The Big Idea
Costa Rica | Slow progress
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The relative stability in Costa Rica sovereigns suggests all is well with the country’s International Monetary Fund program. Reassurance from IMF staff after the recent mission reaffirms the IMF anchor, thanks mostly to Costa Rica’s outperformance on fiscal targets through September. But it’s still important to monitor progress on the country’s reform agenda. The approaching election cycle could add complications to Costa Rica’s economic program and IMF relations next year. Stay neutral on Costa Rica but closely monitor progress on public employment reform and the political risks of the approaching February 2022 elections.
Discussion of public employment reform has gone quiet through the past few weeks of legislative review of an 800-page revised draft proposal. There was finally a breakthrough in the last week week with committee approval and submission to the legislative floor for further review. This is not a fast-track process for a democratized country about to enter an election cycle. There does not seem to be the same momentum on this second round to get legislative approval and address the latest pressures from the IMF. The public employment reform represents critical savings for a structural fiscal deficit and a structural benchmark of the current IMF program. Is there enough momentum? The logistics of the second-round approval process should theoretically be easier.
It is worth remembering that the first-round floor approval in mid-June was not finally reviewed by the constitutional court until mid-September. This was three months on top of many months of preparation and anticipation. It suggested apparently flexible legislative and judiciary deadlines and no respect for the IMF deadline at the end of May. The second round of debate should be easier after making the suggested corrections from the constitutional court; however, the obstructionist opposition from PUSC Pedro Munoz suggests potential glitches and requires a more activist approach from the Alvarado administration. It is also worrisome that the legislature has prioritized vehicle tax cuts as opposed to the revenue-enhancing measures in the IMF program such as luxury home taxes, lottery taxes and so on. It is unclear whether there is sufficient momentum to get reform into yearend for a first-floor vote followed by constitutional court review then a second floor vote.
The market should remain focused on the undefined IMF negotiations after the virtual first review that ran September 22 to October 6. The markets focused on the headline IMF endorsement “of significant progress” and shrugged off the note that “discussions will continue in coming weeks“ with no calendar date for the IMF board review. This seems open-ended with IMF board approval likely depending on progress on the public employment reform.
Costa Rica’s fiscal performance should remain the anchor with performance criteria more relevant for the first review and perhaps the structural benchmarks increasingly relevant for the next reviews. The fiscal performance continues to offer a cushion. The country’s outperformance on targets mostly came from one-off accounting benefits including the SOE surpluses. The cumulative primary fiscal surplus of CRC100.5 billion far exceeded the -390 billion deficit performance criteria in July and the cumulative CRC98 billion surplus also far exceeds the September indicative target deficit of -480 billion.
Despite these benefits, the fiscal targets might become increasingly at risk for no progress on the revenue-enhancing measures. This is where the public employment reform could provide some unexpected savings. The Planning Ministry assumes 0.9% of GDP in savings in the first year that exceeds the 0.4% in forfeited tax revenues and provides some budgetary flexibility for the fiscal targets next year and the recent slippage on reduction in auto taxes.
Even if there is progress on the public employment bill, Costa Rica is probably entering a more volatile phase of the IMF program ahead of presidential elections next year. The legislative support for the public employment reform should provide a preview on broader political support for the IMF program through an election cycle.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
