Country Risk Assesment "1986"

1986 Model to assess the investment risk for a German Company to enter and operate in the Costa Rican market.

Political Factors                      Costa Rica                    Total Possible

•Bad Neighbors                            (1 pts)                           (3 points)

The two immediate neighbors of Costa Rica is Panama to the south with a long history of political and military stability and relatively good relations with Costa Rica¹. à 0 pts

The second neighbor to the north is Nicaragua with a long history of instability and military turmoil, mainly with the US (Sandanista, ..– revolutions)². The relations with Nicaragua continue to be rocky³. The current President Ortega is to be watched closely. US and Costa Rican strong bilateral-relations deter neighbors in general from offensive actions of any sort.  à 2pts 

Colombia further to the south and Honduras further to the north have not and present no risk worth allocating measurable risk to this model. Costa Rica recently has engaged in serious talks with the EU for trade talks that present themselves positive for EU business in Central America⁴.

•Authoritarian Government      (3 pts)                            (7 points)

The democratic republic or Costa Rica has a track record as one of Latin America’s most stable democracies since the establishment of its Constitution in 1949⁵. Due to an Executive, Legislative (high autonomy from especially executive), and Judicial branch with the ability for one party to be in control of the executive and another party to be in control of Congress ensures checks and balances especially as open presidential elections hare held every 4 years Currently not one party holds the required 29 votes to form a majority.⁶  Separate elections are held on the same day the populace elects both the president and a single chamber Legislative. Foreigners possess the same rights as citizens except for suffrage given foreign investor good legal representation and civil rights. Even though expropriation, squatter rights and other governmental risks remain strong⁷ one can easily manage those risks appropriately with professional lawyer support.

•Staleness                                    (2 pts)                            (5 points)

The current re-elected President Oscar Arias, is known as a maverick that has helped Costa Rica achieve international attention, and much of its economic and eco-tourism success from his first presidency on⁸.  Frequent elections with no immediate presidential re-lections possible until 8 years after leaving office, ensures freshness of political perspectives. He is known to be actively promoting and improving the business climate to ensure FDI while appealing to public demands for improving the well being of social services and living standards.  The latter part represents the biggest risk.  The continued progress in the implementation and alignment with CAFTADR demands is threatened by nationalistic interest groups (governmentally run national social institutions INS, import tariff agencies) Rising living costs as well create difficulty to retain broad public support to privatize those sectors of the economy⁹. 

Arias seems the man with the best credentials to continue pushing for deregulation                à     1

due to the government structure and nationalistic forces changes are not certain          à     4

•Illegitimacy of Regime            (5 pts)                             (9 points)

Oscar Arias has received the Nobel Peace Price, is internationally active¹⁰ and the fact that he was just re-elected shows the strong legitimacy among the populace. His first year as president has given him credentials by improving many economic factors  source, and political factors¹¹.  How legite he and his cabinet is to address the social risks associated with privatization that keeps arising in the transitional gap while creating a platform for future more enforceable taxation, that is required to ensure public welfare, is questionable. This difficult task most likely will force Arias to make concessions in his path to reform.  How legite he will be in standing firm to de-regulation efforts while navigating through these stormy sea of opposition is difficult to predict. With an opposing party that via various delaying techniques have delayed the ultimate ratifications and implementations of the DRCAFTA agreement.¹²

According to the EIU: Gallup poll conduted in January 2008 indicated an increase in his public approval rating to 64% from 44% in October  2007.  This shows his public support but with a delaying Congress. Costa Rica deserves despite its positive developments a relatively high score as these drastic reforms are long past due¹³. (last of six to ratify)   à   5

•Generals in Power                  (2 pts)                               (6 points)

Costa Rica does not possess any military capability and therefore no military influence or risk associated with military special interest groups.  By Constitution the creation of a military branch is not allowed.  The fact that Costa Rica has leveraged US open door policy commitments so that in the need for military protection the US will support Costa Rica. Costa Rica has a Guardia Nacional and Policia that are meant to check and balance themselves due to the lack of military control¹⁴. A lack of military can posess a minor operating risk in case relations with Nicaragua, natural disasters and domestic crime worsens to the point the guardia nacional and policia combined are overwhelmed with restoring order.       

•War/Armed Insurrection       (4 pts)                             (20 points)

As mentioned above War or Armed Insurrection is a minor risk as good relations with the United States government and other countries would counter such developments.  A large percentage of US and European citizens permanently residing and many MNC corporations invested and operating in Costa Rica.¹⁵  MIGA & OPIC insurances being available for US and European companies creates an invisible shield of US (EU) protection politically and economically¹⁶.  Nicaragua’s long civil crisis still bears minor risks for Costa Rica businesses especially on the border to Nicaragua, in additions many Nicaraguans living in Costa Rica themselves represent a threat due to national prejudices to foreigners.  Costa Rica’s popularity and economic prosperity and international interdependence and good relations outweigh these risks for the most part.    

                                    à 4

Costa Rica’s Score             [50 points total] 

Social Factors

•Urbanization              (3 pts)               (3 pts.)

Costa Rica has many risks associated with its tourism and real estate rapid developments through the last decade. From personal experience, infrastructure developments and improvements have continuously been inadequate.  Despite an increase in social spending by Arias (1 billion USAID)¹⁷ in the first part of his term the infrastructure across the country lagging behind the investments.  Especially tremendously fast developing remote coastal areas bear tremendous risk due to lack of elementary social service infrastructure i.e. Hospitals, Gas Stations, Banks, Transportation networks (airports, paved roads).   The infrastructure developments that are going on themselves are done in poor quality and present a risk to become a catch up game that can never be won.  The global economic turndown might increase the opportunity for the infrastructure development gap to decrease.

•Religious extremism.     (0 pts)    (4 pts.)

The majority of Costa Rican’s are Christian and no religious extremism has been seen to level mentioning on this risk model.  Both Protestant and Catholic are widely presented and have not engaged in extremist activities against one another. This is mainly due to this common shared Christian believe system among all neighboring nations¹⁸. 

•Corruption      (4 pts)   (6 pts.)

According to Transparency International Costa Rica is ranked 46^th and has a CPI index of 5.0.¹⁹ Corruption is a major risk in Costa Rica as also clearly identified by the recent corruption charges in 2004 and beyond against the highest ranking political figures.  On the other side it is a positive developments how these corruption charges were dealt with resulting in jail court verdicts against two ex presidents²⁰. Trade Corruption practices are common to Costa Rica as I personally experienced importing goods myself. With CAFTA ratification, the government can now crack down illegal tariff bargaining and manage transparency in trade and commerce²¹. One does not have to engage in corruption as long as one knows the laws, and how to control the media and politicians in an persistent and active management approach to get things done in a time effective manner²².

•Ethnic Tension      (2 pts)    (4 pts.)

There are ethnic tensions as seen in history with the African/Jamaican population in the east that due to banana worker influx from Jamaica in the past still remain highly concentrated in the far east of the country.  Illegal immigration, especially from Nicaragua, present social tensions that present social risks especially as Nicaraguans present a large portion of the labor-force. According to the UNHCR Costa Rica Report “President O. Arias stated that emigration and refugee issues an important part of the national agenda”²³ and Costa Rica increasingly works together with the UN on various issues.

Costa Rica’s Score      [17 points total] 

Economic Factors

•Falling GDP per person    (X pts)   (8 points)

GDP growth rate is estimated at 6.8% in 2007. ²⁴

•High inflation      (X pts)    (5 points) 

•Capital flight       (3 pts)    (4 points)

According to a Victor A. B. Davis from the University of Oxford study²⁵: ” I use a range of estimation methods and four capital flight measures – Cline, World Bank Residual, Morgan Guarantee and Dooley. The results consistently support the research hypothesis: Post-war, inflation increases annual capital flight flows by about 0.005 to 0.01 percentage points of GDP. This effect is substantial.” With Costa Rica’s high inflation I rank Costa Rica operating risk fairly high. According to the World Bank.  Protecting Investors has decreased in international rankings according to the World Bank as well as starting a business. Please see ²⁶

•High and rising foreign debt as proportion of GDP (2 pts)   (6 points)

According to an article by Bloomberg²⁷ shows that moody rates Costa Rica with a Ba1 credit rating and Costa Rica shows general good prospects in their ability to service their debt²⁸.

Costa Rica’s debt is 46.6% of GDP in 2007.²⁹

source ³⁰

CIA economy report:

Reserves of foreign exchange and gold:  $4.114 billion (31 Dec 2007 est.)

Debt - external:     $7.422 billion (30 June 2007)

Stock of direct foreign investment - at home:  $8.669 billion (2007 est.)

Stock of direct foreign investment - abroad:  $491 million (2007 est.)

Market value of publicly traded shares:  $1.478 billion (2005)

I rate Costa Rica’s as manageable.

•Decline in food production     (3 pts)    (4 points)

Food production has declined strongly in the past in terms food production for export rising such as coffee and bananas and local demand food production such rice, beans, maize has decreasing. Domestic cereal demand increases imports for matching the supply. ³¹. Costa Rica ranks good in child-malnutrition international rankings³².  This risk especially now exemplified with the food crisis has been managed by a government support of 15 million USD to boost local food production in corn, rice and beans³³. CAFTA-DR agreements call for liberalization of food tariffs and carries socio-political risks for companies if not managed well in the future by the government. The risk is fairly high as a percentage of the country is rural and agricultural³⁴.

•Raw materials as high % of exports  (2 pts)    (6 points)

Trade Exports (2006 estimations) 8.198bilion USD integrated circuits, see  Intel’s³⁵ on Costa Rica, fruits, plants, medical equipment and electronic compponests and textiles³⁶ but have also diversified in the last 10 years, of which since its inception Intel on average represents 20% of all exports³⁷.

      Costa Rica’s Score      [33 points total] 
 
 

http://www.state.gov/r/pa/ei/bgn/2019.htm

Consider Safe by German Government ratings: http://www.bva.bund.de/cln_115/nn_372242/sid_A1A4A5FAD1EEF0B37C9157C7EFFBEFCF/Auslandsschulwesen/FinanzielleRegelungen__ADLK-BPLK/Richtlinie__VIII-Gesundheitsdienst/Gesundheitsgefaehrdende__Gebiete.html?__nnn=true