Author: Botho Steinvorth Koberg
Founding Partner – LatinAlliance Costa Rica
Costa Rica is immersed in a special situation that, if handled correctly, will be temporary. This is a fiscal deficit that requires a legal reform in the Legislative Assembly that allows the State not only to collect new taxes but also to eliminate privileges and pensions called "luxury" due to their high amount in a country whose economic or social situation allows them to be paid. , and put caps on state spending.
The tax reform cannot eliminate the rights that their beneficiaries have already legally acquired, so it creates new rules for public employees who do not yet enjoy those benefits and for new government employees.
The legislative process of tax reform has caused a general strike in the public sector that has lasted more than 30 days, and therefore a convulsive social situation in the country, without turning violent. The legislative process, however, has not stopped and the bill to achieve the reform is expected to be approved before the end of 2018.
All this process has caused a rise in the exchange rate of the colon against the US dollar, going from 565 colones to 600 colones for one dollar in less than 30 days.
On the other hand, during the legislative process, and before the bill underwent the first debate in the Legislative Assembly, Costa Rican government bonds, which are traded on the National Stock Exchange, suffered a substantial drop in price, which has created a great opportunity to buy Costa Rican government bonds with a yield of 6% to 7% per year and that mature in the short term (for example, some mature in the year 2022). That gap was closed somewhat when the tax reform was approved in the first debate in the Legislative Assembly. However, before moving on to the second debate, several inquiries must be made to the judiciary and other instances, a process that would take 45 days and within which we are. This has meant that the prices of these bonds in dollars have not fully recovered and there is still an opportunity to invest in these instruments.
On the other hand, it is expected that the exchange rate will stabilize, falling a little in December, since it is expected that many dollars will be sold to buy colones in order to cover the expenses of payment of Christmas bonuses and salaries. year, as well as the payment of taxes. It is possible that the following year, 2019, the price of the dollar will rise again. This is something that many of the most renowned economists in the country have predicted, since they assure that the colon continues to be overvalued and, according to them, the exchange rate should be between 700 and 800 colones for one USD.
In the real estate part, the situation is similar, since dollars will yield more to buyers who acquire properties listed in colones. It is important that, if what the buyers want is to earn money in the short term, they acquire properties in areas that are desired, because if they do not, even if they buy them at a lower price, it will be difficult for them to sell them later.
However, if the fiscal reform process is not managed properly, the country's fiscal situation will worsen, the exchange rate could be higher than 800 colones per dollar, and bond prices could take longer to recover, which it can mean a wider window for foreign investment.