Costa Rica: Country Economic Forecast: 16 Dec 2010

The economy has improved during 2010 after falling 1.1% in 2009. GDP posted year-on-year growth of 5.3% in Q1 2010, driven by an 11.2% rise in manufacturing, and H1 output is estimated to have risen 4.8% but slower expansion was evident in Q3. The official forecast is for 2010 GDP growth of 3.8% while we expect 3.5%, rising to 4.2% in 2011 (when our forecast is slightly lower). For 2011, the growth outlook may be helped by the 150bp rate cut in August and a further 100bp cut in October to 6.5%, as well as by plans to boost infrastructure spending. While inflation fell from 13.9% at end-2008 to 4% at end-2009, consumer prices rose by 5% in January-November 2010, with the annual rate just above the 6% target ceiling. Hitherto a 5% ceiling has been envisaged for 2011. President Laura Chinchilla of the National Liberation Party (PLN) began her four-year term in May 2010, having won the February election with almost 47% of the vote (PLN won 58 mayorships in polls on 5 December). Continuity with the previous administration is expected but the PLN lacks a majority in the legislature. This could undermine tax reform plans needed to cut the fiscal deficit from a projected 4.5% of GDP in 2010. Recovery has pushed up imports significantly in 2010 (to US$11.2bn through to October from US$9.2bn year ago), with export growth less robust. After falling to US$540m in 2009, the current account deficit is officially expected to rise to US$1.46bn in 2010. We expect a deficit of US$1.6bn, rising to US$1.8bn in 2011.