Costa Rica: Selected Issues and Analytical Notes

Costa Rica: Selected Issues and Analytical Notes

Abstract

Costa Rica: Selected Issues and Analytical Notes

Balance Sheet Analysis1

This note provides an update of the balance sheet analysis (BSA) of the Costa Rican economy presented in the 2014 Article IV report.2 The net external debtor position of the economy increased further in 2014, but this was again driven by continued FDI flows to the private sector, implying limited external risks. While the country maintains a net external creditor position excluding FDI liabilities, this net creditor position continued to fall as a result mainly of external debt issuance by the central government. Risks from currency mismatches appear limited at the aggregate sectoral level, although unhedged borrowers in FX present key risks. The rising trend in household debt deserves monitoring.

1. External risks remain limited given the country’s net external creditor position excluding FDI liabilities, although this has been shrinking over the last years. Costa Rica has a total net external debtor position of about 42 percent of GDP in 2014, up from 35 percent in 2013, but this largely reflects continued increase in large FDI liabilities, which are a sign of a strong capital structure at the country level. Excluding FDI liabilities, the economy has a small net creditor position of about 3 percent of GDP, implying limited risks of a capital account crisis (Figure 1 and Table 1). At the same time, the net creditor position of the economy continued its steady decline with an additional fall to 3 percent of GDP, from 4 percent in 2013 and 8 percent in 2010. While increased reliance on external financing by the financial sector was an important driver of the decline in the economy’s net creditor position excluding FDI from 2010 to 2013, the additional decline in 2014 was driven mostly by continued external debt issuance by the central government (Figure 2).

Table 1.

Costa Rica: External and Foreign Currency Positions

article image
Sources: Banco Central de Costa Rica, and Fund staff estimates.

Excluding net FDI position.

A07ufig1

Costa Rica. Net External FDI and Debt Positions

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Sources: Central Bank of Costa Rica and Fund staff estimates.
A07ufig2

Costa Rica. Net External Debt Position by Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Sources: Central Bank of Costa Rica and Fund staff estimates.

2. Risks from currency mismatches appear limited at the aggregate level, but unhedged FX borrowers in the private sector remain a key risk. Currency mismatches by sector were little changed in 2014. The net external creditor position of the public sector declined slightly from 3½ percent of GDP in 2013 to 2 percent of GDP in 2014, as a result of continued external bond issuance of the central government, as well as a small decline in central bank reserves after the exchange rate volatility of early 2014 (Table 1).3 The net external debtor position of the financial sector excluding FDI increased further in 2014 as banks continued to borrow from abroad, but the increase was at a more moderate pace, rising to 6% percent of GDP, from 6½ percent in 2013 and 1 percent in 2010. The financial sector, however, remained a net foreign currency creditor—with a creditor position of 1½ percent of GDP excluding FDI—as the sector continued to channel the additional external financing into domestic credit in FX. While the non-financial private sector maintained its net FX creditor position at about 5 percent of GDP—with foreign assets held by the sector continuing to offset the sector’s net FX debtor position vis-à-vis banks—risks from the large proportion of unhedged borrowers in the sector remain a key risk for the financial sector (AN II).

3. The household sector has experienced the largest increase in leverage during the last decade. Higher frequency data on bank credit by sector shows that the household sector has been the main driver of the sharp increase in bank credit since 2004. Bank credit to the private sector increased from less than 30 percent of GDP in 2004 to almost 55 percent in 2015, with credit to non-financial corporate (NFCs) increasing from 11 to 17 percent of GDP, and credit to households (HHs) increasing from 20 to 35 percent of GDP (Figure 3). The bulk of the increase in credit to households has been in domestic currency (Figure 4), with the share of credit in FX relative to total credit to households falling appreciably in 2004-09, and remaining fairly stable around 30 percent since then (Figure 5). In contrast, the share of credit in FX to the corporate sector, currently about 65 percent of total credit to corporate, has increased significantly from the lows reached in 2010.

A07ufig3

Credit in FX

(in percent of total)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Source: National authorities and IMF staff estimates.
A07ufig4

Bank Credit to the Private Sector

(in percent of GDP)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Source: National authorities and IMF staff estimates.
A07ufig5

Bank Credit to the Private Sector

(cumulative increase, in percent of GDP)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Source: National authorities and IMF staff estimates.

References

  • Allen, Mark, Christoph Rosenberg, Christian Keller, Brad Setser and Nouriel Roubini, 2002, “A Balance Sheet Approach to Financial Crisis,” IMF Working Paper 02/210 (Washington: International Monetary Fund).

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  • Amo-Yartey, Charles, 2012, “Barbados: Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities,” IMF Working Paper 12/31 (Washington: International Monetary Fund).

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  • International Monetary Fund. (2015) “Costa Rica Selected Issues and Analytical Notes,” Analytical Note VII, Section B on Balance Sheet Analysis, IMF Country Report No. 15/30.

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  • Mathisen, Johan, and Anthony Pellechio, 2006, “Using the Balance Sheet Approach in Surveillance: Framework, Data Sources, and Data Availability,” IMF Working Paper 06/100 (Washington: International Monetary Fund).

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Annex I. Costa Rica: Net Intersectoral Asset and Liability Positions

Costa Rica: Net Intersectoral Asset and Liability Positions, 2014

(In percent of GDP)

article image
Sources: Banco Central de Cosia Rica, and staff estimates.

Costa Rica: Net Intersectoral Asset and Liability Positions, 2010

(In percent of GDP)

article image
Sources: Banco Central de Costa Rica, and staff estimates.
A07ufig6

Costa Rica: Gross Financial Assets and Liabilities of Economic Sectors

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 132; 10.5089/9781484362693.002.A007

Sources: National authorities; and Fund staff estimates.
1

Prepared by Jaume Puig-Forné.

2

Full intersectoral data required for the BSA analysis are currently available from the central bank up to end-2014. The BSA analysis in the 2014 Article IV report was based on intersectoral data as of end-2013 (see IMF (2015)).

3

More recent data shows that this trend continued in 2015, as the new issuance of external debt by the central government outpaced the renewed accumulation of international reserves by the central bank.

Costa Rica: Selected Issues and Analytical Notes
Author: International Monetary Fund. Western Hemisphere Dept.