5 Key Reforms to Improve the Investment Grade in Costa Rica

Costa Rica’s economic future is at a crossroads, with its investment grade in the balance. The country’s positive risk ratings, which have been stable over the past three years, could decline without structural reforms. A higher investment grade in Costa Rica is crucial for attracting foreign investment, creating jobs, and improving the business climate. With better ratings, Costa Rica would benefit from lower interest rates and a more favorable environment for entrepreneurs. To achieve this goal, experts emphasize the need for urgent changes in several key areas that would directly impact the country’s economic outlook.

Preventing Loopholes in Fiscal Reform

One of the most pressing changes required to improve Costa Rica’s investment grade is addressing potential loopholes in the fiscal reform approved in 2018. While this reform is a step in the right direction, concerns remain that it may not be fully effective in the long term. Experts recommend preventing future loopholes that could undermine the fiscal discipline necessary to maintain the country’s economic stability. A key part is ensuring that the budgetary reform remains intact and that no additional exemptions or loopholes could undermine the system’s integrity.

Allowing the Government to Issue Debt Abroad Without Legislative Authorization

Another significant change that could directly impact investment grade in Costa Rica is granting the government more flexibility in managing its debt. Currently, Costa Rica must seek legislative approval to issue debt abroad, a process seen as inefficient and detrimental to the country’s financial credibility. Experts argue that eliminating legislative authorization for external debt issuance would allow the government to respond more quickly to international markets when favorable opportunities arise, such as exchanging expensive debt for more affordable options.

This is essential as the Ministry of Finance and the Central Bank make their financing plans public and the deputies approve the budget. “Requesting Congressional approval only delays the process of entering international markets when opportunities arise to swap expensive debt for cheaper debt,” emphasized Róger Madrigal, President of the Central Bank. Swift access to international financial markets would improve Costa Rica’s fiscal position and boost confidence among investors, which is crucial for enhancing the country’s investment grade.

Modernizing Regulations to Improve the Business Climate

The third area of focus to enhance the investment grade in Costa Rica is modernizing the country’s regulatory framework. As the global business environment becomes increasingly competitive, Costa Rica must streamline its regulatory processes to reduce bureaucratic red tape and facilitate business operations. Experts emphasize the importance of regulatory modernization in supporting local entrepreneurs and foreign investors. By simplifying procedures and making it easier for companies to operate, Costa Rica can attract more investment and foster an environment that enables businesses to thrive.

Moreover, a more competitive infrastructure is required, including investment in the modernization of roads, ports, and telecommunications, to attract foreign investment and enhance productivity. Additionally, there should be a focus on technical and university education aligned with market needs, thus attracting investment in high-value-added sectors,” said Mónica Segnini, former president of the Chamber of Exporters. A modern regulatory framework, combined with improved infrastructure and education, would make Costa Rica a more attractive destination for foreign investment, enhancing its investment grade.

Building Competitive Infrastructure for the Future

Investing in competitive infrastructure is another crucial step in enhancing the country’s investment grade. Infrastructure is central to attracting investment, especially in industries that rely on efficient transportation and communication networks. Costa Rica needs to invest in modernizing its roads, ports, and telecommunications networks to enhance productivity and create a competitive business environment on a global scale. These infrastructure improvements would benefit foreign investors and support local businesses, enabling them to grow and increase their productivity.

Investing in Education to Align with Market Needs

Another aspect of Costa Rica’s competitiveness lies in its education system. Experts emphasize the need for a stronger focus on technical and university education more closely aligned with the job market’s needs. Costa Rica can attract investment in technology, biotechnology, and advanced manufacturing by providing a skilled workforce that meets the demands of high-value-added sectors. A highly trained workforce would contribute to higher productivity and innovation, which would help Costa Rica strengthen its position in the global economy and improve its investment grade.

The Role of Government and Congress in Driving Reform

The current government, led by President Rodrigo Chaves, has made several proposals to address the issues impacting investment grade in Costa Rica. However, much of the responsibility also lies with the legislative branch. In recent statements, President Chaves has blamed Congress for the lack of structural reforms, accusing lawmakers of failing to approve necessary changes.

“It’s incredible that in all the countries in the world, there are governments that want to squander resources, and here, it’s quite the opposite; it’s the Congress, sending and trying to approve projects that generate more spending,” Chaves said. This frustration underscores the country’s political challenges in implementing the reforms necessary to achieve an investment-grade rating.

Shared Responsibility Between the Executive and Legislative Branches

Despite the blame placed on Congress, experts argue that the executive and legislative branches should share responsibility for achieving investment-grade status in Costa Rica. While the government proposes reforms, it is ultimately the Legislative Assembly’s responsibility to approve them. Therefore, a collaborative effort between the two branches is necessary to implement structural reforms that address systemic problems in Costa Rica’s economy.

“I believe responsibility is shared because the executive proposes the measures, and the Legislative Assembly approves them. These structural reforms would address a systemic problem; otherwise, it is impossible to move forward with the necessary state reform, and citizens should not have to finance an inefficient state,” said Mónica Segnini, former president of the Chamber of Exporters.

The Need for Fiscal Reforms and Legislative Action

Among the proposals presented by President Chaves’ government are the modernization of the income tax, changes to the methodology for calculating the vehicle property tax, and the elimination of tax exemptions. Additionally, the government seeks to expand the Ministry of Finance’s powers to enhance tax collection. It aims to eliminate the requirement for congressional approval for the government to issue external debt or finance itself through international organizations. These reforms, if enacted, would help improve Costa Rica’s fiscal position and enhance its investment grade.

However, many of these proposals are still pending review by Congress. As the country faces increasing pressure to implement these reforms, experts emphasize the importance of timely action. “99% of what President Rodrigo Chaves says is false or simply a way to get people fighting for other purposes. This is not the responsibility of the Legislative Assembly; it is that of an Executive that has failed to push through more fiscal reforms. It’s easy to blame others when you don’t push the necessary reforms. It’s a political process that won’t be easy, as many irresponsible individuals in Congress won’t want to move forward on these issues. Still, we must strive to do so,” said José Luis Arce, economist at FCS.

By implementing these strategic changes, Costa Rica can improve its investment grade, attract more foreign investment, and set itself on a path toward sustained economic growth. Collaboration between the government and Congress and focusing on regulatory modernization, infrastructure development, and education will be crucial to achieving these goals. The investment grade in Costa Rica is at stake, and the time to act is now.