarado said in a video interview from San José. Costa Rica is holding presidential elections in February.

Despite its debt problems, Costa Rica boasts of an unlikely feat: save job creation, increased exports and significant foreign investment last year, despite Covid-19.

“During the pandemic, what are the chances that foreign investment will arrive in Costa Rica, increase operations or hire new people? It is counterintuitive to think that operations will develop in such a context, ”said Alvarado.

“We need stability even though it sometimes seems boring – in the long run it’s much better. Stability means peace, stability means jobs, stability means certainty, stability means growth. “

Although peaceful Costa Rica has been a nearby destination for more than two decades, it has Trump’s turbulent years to thank for helping to strengthen his investment credentials during the pandemic.

“What has happened in relations in recent years between the United States and China. . . has a lot to do [with investment dynamics], “he said.” Some of the value chains that were positioned in Asia are turning back to the Americas. This is one of the main drivers. “

At the top of that list is Intel. The American tech company chose Costa Rica as its hub in 1997, and within a few years, microchips accounted for 36% of the country’s total exports.

But in 2014, amid a downturn in the personal computer market, Intel outsourced chip manufacturing to China, Malaysia and Vietnam, cutting 1,500 jobs and wiping out a quarter of Costa’s overseas sales. Rica.

Now Intel has U-turned on this decision, announcing last December the return of manufacturing to Costa Rica, where it had anyway kept a research and development center.

Alvarado compiled a list of other large companies that had made substantial investments in Costa Rica in 2020 and 2021, including technology provider Amazon Web Services, life sciences group MicroVention, electronics maker Philips, the pharmaceutical group AstraZeneca and healthcare company Viatris.

Net employment in Costa Rica

Yet in dollar terms, Costa Rica foreign direct investment fell 38 percent last year. Jorge Sequeira, head of investment promotion agency Cinde, argued that job creation – which rose 12% in 2020 – was a more relevant measure now that much of the economy has passed. from manufacturing to services.

“Last year, in the midst of the pandemic, we created nearly 20,000 new jobs in multinationals. We believe that number may be higher this year, maybe even much higher, ”he said. “We are very optimistic about this lawsuit.”

Costa Rica produces 99% of its electricity from clean fuels, which makes it easy for a multinational to meet the ambitious green goals of the United States or Europe by setting up in Costa Rica.

“If you mean your production is 100% renewable, the next country is Costa Rica,” Alvarado said. “We don’t just dream big, we act big.”

These ambitions extend to education and human capital with goals of teaching Scandinavian English. “Over the next two decades, everyone who leaves public education will be bilingual. It’s a competitive advantage, ”said Alvarado, speaking fluently English himself.

Costa Rica’s economy was close to crisis at the end of 2018 after its bonds and currency collapsed and weeks of events last year against tax increases and the deal with the IMF. Powerful unions remain opposed to overhauling public sector pay.

But Alvarado is convinced his country can contain a budget deficit of nearly 9% in 2020 and a debt burden that is expected to peak at 76% of GDP in 2023.

“We are sending the right signals to the market that we are serious about this,” he said. “What we will ultimately guarantee is to have fiscal space and stability for this generation and the next.”

But even for Costa Rica, whose political tranquility is the envy of its neighbors, this cannot be taken for granted. “Stability is not written in stone,” he said. “You have to constantly feed him.”

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