by Rod Hughes

The Legislative Assembly’s coalition of 38 deputies voted “yay!” yesterday after the second reading of the final of 13 bills needed to bring Costa Rican laws into accord with provisions of the Central American Free Trade Agreement (CAFTA). Now the country is officially a member of the trade pact on which President Oscar Arias bet so much of his political capital.

The two-thirds majority consisting of the National Liberation, Social Christian Unity and Libertarian Movement contingents in the unicameral congress capped a tough battle and the longest political soap opera in recent memory. The Citizen Action Party (PAC) maintained its opposition to the end after fighting a year and a half rear guard campaign that often held up votes on other issues.

Granted, some housekeeping measures are still to be performed, but the titanic struggle is over and the Executive Branch has until Dec. 31 to accomplish them. Three regulations relating to foreign trade have to be signed by the President and various ministries, including Foreign Trade and the Environmental Ministry, have to reform some rules. No difficulties are expected but, where bureaucracy is concerned, one never knows.

The jubilation on the Assembly floor yesterday may have masked how close run the whole affair had been, with only a bare, delicate coalition of 38 votes staving off the nullification of the plebecite last November, Costa Rica’s first, that approved CAFTA by a narrow margin. PAC’s opposition to the trade pact had made itself felt so definitely that Arias had to plead for two extensions on the deadline to join the other nations.

The final bill to clear the way was one that had not been expected to be especially controversial: the copyright and trademark law. But after it had been passed, just before the first extension deadline was about to run out, a constitutional review of the Supreme court found that on one provision the lawmakers had illegally cut corners.

The other CAFTA member nations graciously granted another three months, a generous concession considering that all of them had quickly ratified the treaty, some within days after signing. In the U.S. Congress, the measure had gone through after little debate despite opposition of the Democrats who were then in the minority.

PAC and a couple of socialist allies mainly objected to two of the laws needed to implement the treaty: one freeing the country from the monopoly of the government insurance company INS and the other opening the telecommunications market and breaking the ICE monopoly over the Internet access. Ironically, they were not the last to be passed, due to the procedural error on the copyright law. But PAC’s obstructionism cost them a lawmaker who withdrew from the party since, she said, the people had spoken in the referendum.

Some observers, especially foreigners, were puzzled by PAC’s fierce opposition and the pro-CAFTA determination to pass it at the expense of often urgent legislation. The English-language weekly The Tico Times editorially scratched its head and said, essentially, “What’s all the hoopla about? It’s just a trade treaty…”

But that ignores the ideological struggle going on between PAC and the President. Arias had taken his left-of-center National Liberation party into the center, even, some dissident members complained, right of center. While traditionally the party had not been hostile to business, it had been definitely socialist. That left the doctrinaire PAC under Otton Solis to fill the vacuum on the left, a place on the political spectrum that would have been, in the 1950-80 era, occupied by a handful of communist lawmakers.

Leglislative Assembly rules do not admit filibustering but PAC used something against the 13 CAFTA laws a tactic nearly as effective. The party whips tried to strangle those bills in their cribs by proposing an avalanche of amendments. Whether this tactic will backfire on the party and its almost inevitable presidential candidate, Otton Solis, in the 2010 elections remains to be seen, but it will likely be an issue to be exploited by their adversaries.

by Rod Hughes

The Mexican appliance manufacturer Mabe (pronounced Mah-bay) announced yesterday that it was laying off workers at its Heredia plant. Mabe acquired controlling interest in the Costa Rican Atlas company that made and sold appliances throughout the region last February. The firm did not say how many workers would be affected.

The Heredia plant turns out home appliances such as electric stoves, refrigerators, air conditioners and microwave ovens, employing 1,350 workers. Company spokesman Diego Artinano, blamed world economic uncertainty for a drop in sales that made the cutback necessary. Artinano added that the firm had to adjust its production to conform to a “perceptible contraction” in its export sales.

The announcement comes in stark contrast to another large manufacturer here, Intel. That company announced last month the launching of new products and investments in research in which this country plays a role. But, as a business writer for The Tico Times observed recently, Intel has never been a company to swim with the mainstream.

by Rod Hughes

The Arias Administration has decided to go through the Legislative Assembly to obtain extraordinary funding for the nation´s two largest state-owned banks. President Oscar Arias announced last week that he would use the budget surplus to inject $50 million each into the reserves of Banco de Costa Rica and Banco Nacional to loosen up credit.

The administration had at first contemplated releasing the funds by decree but legal advisors counseled that the Comptroller General’s Office, the budget watchdog agency, would declare that method illegal. The President felt some urgency in getting liquidity to the banks but Finance Minister Guillermo Zuniga told the daily newspaper La Nacion that he expected the special budget measure to speedily pass the Assembly.

He told the paper that the bill would be written Monday and Tuesday and signed today, ready to send over to the lawmakers Wednesday. His Deputy Minister for income, Jenny Phillips, will be the one actually carrying the draft since he leaves for a visit to Honduras Wednesday but promised to return in time to meet with the Financial Affairs Committee to explain the bill next week.

When Arias made his announcement of the credit loosening measure last week, businessmen heaved a long sigh of relief. Many businesses, especially the small ones, often carry on normal operations with borrowed funds. Some export firms complained that they could not fulfill current orders without loans, certainly a serious situation for the overall economy, which has suffered a worsening trade deficit since the beginning of the second trimester this year. Layoffs threatened and are being felt in construction trades.

The credit crunch could not have come at a worse time. The financial woes of the nation’s biggest trading partner, the United States, have affected not only that country’s purchasing of local goods but also worsened the trade climate worldwide, so that opening of alternative markets is increasingly difficult. It has also made negotiations with the European Union more laborious as this country seeks a free trade treaty with that market.

But despite continuing gloomy news from up north, this country finds itself in better shape than many countries in Latin America. First, in the last six years, it retired 43% of its foreign debt. Second, it finished last year with a budget surplus. The Central Bank also began the year with a healthy dollar reserve, enough to keep the country’s currency from being the plaything of money market speculators taking advantage of the unstable world financial climate.

The downside of using the budget surplus to prop up credit, is that it dashes hopes of using those funds next year for social programs. That fond hope earlier this year, coupled with low unemployment, raised hopes that the administration could lower the poverty level, a situation that showed encouraging improvement last year. Now prospects at even maintaining last year’s provery and unemployment levels are grim.

President Arias’s original plan did not include a third state bank, Banco Credito Agricola de Cartago, because close financial advisors deemed that bank sufficiently funded. A development bank, it receives funds already from the regular budget. However, Zuniga told La Nacion, that bank will receive a modest injection of extra funds as well. Wednesday’s edition of La Nacion reported that the administration has $17.5 million earmarked for that bank.

Meanwhile, the Central Bank intends to sell fewer dollars and, indeed, has cut back in the past four weeks. An important factor was the lessening of the drain of dollars due to the decline of world petroleum prices. The skyrocketing fuel price was the main villain in the worrisome trade balance figures earlier this year.

by Rod Hughes

The Supreme Court’s Constitutional Chamber has ruled that private electricity generating companies in Costa Rica may not sell energy to the rest of Central America. Private power companies produce 10% of the country’s power, the national power company, ICE, 90% So, although a new law breaks ICE’s monopoly on the telecommunications market, its dominance of electricity is still complete.

A group of businessmen challenged the law making ICE the sole buyer of power within the country but the panel of judges rejected their arguments on constitutional grounds. Some 35 private generators are therefore left out of the electrical market treaty with the rest of Central America. Private power companies began to grow rapidly during the 1990s.

Meanwhile, local electric bills are to go up 9.4% soon. The country’s chief regulator, Fernando Herrero, approved the rate hike yesterday. The raise did not come easily for ICE which has been battling reluctant rate regulators for several months.

by Rod Hughes

Sometimes when one reads a news item about government spending, one asks, “Where is the money coming from?” The daily newspaper La Nacion today answered that question as far as the injection of money into Costa Rica’s state banks to loosen up credit to private enterprise: The budget surplus that built up last year will go to this end.

The only question about the $100 million infusion is how it can be done legally. Will it be by Presidential decree or must it come from a special budget measure in the Legislative Assembly? The latter would be easy because next year’s budget is currently under debate by lawmakers and must be approved, according to the constitution, by Nov. 30.

The nation’s two largest banks, Banco de Costa Rica and Banco Nacional, slowed credit growth in a cautious reaction to the world economic uncertainty. This brought cries of pain from Costa Rican business and industry that companies could not grow without loans. Some export firms complained that they could not even fulfill orders without infusions of liquidity.

Then, earlier this week, President Oscar Arias turned a sympathetic ear to these outcries and promised $50 million to each bank to give officials courage to loosen the purse strings. This is hardly a princely sum on a national basis but should be enough to avoid a business meltdown. Construction, last year the strongest sector of a hearty economy, was especially hard hit by credit tightening with many projects frozen and most new projects unable to get off the ground. The effect on unemployment figures boded to be devastating.

Although Finance Minister Guillermo Zuniga said he is still unsure whether the budget surplus or an international bank loan, it is comforting to know that Costa Rica has funds to aid itself. Some of the most powerful international lending institutions, aware of the effect world marketing and financial difficulties are having on Latin American nations, have set aside funds for loans to these small economies. Many of those countries, especially in Centra America, are vulnerable, with large debts.

No matter what the ultimate funding source, the need is immediate and La Nacion financial writer Marvin Barquero put forth a strong case for transferring the funds by decree. Inevitable delay will result in getting the money into the banks if the lawmakers are to go through their laborious procedure.

Another important consideration, Zuniga pointed out, is the effect the credit loosening will have on inflation. Tight credit means a cooling of the economy with a depressing effect on inflation while encouraging loans means far less unemployment. In theory, it is a tradeoff.

But President Arias, a graduate of the London School of Economics, appears to be willing to run the inflation risk. Zuniga gave one indication of why: world petroleum and food prices have been declining in the past few months, and they were the main inflationary villains earlier this year. Also, the country’s internal economy has been cooling, relieving the pressure to raise prices. Even bad economic news has its bright side.

by Rod Hughes

President Oscar Arias yesterday announced that he is injecting more funds into the nation’s two largest state banks, Banco de Costa Rica and Banco Nacional, to give them more liquidity and to allow them to ease credit. Private enterprise, especially the vital construction sector, has complained that credit restrictions have resulted in some projects shutting down and others to be frozen before they could begin. (See previous blog.)

The move comes a scant week after Central Bank president Francisco de Paula Gutierrez defended the policy of tightened credit in order to protect the economy. But the new Central Bank reulation would allow an entity to obtain credit based on 30% of its projected profits or 30% of long term profits.

The new credit measures are somewhat simlar to measures ordered by President George W. Bush in the United States, in order to increase liquidity. Costa Rica’s credit policy has been a cautious one always with one eye on the global economic situation. But the financial meltdown in Costa Rica’s biggest trading partner have caused not only a worrisome balance of trade deficit but a slowing of foreign investment.

by Rod Hughes

The Union of Chambers of Private Enterprise in Costa Rica has issued a public protest against tightened credit. Manuel Rodriguez, its president, protested that the new credit policies of state-run banks are a brake on the forward advance of the 44 companies and six associations of private businesses the Union represents.

Both the Central Bank and public financial regulatory entities reacted to the declaration with astounded denials, the daily newspaper La Nacion reported this morning. National Finance System Supervisory Council chief Alberto Dent confessed to being “surprised” and stated flatly that his agency “has taken no decisions to limit credit.”

Central Bank President Francisco de Paula Gutierrez responded, “The reduction of internal credit growth is not the result of new limitations on the part of the Central Bank, or (the Council) or Sugef (another regulatory body) but rather, principally, the past accellerated expansion of credit and restrictions established by the world financial situation.”

Dent attributed the Union of Chambers statement to “citizen insecurity” in a troubled and uncertain international economic climate. Although unavailable for comment on the recent statement, Sugef superintendent Oscar Rodriguez told the daily paper last week that, “credit hasn’t been stopped. It has grown some 40% to 50% in past years and the first half of this year grew 30% which is quite robust.”

Update: Gutierrez, interviewed by La Nacion the day after this item was written, clarified the actual credit growth figures. He said that the credit growth was only 17% as of September, it was desireable for an economy that will only grow some 3.5% this year and suffer an inflation rate of 14-15%.

But he admitted that recently a slowing in the construction sector has caused 20,000 to become unemployed and resulted in fewer applications for credit. Construction Chamber president Juan Jose Castro concurred with this assessment, estimating that for every 10 building projects, two have been halted for lack of national or international financing.

Foreign Trade Minister Marco Vinicio Ruiz also expressed concern in credit cutbacks’ effects on exports. Ruiz, speaking recently at a trade-related gathering, warned that “it appears that the banks have not been careful not to hurt the goose that lays the golden eggs.” He warned that credit cutbacks would result in layoffs and hamper companies that lost ground now in re-entering the fray again when the markets begin to improve.

Monica Araya, president of the Exporters’ Chamber, was even more emphatic, warning that credit limits effect mainly small and medium sized export firms. “The majority of these ‘pigmies’ are already in debt and have signed international contracts and can’t obtain credit because it is blocked,” she told La Nacion. “How can they pay their old debt if they can’t generate new income or employment?” she asked.

The export promotion agency Procomer announced this week that export companies in this country employ more than 409,000 persons. Of these, 212,171 are in the industrial sector while nearly 189,000 are in agriculture, according to the 2008 Procomer census. Another 8,400 are in livestock and fishing export.

Meanwhile in Washington D.C., the U.S. Federal Reserve has announced a two-day meeting to consider a lowering of credit by 1.5% to try to jump start the ailing economy. The Fed, the equivalent of Costa Rica’s Central Bank, lower the prime rate half a point Oct. 7 in conjunction with six industrial nations’ central banks in a concerted effort to stave off an even worse economic downturn in world money markets.

by Rod Hughes

ICE, which provides the vast majority of the country’s electricity, is back arm twisting the untility rate regulators again. The power company announced that if ARESEP, the regulating agency, does not grant them the whopping 46% rate hike previously solicited, the nation should prepare for programmed blackouts this dry season.

The state-owned company claims that the current rates do not allow ICE to buy diesel fuel to run backup generators. During the dry season, lower water levels in the country’s two main hydroelectric dams do not produce sufficient electricity for the demand. ICE president Pedro Pablo Quiros warned that if the funds run out to buy diesel “we’ll have to go for Plan B.”

How that squares with his claim that removing the 100-colon tax on the fuel from ICE’s cists would result in a 6% lowering of rates (see previous blog) is anyone’s guess. But Quiros claims that his engineers have prepared a schedule of planned power outages.

ARESEP was once known as a rubber stamp agency that never met a rate hike it didn’t like, but in the past two decades has found its backbone, demainding proof from petitioning agencies and companies of the necessity to raise rates. ICE’s first petition for the rate hike was turned down when the regulators suggested that ICE take out loans to tide it over during the dry season.

Meanwhile, the Oct. 10 Tico Times reported that 28 new windmills have been raised near the Guanacaste province town of Bagaces, the first of a projected 55 towering, three-blade propeller generators projected tio produce 245 gigawatts of energy, 3% of the 9000 gigawatts currently consumered last year.

The Wind Power Project of Guanacaste (PEG) will double wind-generated electricity when it goes on line in 2010. Four such wind installations are already producing power in Tilaran, 40 kilometers to the east of PEG. Reporter Devon Magee wrote that the project will cost some $110 million and 28 of the towers are expected to be in operation is January, according to Jorge Dengo, president of PEG. The experienced Juwi, a Ferman renewable energy company, is the contractor.

by Rod Hughes

After ending last year with a comfortable budget surplus aided by more efficient tax collection, the Arias Administration now faces falling income problems caused by the world economic crises. In fact, Finance Minister Guillermo Zuniga admits that the government and the Central Bank are both considering applying to international bodies for loans to tide the country over.

Foreign trade is down, causing balance of payments woes not helped by the continuing high price of petoleum, even though the price per barrel has dropped in recent weeks. Such bodies as the World Bank and the International Monetary Fund have announced special lines of credit to access emergency funds set aside for just such problems.

“The idea is to obtain those lines of credit to give liquidity in hard money in case access to credit hardens,” explained Zuniga. “However,” he added, “Loan conditions and interest rates that the country would have to accept are not yet defined.” He and Central Bank president Francisco de Paula Gutierrez have already journeyed to Washington but only to meet with international fund executives but did not get down to details.

While such measures would ease liquidity problems, taking out such loans would also sadden the administration which entered this year with the distinction of having slashed the national debt.

Meanwhile, one economic indicator bodes ill. The sale of imported used cars, a lucrative business as late as early this year, has fallen victim of uncertainty in the world economic outlook and high fuel prices, reported Friday’s La Nacion. Alfonso Hernandez, an 11-year veteran in the used car business in the town of Grecia, told the newspaper that his business is nearly frozen, while normally he sells five or six cars per month.

Fernandez says he is getting out of the trade, selling his last units and importing no more. “The psychological part is an influence,” he told a reporter, “but cuts in credit and higher interest rates also affect the market.”

by Rod Hughes

Like the United States (but without feelings of panic) the economic news today in Costa Rica is a mixed bag. Now is the time the government and labor unions begin negotiations on salaries and, to the surprise of no one, the unions will ask hikes, the government will counter with a much lower figure. The resulting compromise will please no one completely.

The government controls such private enterprise activities as minimum wages and degree of adjustment for inflation. This year the unions are calling for an across-the-board increase of 9.08% on salaries with starting salaries going up 16.08% to go into effect the first six months of 2009. This was the opening shot in the battle to be waged within the National Salary Council. the government counter offer has yet to be heard.

This, as the daily paper La Nacion points out, would result in an overall increase of 11.08% to 16.08%, depending on the category of employment. The paper used the example of a coffee harvestor who would receive a hike of 14.08%. Edgar Morales of the ANEP union says the labor sector proposal would benefit most thoses to earn the least.

In other business news, the Central Bank reported that production in August showed a modest 3% gain over the same month of 2007 despite worsening financial conditions in the world. True, the accelleration in production is down from 2007, when it rose 8% overall from the year before. Construction continued to lead the economy, rising more than 11% but still showed a decline in growth from last year.

Less hopeful was the drop of $20.65 per quintal (a 46-kilo sack of dried beans) of coffee on the New York commodity market last Friday. Coffee closed out at slightly more than $113 per quintal. Costa Rica is somewhat cushioned from the regular price fluctuations in that its high mountain grinds are much in demand by gourmet brewers such as Starbucks and other customers. But a belt-tighening among cafeine addicts among the middle class in the United States could hurt this market as well.

Even Costa Rican debt bonds have been a victim of the uncertain world financial situation. The greatest loss were bonds with a term ending in 2020, from 132% last May to 118% Oct. 10. The largest part of that decline was from Oct. 7 to Oct. 10 when those bonds lost 10 percentage points. Besides the world financial crisis, some investors might be aware that the national economy is feeling the pinch of petroleum prices and a worsening balance of payments since May when the International Monetary Fund announced that in the past six years Costa Rica had retired 43% of its international debt.

Still, the country is in stable shape and is far better off than many in Latin America. In fact, the Interamerican Development Bank, the Andean Development Corporation and the Latin American Reserve Fund have all announced financial packages to help Latin American governments tide themselves over the crisis. The International Monetary Fund has told its member nations that it has $250 billion reserve for emergency economic aid.