FROM THE ECONOMIST INTELLIGENCE UNIT

Outlook for 2009-10

Political and social pressures are set to rise in Costa Rica, given the economic downturn, which is bringing increased unemployment, particularly in export-oriented manufacturing sectors.Economic policy will focus on measures to support economic growth during the global downturn. Economic stimulus packages focusing on employment creation are expected to be passed in early 2009.We have made further downgrades to our forecasts for the fiscal deficit, to 3% of GDP in 2009 and 2.7% in 2010 (from 1.8% and 1.7% in our December report), owing mainly to customs-related falls in revenue.We now expect global growth at purchasing power parity to fall to 0.2% in 2009 (previously 0.7%), picking up to just 2.4% in 2010. Measured at market exchange rates, growth will contract in 2009 for the first time in 18 years.The downward revision to our global forecasts have led us to make a further adjustment to our forecast for Costa Rican growth, which will slow to 1.5% in 2009 (previously 1.9%), before recovering to 2.3% in 2010 (down from 2.6%).We have made a downward revision to our 2009 forecast, following a sharper-than-expected fall in December inflation. We now forecast an end-2009 rate of 7.2%, down from 9.5% in our December report.After a sharp deterioration in 2008, to 9.9% of GDP, the current-account deficit is forecast to narrow in 2009-10, to 4.1% of GDP in 2009 rising to 4.5% in 2010.

Monthly review

A possible challenge to Otton Solis as the opposition's presidential candidate in the February 2009 election might come from Epsy Campbell, which would require the PAC to hold its first ever leadership vote.The DR-CAFTA came into operation on January 1st, enabling immediate cuts on trade tariffs between the signatory countries and the liberalisation of Costa Rica's telecommunications and insurance sectors.The government has launched a US$117.5m (0.4% of GDP) programme (funded from the 2008 fiscal surplus) to capitalise state banks with the aim of stimulating credit to small and medium enterprises and the housing sector.A fall in customs revenue in November and a sharp decline in growth of sales tax revenue has brought concern over the fiscal accounts for 2009-10.Slowing investment brought down third-quarter GDP growth to 3.1% year-on-year. Although revisions for earlier in the year have not been published, the Central Bank has released preliminary data showing full-year growth of 3.3%.Import growth drove a widening of the third-quarter current-account deficit.