Trade Deficit Takes Plunge as Oil Skyrockets

June 6, 2008

The economic scales are not weighing in Costa Rica’s favor.

Despite a 10.5 percent increase in exports in the first four months of the year, the country’s trade deficit approached $1.8 billion at the end of April – an 88 percent increase over the same period last year.

Experts point to rising oil and construction material prices as two principal reasons for the trade gap.

Historically, Costa Rica has always had a multimillion-dollar trade deficit, with imports exceeding exports. The only exception was 1999, when the nation was in the black by $357 million (see table).

Economists say deficits are only troubling when they account for more than 1 percent of a nation’s gross domestic product.

“There are amounts that, yes, are acceptable,” said Carlos Palma, director of the University of Costa Rica’s EconomicsSchool. Yet “there is a time, like that right now, (when) you have to worry.”

Costa Rica’s gross domestic product for the first quarter of 2008 will not be released until June 30, according to a Central Bank representative.

Several converging nasty economic factors have contributed to the trade balance’s downward dip of late. Record-setting oil prices, a deflated U.S. market, the weakening colón, and low interest rates spurring higher consumption on credit have sunk Costa Rica deeper into debt.

Crude oil prices hit unprecedented highs in recent weeks. After surpassing the unthinkable marker of $100 a barrel in the first months of 2008, oil prices continued to climb, reaching a peak last month of $135 a barrel.

Since then, the going rate for oil simmered down to $123 a barrel, as of press time. The spikes in crude prices have not helped lighten Costa Rica’s import load. By the end of April, the country spent $665.6 million on fuels and lubricants, or 58 percent of its total bill for the same products in all of 2007.

That marks an 89 percent increase over the same period last year, according to Francisco Gamboa, director of economic studies at the Foreign Trade Promotion Office (PROCOMER).

Construction materials also saw a hike. Costa Rica spent $161.2 million by the end of April on such goods. Compare that to 2007, when the country spent $373.4 million by the end of the year.

Rigoberto Torres, the Central Bank’s head of statistics for the foreign sector, said imported raw materials across the board were more expensive, including those in the industrial and agricultural sectors.

Low interest rates likewise encouraged Ticos to charge purchases.

The past year saw a drop in average interest rates for debt in colones, falling from almost 17 percent to 14.5 percent from May 2007 to May this year. The dollar’s interest rate also dropped over the same period, from 10 percent to 9 percent.

Consumer credit responded to that drop, growing from ¢1.2 trillion ($2.4 billion) to almost ¢1.9 trillion ($3.6 billion) – a 49 percent increase.

Many of those purchases were for foreign goods, Palma of the UCR said. Debt incurred in dollars could become painful to Ticos who earn in colones, as the national currency has slid in value against the greenback in recent weeks.

A weaker colón is good news generally for exporters, whose sales increased by 10.5 percent from January to April over the same period last year. As of April, Costa Rica exported $3.3 billion worth of goods, according to the Foreign Trade Ministry.

The largest growth came in the agriculture and fishing sectors, each increasing sales by 11 percent.

However, two products – bananas and melons, the first and fourth leading sellers –actually lost ground. Banana exports fell by 1 percent, while melons dropped by 19 percent.

Gamboa said the recent wet weather contributed to the crop loss.

The textile industry, a mainstay in Costa Rica, also suffered losses. Gamboa said exports shrank by 19 percent as of April, compared to the same period last year.

Meanwhile, the United States is drudging through an economic recession whose effects are felt around the world.

Costa Rican exports to the economic superpower decreased by 1 percent in the first four months of 2008, compared to the same period last year, according to the Foreign Trade Ministry.

“It’s evident that the economic deceleration in the United States and the delay in entering the free trade agreement with that country continue to affect our exports to that market,” said Foreign Minister Marco Vinicio Ruiz in a statement last month.

lfriday@ticotimes.net

 

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