Sunday, March 01, 2009

Costa Rica Tries to “Bullet-Proof” Economy

Sources:
Bloomberg
Inter-American Development Bank

Costa Rica is in negotiations with the Inter-American Development Bank (“IDB”) for a $500-$750 million loan. Costa Rica states that the loan is merely a precaution against any sudden downturn in their economy. The country has about $4 billion in foreign reserves and views this to be an adequate amount, but is seeking the IDB loan in order to “bullet-proof” its economy.

Costa Rica’s economy has been strong in recent years, growing at an average rate of 3%. However, like most other Latin American countries, Costa Rica is facing falling foreign investment and reduced demand for their exports. Costa Rican Central Bank President, Francisco de Paula Gutierrez, said that it is “not possible for an economy as open as Costa Rica to escape a decline in external demand.” Because of the global crisis, many experts project Costa Rica to have between 0%-1% growth in 2009.

The loan from the IDB comes from its Liquidity Program for Growth Sustainability, whose purpose is to “help Latin American and Caribbean governments alleviate the effects of the international turmoil on their countries' macroeconomic stability, growth, and employment.” Costa Rica will use the money in order to provide capital, in US dollars, to its export industry. The export industry has had trouble securing financing because of the global credit crunch, and the loan would fill that role in addition to providing money to other domestic industries in the export chain.

The influx of money may be coming at the right time for Costa Rica’s exporters. One of Costa Rica’s largest exporters, Intel Corp.—which accounts for one-fifth of Costa Rica’s total exports—has seen its fourth quarter exports down 32% compared to last year’s fourth quarter. Though the money won’t help demand problems, it will help stabilize its exporters and mitigate any financing problems they are facing.

In addition to securing a the IDB loan, the Costa Rica government is addressing the financial crisis by raising pensions by 15% and is also investing in school and road construction in order to create jobs.

Questions:
1) It is certainly important to ensure that exporters have access to capital, but if foreign demand does not increase will the investment in exporters be fruitful?
2) Would it be better to spend the money on other projects or industries?

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