Has the Sun Set on U.S. Investment in Costa Rica?

The current economic downturn in the United States has begun to affect Costa Rica in both positive and negative ways. Echoing events in the U.S., the Costa Rican cost of living has risen, though certain products have seen price drops. Loans are more difficult to secure for individuals, governments and corporations. According to many though, the most worrisome and long-term effect is the possibility that Americans, who make up for almost 60 percent of Costa Rican tourism, will soon keep their vacations closer to home, if they take vacations at all.

International markets are worried - reduced American buying power could affect demand so greatly that prices would fall without end. Therefore, instead of waiting for the worst case scenario, certain staple goods and international products have already brought their prices down. In this way, companies hope to stimulate purchases, even by families and individuals whose buying power has been affected. That said, recent price drops in gasoline, wheat, corn, and soy have not yet been felt in Costa Rica, but experts say that they soon will.

Indeed, Recope (the Costa Rican Petroleum Refinery) has already asked for a slight reduction in gas prices. This request comes after months of steadily increasing prices. As for food prices, local economists believe that relief is on its way; when Costa Rica food suppliers, companies, and markets purchase their next large batch of supplies, their savings should be passed on to the consumer. Despite these reassurances, many Costa Ricans remain convinced that their buying power has been severely reduced, and will not improve any time soon.

The good news seems to end there, however. “It seems to me that the most serious consequence is about access to credit, because the world financial system is all interconnected,” Alberto Trejos, economist, explained. Essentially, if the United States economy enters a serious recession and credit becomes more difficult to secure, Costa Rica will feel the effects in exchange rates and international loans, among others.

In addition to these worries, the Costa Rica economy is partially dependent on the investment of Americans. Tourists spend $2 billion annually on Costa Rica vacations, a number that is set to dip sharply if the economy does not right itself. In addition, many Americans choose Costa Rica for retirement or real estate investment, taking advantage of a beautiful climate, hot real estate market, and proximity to their families in the United States. With less disposable income, the eventual effect will be fewer investors and retirees setting up house in Costa Rica. In fact, the U.S.-based lending bank Lehman Brothers, which just opened up services to foreigners in Costa Rica earlier this year, had to declare bankruptcy on Monday.

The United States’ economic problems and their effects on Costa Rica have left Costa Ricans feeling pessimistic. In just the past five months, Costa Rican preoccupation with cost of living has risen from 28 percent of the general public to a whopping 44 percent. Indeed, all socioeconomic classes are feeling the pressure, and 80 percent of Costa Ricans believe that their economic situation is worse than this time last year. Even more telling, the same percentage believe that the situation will only worsen over the next twelve months.

Photo by Adam Baker.

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Filed under: Business on September 18th, 2008