Credit is a hard thing to come by these days, and that just might be a good thing for the Costa Rican economy.
Interest rates have been climbing steadily in recent months as banks try to sop up whatever cash they can by offering attractive savings rates.
This, economists say, is likely to bring inflation down – a good thing for consumers who could end up paying less at the supermarket, or at least not suffer a skyrocketing cost of living.
Inflation is at a 10-year high of 15.77 percent.
But as more people put their money into savings, they are spending less, which is not so good for small businesses and employers hoping to pay their workers.
“It is going to provoke a greater slowdown of the economy, probably a period of stagnation and we see a recession as likely,” said Eric Vargas, director of strategy for the investment firm Aldesa.
But, he said, the measures are necessary to “mend the imbalance” in the economy. Vargas noted that low interest rates last year and earlier this year encouraged spending and debt.
In April, the Central Bank’s average interest rate for loans and credit in colones was 14.02 percent. At the same time, the tasa básica, the average interest rate for colón savings accounts over a six-month period, was at just 3.72 percent. By June, the tasa básica had dropped as low as 3.52 percent.
According to the Costa Rican Banking Association, total debt on active credit cards rose by 55 percent between March 2007 and March 2008 – increasing from ¢14.6 billion (about $26.5 million) to ¢22.6 billion (about $41 million).
Where did all that money go? Much of it, Vargas said, was spent on imported goods.
“Stimulating so much spending has provoked a very big trade deficit,” Vargas said.
As of September, the deficit was $4.4 billion, an 89 percent increase from a year earlier. Imports grew by more than 26 percent between January and September, while exports grew by just 5.5 percent.
The Central Bank has estimated that the deficit could reach 8 percent of gross domestic product by the end of the year, Vargas said. “We believe that it could actually be higher than that,” he said.
Historically, the government has made up for the trade balance thanks to foreign direct investment, such as the call centers for U.S. corporations that have popped up in recent years and the hundreds of millions of dollars invested in real estate and tourism.
But with cash and credit drying up in the United States – the principal source of Costa Rica’s foreign direct investment – that investment here is slowing.
For example, Punta Cacique, an $800 million resort on the northern Pacific coast backed by AOL co-founder Steve Case, has been postponed for at least a year. A project spokesman said the delay is because of the “melting” global financial situation.
With more money flowing out of the country, and less flowing in, an increase in interest rates might go a long way to stop the bleeding, analysts say.
Isaac Castro, chief economist at the financial firm Interbolsa, said the tightening of credit could also sort out, in the business world, the weak from the strong.
“This will stimulate demand for investment in a way that the projects that get financing will be those that are so profitable they can bear a higher interest rate,” Castro said. The economy will generally continue to tighten up through at least the beginning of next year, Castro said.
“I think that we are at risk, or have already entered a recession. The gross domestic product from the (second) quarter compared to the first fell 0.05 percent. Though that is a small drop, it may deepen in the (third) quarter, which just finished, and in the last quarter of this year.”
The contracting economy, Castro said, will likely mean job losses, which will also add up to less tax revenue for the government.
President Oscar Arias’ administration has so far been enjoying a budget surplus as it goes into the final quarter of the year. But without spending cuts, that surplus is going to shrink and perhaps become a deficit by next year. In the case of a budget deficit, the government must finance its spending by selling off government bonds.
The bonds, however, must be competitive in a market where, just by adding the bonds to the mix, interest rates will increase more. That means further debt for the government.
lbaxter@ticotimes.net
