What MNCs should expect from Carlos Alvarado’s government in Costa Rica

Carlos Alvarado (Citizen’s Action Party – PAC) won the Costa Rica presidency in the runoff elections on April 1 against Fabricio Alvarado (National Restoration Party – PRN) with 61% of the vote. The incumbent party’s candidate will take over the presidency from Guillermo Solís on May 8. The election of Carlos Alvarado ends the uncertainty regarding the future of economic policy since Carlos Alvarado has a clearer economic platform than Fabricio Alvarado.

Considering this, here are four things MNCs should expect from Carlos Alvarado’s government:

  • A centrist, pragmatic policy agenda: Despite fitting the traditional center-left political mold, Carlos Alvarado will govern more from the center. This is because he was able to secure an alliance with center-right candidate Rodrigo Piza and his party (PUSC) during mid-March
  • Slightly better ability to govern than the Solís administration: Three factors contribute to this – the unanimous understanding of urgency regarding Costa Rica’s fiscal problem, the aforementioned political alliance, and no direct connection for Carlos Alvarado in the cementazo corruption scandal. However, the unicameral legislative assembly is highly fragmented by party. Alvarado will need to negotiate and simmer his party’s future role in corruption scandals
  • A priority to tackle Costa Rica’s emerging debt crisis: Costa Rica’s 2017 fiscal deficit (6.2% of GDP) is the highest in its history, while its public debt (49% of GDP) is double from ten years ago. The Central Bank of Costa Rica has forecast that without a major fiscal reform, the fiscal deficit will rise to 7.1% and 7.9% of GDP in 2018 and 2019, respectively. Carlos Alvarado’s fiscal objectives are clear. He wants to introduce a VAT on all goods and services of 13%, cap the growth of public service hires at 1% per year until 2020 (then 1.5% in 2021 and 2022), and limit annuity bonuses for public employees. The plan aims to reduce the fiscal deficit by half at a pace of 75 basis points a year until 2022
  • No devaluation of the Costa Rica colon: Alvarado was explicit during his campaign that he would not adhere to demands of export industries and devalue the nation’s currency. He will, however, push for more transparency when the Central Bank decides to intervene in the FX market

In addition, MNCs should monitor three signposts to determine the level of success of Alvarado’s government in the medium term:

  • Urgency of the fiscal reform in the legislative assembly: Most politicians in Costa Rica understand that a potential fiscal crisis is a race against the clock. Delaying this reform until 2020 could lead to a serious debt crisis and economic recession
  • The evolution of the same-sex marriage debate: This was the polarizing theme of the elections, which firmly placed social conservatives and liberals on different sides of an intense disagreement. If Carlos Alvarado and the PAC make this the theme of his presidency, their coalition will in all likelihood face complete congressional deadlock and potential social unrest. However, FSG believes this is unlikely because of his agreement with Piza to not make this a major priority
  • How the new administration tackles security concerns: The Carlos Alvarado administration will want to improve the security perception of the country to increase tourist arrivals and foreign direct investment

Actions to Take

Taking these factors into account, MNCs should consider these two actions:

  • Create contingency plans in the scenario that no fiscal reform is passed by the end of 2018: this only increases the probability of an abrupt collapse of demand in Costa Rica because of fears of a debt crisis
  • Revisit the role of Costa Rica in your regional portfolio, as operating conditions and market opportunity are unlikely to dramatically change in the short-run

For our latest updates and insights, FSG clients can visit the client portal or contact their Client Services Director for more in-depth briefings. Not a client? Please contact us to learn more.

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