Costa Rica – Reforms Fuel Backlash

Carlos Alvarado is in some ways an accidental president, in that he appeared to an also-ran contender in the 2018 election until a controversial ruling on same-sex marriage issued by the IACHR just weeks before the first round on voting completely upended the campaign. Despite his improbable win and the fact that his PAC won just 10 seats in the 57-member Legislative Assembly, he managed to pull together a majority coalition and secure passage of a fiscal reform package last December, accomplishing what each of his four most recent predecessors attempted but failed to do.
In the months leading up to implementation of the tax changes, which took effect on July 1, Costa Rica was besieged by a series of strikes and protest demonstrations, some of which were marked by violence. A week-long strike by health care workers necessitated the cancellation of tens of thousands of medical appointments and procedures, and forced the government to agree to arbitration on bonus payments for workers and to restart negotiations on back pay. The compromise was a significant retreat, and Finance Minister Rocio Aguilar openly decried the concessions as a threat to the hard-won fiscal reforms.
The disturbances revealed a well of discontent in a country accustomed to social peace, and became a catalyst for action by groups with grievances not related to the fiscal reforms. The political difficulties have taken a toll on Alvarado’s coalition, which no longer includes the PUSC. A split in the main opposition PREN, which won 14 seats riding the coattails of Fabricio Alvarado, who lost to Carlos Alvarado (no relation) in the run-off, has enabled the government to retain its claim to majority support in the Legislative Assembly, but it is an open question whether the reconfigured coalition is strong enough to achieve passage of additional reforms that will be necessary to contain the fiscal deficit and sustain a downward trend in the debt burden, which include civil-service reforms that are certain to provoke a significant backlash from the unions.
When he took office, Alvarado unveiled ambitious plans for increased spending, including a $4.6 billion infrastructure plan aimed at upgrading roads, building a new train network, and developing other facilities. Any chance that the watered-down fiscal reforms might create room in the budget to implement his broader agenda rested on the assumption of additional structural reforms and stable moderate real GDP growth of around 4% or more. Unfortunately, real GDP growth is forecast to slow to 2%, as a combination of dry weather and falling prices reduces the positive contribution from the agricultural sector and reinforces the negative impact of weaker US demand on exports.
Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.