By Wendy Anders

During 2016, the Costa Rican economy benefited from a favorable macroeconomic environment, allowing the country’s economy to maintain stable behavior; however, according to economists at Costa Rica’a ACOBO Financial Group this could change in 2017, causing some indicators such as the exchange rate, interest rates, and inflation to rise.

According to Luis Diego Herrera, economist at ACOBO, an important factor to take into account are the economic policies that the president-elect of the United States, Donald Trump, implements during his administration.

”The United States is in the process of normalizing its monetary policy, which would cause interest rates to gradually increase in 2017, as the Federal Reserve (Fed) sees the economy performing better. This, coupled with increased public spending announced by President-elect Donald Trump, would push up international interest rates. As a result, rates in both colones and dollars will tend to increase in Costa Rica this year,” explained Herrera. He added that the passive basic interest rate could reach 6.5 percent in 2017.

In addition, international risk ratings could reduce Costa Rica’s country risk rating, leading to an increase in investors’ risk perception, which would have a direct impact on interest rates, as investors would demand better performance to invest in national bonds.

As for inflation, it is expected to return to the target range established by the Central Bank of Costa Rica (BCCR) of 3± 1 percent, driven mainly by an increase in international oil prices. According to estimates, inflation in Costa Rica could be 3.5 percent at the end of 2017.

With respect to the exchange rate, this would also probably increase in 2017 driven by external interest rates, as well as the increase in the price of oil, since the Costa Rican Oil Refinery (RECOPE) will be using more dollars to pay the country’s oil bill. Another factor that would influence the exchange rate is the amount of dollar credit. If it picks up, banks will have to go out looking for dollars to lend to people which will pushing a rise in the exchange rate to a possible rate of ¢575 per dollar, said the economic analysts.

Similarly, despite business tax reductions announced by Trump in the U.S., Herrera does not expect significant loss of Foreign Direct Investment (FDI) among companies already installed in Costa Rica, saying “Companies take into consideration other aspects besides taxes.”

ACOBO predicts Costa Rica’s Gross Domestic Product (GDP) will grow about 4.5 percent in 2017. This will not be enough growth to generate noticeable improvements unemployment or poverty.

The economist said that if the U.S. economy experiences a boost from increased domestic spending, this would certainly benefit its trading partners, including Costa Rica.

By the end of this year, Costa Ricans will likely feel greater economic stability, said the analysts, who said it will be important to keep a watchful eye on changes in the international environment, mainly the U.S. economy and in oil prices. In addition, the main challenge at the domestic level is to find a solution to the delicate fiscal situation of the country and its effect on interest rates.