Event

In the second and final round of the Costa Rican presidential election, former minister of labour Carlos Alvarado Quesada beat the evangelical singer Fabricio Alvarado Munoz. The centre-left candidate won by a wide margin over his rival who centred his anti-establishment campaign on a commitment to conservative family values. The president-elect, who will be taking office on 8 May 2018, is expected to bring policy continuity as he represents the incumbent president Luis Guillermo Solís's party. Nevertheless, he will be confronted by the challenge to build alliances to pass legislation as his party does not have a majority in the legislature. With that in mind, Alvarado Quesado has taken a conciliatory stance and has pledged to reach out to supporters of Alvarado Munoz but it remains to be seen if he will be able to break the congressional gridlock of the past years.

Impact on country risk

The new president has his work cut out for him. First of all, addressing the fiscal deficit is a key issue. Costa Rica’s persistent budget deficits have been on the rise, amounting to the elevated level of around -6.5% of GDP at the end of 2017. Without reforms, fiscal deficit is expected to widen to more than -8% of GDP within a period of four years. As a consequence, the debt burden has been swelling in the past years (to roughly 52% of GDP at the end of 2017) and is expected to increment to about 70% of GDP in 2022. Alvarado Quesada has pledged to introduce fiscal rules that will limit the government’s ability to run up debts, and to pass a package of tax and spending measures. Nonetheless, fiscal austerity will be a tough idea to sell to the public when Costa Ricans believe that politicians accused of graft remain in power. Indeed, lingering corruption allegations against president Solís in the “Cementazo scandal” – in which the government reportedly used its influence to help a Costa Rican businessman import cement from China – stains Alvarado Quesada as he served as minister of labour under M. Solís.

Also, reducing criminality will be a top priority for the new government. Though crime rates are well below these of the three countries of the Northern triangle (Honduras, El Salvador and Guatemala), homicides surged to a national record last year, blamed on rising gang violence.

That being said, the Costa Rican economy is in a quite healthy state. The country falls into the second best category (2/7) for short-term political risk, with a stable outlook thanks to a comfortable level of foreign exchange reserves (covering 3.5 months of imports in February) and a relatively low external short term debt. For the medium/long-term political risk, it falls into category 3/7, with a stable outlook too. Costa Rica’s moderate rating reflects its sustainable external debt, robust growth, moderate current account deficit and difficult public finances situation.

Analyst: Jolyn Debuysscher - J.Debuysscher@credendo.com