Costa Rica: Country Economic Forecast: 12 Sep 2011

Preliminary indications suggest that GDP grew by around 3.5% in H1 2011 after growth of 4.2% in 2010 (and a 1.3% decline in 2009). However, despite 400bp of interest rate cuts from mid-2010 to 5% in mid-2011, the already slower pace of growth combined with more adverse signals for the US and global economy may qualify aspects of the outlook. The central bank's recent upward revisions to its GDP forecasts to 4.5% for this year (from 4.3%) and 4.7% (from 4.5%) in 2012 may be over-optimistic. Our 2011 GDP forecast remains at 4.0% pending Q2 data, but our 2012 projection has been lowered to 4.3%. But efforts to cut inflation to 5% this year from 5.8% at end 2010 may be aided by easing of commodity prices. Recovery contributed to a rise in the current account deficit to US$1.4bn in 2010 from US$570m in 2009 as rising imports pushed up the trade deficit. The current account gap was US$867m in H1 2011, up from US$270m a year earlier, and we expect a 2011 deficit of US$2.3bn (5.7% of GDP), with a similar outturn in 2012 as the trade deficit widens. President Laura Chinchilla of the ruling PLN began her four-year term in May 2010. But political difficulties have intensified both from within the PLN (from the faction loyal to her predecessor Oscar Arias and his brother Rodrigo, who has presidential ambitions for 2014) and opposition parties in Congress. This is hampering fiscal and other reforms and undermining governability.