Front Matter

Front Matter Page

IMF Country Report No. 16/132

COSTA RICA

SELECTED ISSUES AND ANALYTICAL NOTES

May 2016

This paper on Costa Rica was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with Costa Rica. It is based on the information available at the time it was completed on April 25, 2016.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2016 International Monetary Fund

Front Matter Page

COSTA RICA

SELECTED ISSUES AND ANALYTICAL NOTES

April 25, 2016

Approved By:

Western Hemisphere Department

Prepared By Valentina Flamini, Anna Ivanova, Joyce Wong, Rodrigo Mariscal Paredes, Yixi Deng, Lennart Erickson, Iulia Teodoru, Jaume Puig-Forné, and Dmitry Plotnikov, with research support from Victoria Valente, and editorial support from Patricia Delgado and Misael Galdamez.

Contents

  • MACRO-FINANCIAL LINKAGES

  • A. Financial Conditions Index

  • B. General Equilibrium Model Simulations

  • C. Macro-Financial Baseline Projections and Risks

  • References

  • FIGURE

  • 1. FSGM Model Simulations

  • FINANCIAL SECTOR VULNERABILITIES

  • A. Financial System Structure and Trends

  • B. Bank-level Stress Test and Contagion Analysis

  • C. Inwards Spillovers from Stress in International Banks

  • TABLES

  • 1. Structure of the Financial System

  • 2. Financial Soundness Indicator Map

  • 3. Banking Sector Financial Soundness Indicators

  • 4. Stress Test Results

  • 5. Summary of Stress Test Results

  • 6. Spillovers from International Banks’ Exposures, Oct. 2015

  • FIGURES

  • 1. Interbank Network Analysis

  • 2. Stress Test Results

  • MONETARY POLICY STANCE

  • References

  • TABLE

  • 1. Neutral Interest Rate: Latest Estimates

  • FINANCIAL DEEPENING IN COSTA RICA

  • A. Financial Development: Where Does Costa Rica Stand?

  • B. The Potential for Raising Growth and Stability through Further Financial Deepening in Costa Rica

  • C. Conclusions and Policy Recommendations

  • FIGURES

  • 1. Financial Sector Development

  • 2. Financial Development Gaps

  • 3. Financial Institutions, Market Development, and Economic Growth

  • APPENDIX

  • I. Measuring Financial Development

  • FINANCIAL INCLUSION IN COSTA RICA

  • A. Introduction

  • B. Empirical Approach

  • C. Theoretical Approach

  • D. Conclusions and Policy Recommendations

  • TABLES

  • 1. Financial Inclusion and Fundamentals

  • 2. Determinants of the Financial Inclusion Gaps

  • FIGURE

  • 1. Financial Inclusion in Costa Rica and Emerging Markets

  • 2. Enabling Environment for Financial Inclusion

  • 3. Financial Inclusion Gaps

  • 4. Country-Specific Financial Constraints

  • 5. Impact of Reducing Financial Constraints on GDP and Inequality

  • APPENDIX

  • I. Financial Inclusion Indices

  • II. Model Characteristics

  • RECENT FISCAL DEVELOPMENTS AND MEDIUM-TERM SUSTAINABILITY

  • A. Recent Developments

  • B. Sustainability Gap and Recommended Adjustment

  • C. Authorities’ Plans and Fiscal Scenarios

  • D. Risks and Mitigating Factors

  • References

  • TABLE

  • 1. Central Government Fiscal Consolidation Measures

  • FIGURES

  • 1. Recent Fiscal Developments

  • 2. Long Term Sustainability

  • 3. Baseline and Adjustment Scenarios

  • 4. Sovereign-Financial Linkages

  • BALANCE SHEET ANALYSIS

  • References

  • TABLE

  • 1. External and Foreign Currency Positions

  • ANNEX

  • I. Net Intersectoral Asset and Liability Positions

  • SELECTED REAL SECTOR ISSUES

  • A. Potential Output Estimates

  • B. Impact of Intel Exit

  • C. Real Sector Spillovers

  • References

  • TABLE

  • 1. Potential Output Growth and Output Gap Estimates

  • BOX

  • 1. Methodologies for Potential Output Estimates

  • FEMALE LABOR FORCE PARTICIPATION IN COSTA RICA

  • A. Introduction

  • B. Some Stylized Facts

  • C. Evidence from Microdata

  • D. Cross-Country Evidence

  • References

  • TABLES

  • 1. Regression Results Using Microdata

  • 2. Cross Country Regression Results

  • ANNEX

  • I. Bank Heat Maps