US Fears Of Recession Not Felt At Home
Costa Rica’s economy remains strong and in the short to medium term is unlikely to be affected by the economic woes hitting the United States, economists said this week.
“It (Costa Rica’s economy) remains strong despite what is happening in the US,” said Alfredo Ortuño Victory, the Director of the Central American Bank for Economic Integration (CABEI), in San José.
“Our bank is doing a very extensive research and analysis, how the sub-prime mortgage market is, or will be affecting this region, especially Costa Rica and Panama,” Mr Ortuño said.
“So far it has not affected us, that we can assess, nor will it in the immediate future.”
The assessment by CABEI was reiterated by Fernando Víquez, from Scotiabank, who described the state of the country’s economy as “unprecedented.”
“The economy is great,” he added.
“I believe the state of the economy is a matter of the direct investment from abroad in the real estate business,” Mr Víquez said. “Not only do you have building along the beaches, but you also have a lot of companies coming to the cities, that need space in which to operate.
“The pharmaceuticals, software, the intels, the intel providers; it is a strategy that has been built over ten or 15 years, to bring a cluster of foreign companies into the country.”
The bankers’ reassurances came amid a flurry of bad news from the US.
Figures released this week show the US economy barely grew in the fourth quarter of 2007, pulled down by a worsening slump in housing and heightened caution by consumers and businesses.
The US Commerce Department reported a 0.6 per cent annualized growth rate in Gross Domestic Product (GDP), yet many economists had predicted growth of up to 1.1 per cent.
In other news the Federal Reserve cut US interest rates by a hefty three quarter-percentage point on Wednesday as part of an ongoing aggressive effort to halt the sharp slowdown in an economy.
The Fed’s action takes the bellwether federal funds rate to three percent, the lowest since June 2005, and came just eight days after the central bank slashed rates by three-quarters of a point.
And consumers increased their spending at the weakest pace in six months while applications for unemployment benefits soared last week, two more signs the economy is weakening, and further fueling fears of a recession.
Recession is defined as a decline in a country’s Gross Domestic Product, or negative real economic growth, for two or more successive quarters of a year.
However, local economists point to an excess of cash throughout the world, in the past three or four years, which they say has been making its way to Costa Rica as property investments and second homes.
“I believe that in 2008 we will continue to get investors in second homes,” argues the Scotiabank’s Víquez. “Either those projects that are already under construction or those that are about to start. Costa Rica is still considered to be a good real estate investment.”
“Let us put it into perspective,” says CABEI’s Ortuño. “There is no financial institution that I am aware of that has any exposure up there.
“The sub-prime mortgage market is unlikely to affect us. One thing that one has to bare in mind is that Costa Rica kind of leap-jumped in the way it developed tourism.
(A sub-prime mortgage lender is one lending to borrowers who do not qualify for loans from mainstream lenders. By definition there is more risk attached.)
“Thirty years ago we were discovered by backpackers who put us on the map,” Mr Ortuño adds.
“What should have happened was that which happened in Mexico and in Spain, where smaller scale developments should have started. This didn’t happen, Costa Rica passed from the backpackers to the mega-projects.
“Now everyone is benchmarking with The Four Seasons Hotel (a luxury resort development in Guanacaste’s north).”
Luis Mesalles Jorba, an economist with Ecoanálisis, a group of financial consultants, agrees, saying the situation is probably not as bad as people predict.
“Most of the investment in Costa Rica is of the prime market, not the sub-prime market,” he explains. “There will be some effect on the Costa Rican economy, but the investors here are more the prime market people who don’t have to ask for credit.”
And there is Costa Rica’s inventory — it’s small. There is limited real estate, in what is a small country.
Jorge Madrigal, the director of the Economics Division for the Central Bank of Costa Rica, also points to the purchasing power of foreign investors.
“My personal perception is the majority of those investing in Costa Rica are North Americans with high taxes and a very high purchasing power,” he said. “These are probably not the types who are going to be very hard-hit by an eventual crisis in the US.”
There is a threshold, however, below which investors are using borrowed money, and they are more likely to be affected.
“I don’t know what that threshold is — $400,000, $500,000 or even a million dollars,” says Mr Mesalles. “The lower the price is within the housing market the more the effect of the US economy will be felt. The higher you go with land and housing prices, the less the effect will be felt.”
Despite the assurances, Costa Rica is far from immune to problems in the US.
Economists will continue to monitor a number of key sectors, chief among them, exports from Costa Rica; a hardening of US credit conditions, which makes money more difficult to get; the price of oil which sits at about $91 a barrel; and this country’s tourism industry.
The concerns lie in the statistics. Forty-one per cent of Costa Rica’s exports go to the US, while a big percentage of the remainder are value add-ons, going north via other Central American countries.
Direct investment from the US has dropped from 70 per cent in 2004 and 2005 to 50 per cent in 2006.
And 58% of foreign tourists are from the US.
“Less growth means less demand for Costa Rican exports,” says Mr Mesalles. “The export sector has been one of the fastest growing in Costa Rica in the past ten years.”
“We are a very small economy and intrinsically linked to the international markets,” says the Central Bank’s Madrigal. “Therefore, whatever behavior occurs in the big markets brings us repercussions.”