Costa Rica: Country Economic Forecast: 09 Sep 2010

President Laura Chinchilla of the National Liberation Party (PLN) is now in her fifth month of a four-year term that began in May, having won the February election with almost 47% of the vote. She is expected to provide continuity with the Arias administration, but the PLN lacks a majority in the legislature and this could undermine tax reform plans. While decrees were issued in priority social policy areas, the early period of the new government has seen some dissatisfaction with Chinchilla performance, not least with controversy over higher education funding and US naval access. These were partly resolved in August, and Chinchilla has also outlined a plan to boost infrastructure spending and FDI as well as fiscal reform.

After falling 1.1% last year, GDP posted year-on-year growth of 5.3% in Q1 2010, up from 3.0% in Q4 2009, driven by an 11.2% rise in manufacturing. H1 output is estimated to have risen 4.8%. The official forecast is for 2010 growth has been raised to 3.8% (ours remains at 3.5%) and a 150bp rate cut in August should help to support activity. Inflation fell from 13.9% at end-2008 to 4% at end-2009. Consumer prices rose almost 4% in the first eight months of 2010, with the annual rate of 5.2% below the 6% target ceiling. After falling to US$540m in 2009, the current account deficit is officially expected to rise to US$1.46bn in 2010 as higher imports widen the trade deficit. We expect a 2010 current account deficit of US$1.3bn.