About the author – “I retired in Costa Rica three years ago. My background is over 40 years international experience as an investment banker in Europe, a Partner in a major global consulting firm in Europe and Asia and as CEO of a global enterprise based in New York.

During my career I advised major corporations and governments on aspects of central banking, industrial structure, regulation and finance. I am not a personal investment advisor, but have benefitted and occasionally suffered from much such advice.

Current economic situation in Costa Rica.

The Costa Rican economy is in trouble and there seems little prospect of any soft landing. What should individuals do?

The economy is in trouble – There are a number of signs.

Recently, Costa Rican government debt was reduced to one place above junk status by rating agency, Moody’s. The IMF has warned about the status of the economy. The reasons for their comments include:

1. Institutional weakness, as evidenced by continued political obstacles to comprehensive fiscal reform. Several attempts in recent years to address Costa Rica’s growing fiscal deficits and debt have not brought these levels lower.

   The new Solis administration, which took office in May of this year, has indicated it will only gradually introduce fiscal consolidation.

2. 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. The fiscal deficit has averaged 4.5% of GDP since 2009, largely driven by spending growth, and is expected to reach 5.8% of GDP in 2014 and 6% next year. The high deficits have materially worsened

   Costa Rica’s debt burden, with debt to GDP expected to rise close to 40% this year, compared to 25% of GDP in 2008.’ (Moody’s Global Credit Research – 16 Sep 2014)

When the sovereign debt of a country is considered close to Junk, all other debt in that country is considered the same. There is no safe haven for investment in Costa Rica. It is a high risk destination.

We can all observe:

• Escalating government spending, failure to reign it back and no prospect of it happening. The New President has proposed a 19% increase in the budget.
• Significant future interest payments are needed to fund high existing debt. The debt is in US dollars. This means that devaluation of the Colon would not resolve the problem. It would make the government, individuals and businesses that took out dollar loans and mortgages unable to pay.

  That would cause a raft of bankruptcies and threaten the banks’ viability. That is why the published rates for the Colon are kept remarkably stable just now and way above any likely free market rate.

• This is why Costa Rica is increasingly expensive for citizens, residents, potential inward investors, manufacturers and tourists relative to alternative options.

Other problems include:

A bloated government, judiciary and bureaucracy that continues to pay and pension itself beyond levels that can be justified. All the signs are that this will continue. Turkeys do not vote for Christmas. At the same time, vital areas of the economy such as roads, infrastructure, education and healthcare are underfunded and crumbling.

Increases in interest rates, to enable re-funding or even increased borrowing are widely expected. This would increase the costs of doing business and could cause mortgage and business loan defaults, as well as further slowing the economy.

Quasi monopolies, owned by influential families, ensure that some sectors of the economy are inefficient and sell their products at high prices. Corruption and tax evasion appear to be endemic.

There has been a 9% increase in tourism, but hotel occupancy is down. This is due partly due to the large number of rental properties now available. Many of these are for rental because they are not selling, even at deeply discounted prices. The old dream of coming to Costa Rica and flipping a property for a handsome gain is dead. The government wants to tax rental income.

Unemployment, especially in rural areas, is another issue and is exacerbated by business unfriendly laws and taxes on labor. Some large employers have already moved their production elsewhere.

Potential for collapse – Business as usual is unsustainable and the only uncertainty is when a collapse will occur. It may be in the next few months or in a few years. An external shock, such as a big downturn in the world economy could be a trigger. Being unable to pay back foreign debts could be another.

The intervention of either the US or China to shore up the system could delay matters, but seems unlikely. The US and China have rival strategic interests here because of the existing and potential Atlantic/Pacific canals. Costa Rica is part of their global chess game, or maybe the game is Go.

The nature of collapse – Collapse could take various forms.

If there is no rescue from the IMF, China or the US, then sovereign bond default becomes a real likelihood. A run on the banks and a flight of capital to safer havens could occur.

I first saw the collapse of entire economies in South East Asia in 1997. It was not pretty and caused widespread personal hardship. High end cars, bought on loans were abandoned by the roadside.

There were government defaults, devaluations of currencies by more than 30% and much unemployment and bankruptcy.

More recently in similar cases in Ireland, Greece and Cyprus, governments have variously slashed spending, raised taxes and confiscated a proportion of large bank accounts. This caused economic slowdown and higher unemployment.

Because of their membership of the Euro zone, currency devaluation and debt default were not available policy options. They are here.

Germany bailed out the currency. There is no rich uncle available to Costa Rica.

The prospects of higher crime rates, even worse roads and other deteriorations in life here are likely results of economic collapse.

What should the individual do?

Qualified investment advisors always propose a diversified portfolio. The amount of risk included depends on the age of the investor and their risk appetite. Retired folk are usually advised to take less risk, as their prospects of recovering losses are limited.

Here are some steps that can be taken to avoid as much of the Costa Rica problem as possible:

1. Rent rather than buy property. It may well be available for purchase at a cheaper price later. For existing owners, the possibility of a sell and rent back agreement or of taking out a colon mortgage, changing the money into dollars and taking it offshore might be evaluated.
2. Do not bring most of your wealth into this country. This may already be too late for some, in which case consider liquidating much of it and taking it back out again to spread the risk.

   Keep most of your funds in hard currencies; invested in stable countries and bank in those.

   Do not keep more than $50,000 in any one bank here. Switch out of the government owned banks. That may or may not help. If there are bank failures and capital levies all banks might be affected.

3. Avoid seemingly enticing interest investments in minor CR institutions. High interest means high risk.
4. Sell existing CR investments where possible and move the funds elsewhere and into hard currencies.
5. If you plan major purchases of imported goods such as cars, washing machines etc, buy before the currency collapses.
6. Do not take out loans in foreign currencies for spending in Colones, unless you are a gambler and can afford to repay, if the colon devalues.
7. Be alert to changes in the financial situation. Watch out for signs of crisis.

Timing

The problem with the suggested actions is that when everyone tries to take them, financial panic ensues. Therefore the time to act is now and without panic.

Written by VIP Member Chris Clarke who is a retired economist, consultant and investment banker.. Chris and his wife, Ivy are British who have lived and worked in Europe, Asia and the US.

They have been fortunate in travelling extensively on the corporate dollar. When Chris retired from his role as President and CEO of a global executive search firm in December 2010, he and Ivy had already considered their retirement options. Chris wanted a haven to write novels and they both ended up retiring in Costa Rica.

The AARP (American Association of Retired Persons) ranks Atenas as one of “The Best Places to Retire Abroad.” For more information about homes for rent and for sale and land for sale in the area please telephone our Recommended Realtors in Atenas Dennis Easters and Gerardo Gonzalez-Porras on (506) 8854-7721 or contact him using the simple form below:

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.