Broad Policy Continuity, Falling Inflation To Support Political Stability In Costa Rica

• Fitch Solutions holds its Short-Term Political Risk Index (STPRI) score for Costa Rica at 62.4 out of 100, as they expect broad political and social stability to persist during 2023.
• Despite a slowing economy and fiscal consolidation, President Rodrigo Chaves's high level of popularity and easing inflationary pressures will limit the risk of social unrest during 2023.
• Economic conditions improved during H222 despite moderating growth. Inflation peaked at 12.1% y-o-y in August before falling back to 7.9% by the end of the year, while the unemployment rate fell to 11.7% at end-2022, from 13.7% a year earlier. Further, the government's budget deficit fell to 2.5% of GDP in 2022 from 5.0% in 2021, easing fiscal risks.
• Additionally, Fitch believes easing inflationary pressures will contain the threat of social instability over the coming quarters. Currently, it is forecasted that inflation will fall gradually to 4.8% by the end of 2023, reducing pressure on household budgets (though above the Central Banks target of 2-4%). It is also expected that the central bank will begin to cut its policy rate in H223, easing borrowing costs for consumers and businesses.
• On the other hand, a forecasted uptick in the unemployment rate to 12.0% in 2023 as economic activity moderates will continue to weigh on its score, specifically, the 'social stability' component of the STPRI.
• Despite the relatively favourable outlook, Fitch believes there are still some downside risks to stability. A sharper economic downturn or more persistent inflationary pressures than currently expected would increase social instability risks. Additionally, a recent increase in migration into Costa Rica, particularly from Nicaragua, could also potentially lead to rising social tensions, which would be exacerbated by a more severe growth slowdown.

(Source: Fitch Solutions)