Caribbean & Central America - October 2014 (ISSN 1741-4458)

Days after bemoaning the “unimaginable” disorder he had inherited on entering office, Costa Rica’s President Luis Guillermo Solís found his task yet more complicated. Moody’s Investors Services, an international credit ratings agency, downgraded Costa Rica’s sovereign bond rating on 17 September. The decision appears to have spurred the president into action. Whereas tax reform had once been promised in the second half of his mandate, Solís said that he would send a bill to congress by the end of this year.

Moody’s decision

The downgrade, from investment-grade Ba1 to a speculative-grade Baa 3, was based on Costa Rica’s persistently high fiscal deficit, which is expected to reach 5.8% of GDP this year. Solís had long anticipated such a scenario, and had made bringing down the deficit the subject of his first speech as president back in May. But he did not escape censure from the ratings agency. “The new Solis administration has indicated it will only gradually introduce fiscal consolidation. […] As a consequence of inaction, we expect the current large fiscal deficits and increasing debt burden are likely to continue for the next few years,” it noted.

Costa Rica’s debt-to-GDP ratio is expected to rise to 40% this year. In response, Solís announced that he would send two tax bills to congress in order to boost the treasury’s coffers. The details of one of the proposals, involving the taxation of Costa Ricans’ foreign income, has yet to be spelt out. The other, the conversion of the country’s 13% sales tax, which the president describes as “regressive”, into a value-added tax, should boost the government’s revenue by C$300bn (US$555m) a year. On 19 September, the president, a former political scientist, began the process of negotiating with congress’s nine different parties in an attempt to draft the law.

One of Moody’s concerns is just how complicated that negotiation process is likely to prove. Its report also noted “the government’s weak position in congress has delayed approval of legislation because of the need to forge ad-hoc alliances”. Solís’s Partido Acción Ciudadana (PAC) has just 13 seats in the 57-seat unicameral congress.

Open for business

In several media interviews he gave while in New York for the United Nations (UN) General Assembly, Solís sought to minimize the downgrade and instead promote the benefits of Costa Rica’s economy, including its relatively well-educated workforce, to foreign investors. Over the past year, a number of high-profile companies have announced plans to leave the country. HanesBrand, the textile manufacturer, plans to relocate to Vietnam. Intel, the microchip manufacturer, has also shifted some of its operations to the Far East, but it is keeping an engineering and design centre in Costa Rica.

The Central American country has ambitions to join the Organisation for Economic Co-operation and Development (OECD). Should it succeed, it would become only the third Latin American country, after Mexico and Chile, to be accepted into the club (Colombia is also in talks). Speaking to the Financial Times, Solís made his case for membership. “We’re a responsible state, we pay our bills, take things seriously, uphold the rule of law,” he said. The president emphasized the “very stern austerity programme” his government was embarking on, and warned that Costa Rica’s finances could be seriously harmed if the US decided to raise interest rates too quickly over the next year.

The private sector at home has been grumbling about Solís’s economic policies. The Unión Costarricense de Cámaras y Asociaciones del Sector Empresarial Privado (UCCAEP), a business lobbying group, has clashed with Solís over his national employment and production strategy, which aims to create over 200,000 jobs over the next four years. The lobby’s major concern is that the government is prioritizing social impact over economic competitiveness. In an effort to reach out to UCCAEP, on 19 September, Solís announced the creation of a new presidential competitivity and innovation council which would include members of the lobbying organization. In a rare flash of good news for the new president, he was able to announce on 22 September that Accenture, the US consulting firm, would expand its operations in Costa Rica, creating 300 new jobs.

On 29 September, the president announced plans to cut the 2015 draft budget by 2.8%. The finance minister, Helio Fallas, claimed the savings of C$221bn (US$409m) could be achieved by postponing the payment of public debt and cutting spending in state institutions by reducing staff overtime and expenses. That move prompted opposition from the Left. Public sector unions are planning to hold a major demonstration on 20 October to urge congress not to cut salary bonuses from Costa Rica’s budget.

In a document circulated by Asociación Nacional de Empleados Públicos y Privados (ANEP), the union argues that wage bonuses are lawful and cannot be eliminated. ANEP claims that it is the country’s business sector which “concentrates wealth, dodges taxes and is pushing to maintain an unfair Costa Rican tax structure.”

Despite protests, attorney general re-elected

A group of protesters in downtown San José, which included two congressmen from the ruling PAC, failed to halt the re-election of Jorge Chavarría Guzmán as Costa Rica’s attorney general on 6 October. With 16 votes in favour and six against, the supreme court elected Chavarría to serve a second four-year term. Earlier this year, Chavarría had ruled himself out of contention, but changed his mind following a campaign by public prosecutors for his re-election.

Much of the opposition to Chavarría is due to his alleged failure to prosecute public officials linked to various scandals from the administration of former president Laura Chinchilla (2010-2014), who stepped down earlier this year. Franklin Vargas, a PAC legislator, told reporters that there was no reason for Chavarría to be re-elected. “It is in no way possible to maintain in office [an attorney general] who has been so complacent in the face of the corruption in our politics,” he said. “A change is needed in the judicial branch after the last two governments, which were some of the most corrupt in the history of our country.” One of the protesters’ main demands was for the court to act over the allegedly fraudulent use of US$38m of public emergency funds for a badly made road running parallel to the border with Nicaragua.

• Chinese visit

A delegation of Chinese officials from the Chinese Development Bank and the ministry of trade visited San José on 22 September to discuss further cooperation and assistance with Beijing. Among the Costa Rican officials present at the talks were representatives from the foreign, finance, agriculture, health and public security ministries. President Solís is planning a trip to China in January 2015.