Anyone thinking of retiring in Costa Rica or purchasing property here will be please to to read the following information about the state of the country’s economy. February 8, 2013 (Reuters) Fitch Ratings has affirmed Costa Rica’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB+’. Fitch has also affirmed the Short-term foreign currency rating at ‘B’ and the Country Ceiling of ‘BBB-’. The Rating Outlook is Stable. Why? The affirmation of Costa Rica’s ratings is supported by the country’s institutional stability and strong social indicators that have facilitated large FDI inflows, thereby contributing to steady growth, high per capita income and better financing of the country’s large current account deficits. The ratings are constrained by the lack of political consensus to address high structural fiscal deficits that result in negative debt dynamics, and by limited monetary and exchange rate policy flexibility. Costa Rica’s diversified value-added export-based economy should continue to be resilient in the face of sluggish global growth. Costa Rica’s economy is estimated to have expanded 5.1 percent in 2012, outperforming the 4% median of ‘BB’ peers amid a fragile global economy. Fitch expects the economy to expand an average of 4 percent over the next two years. Risks stem from renewed weakness in the U.S. economy, the country’s main export destination and source of FDI flows. Costa Rica’s five-year inflation rate remains above the ‘BB’ median. However, after a long history of double-digit inflation, an improved monetary policy framework has raised the central bank’s credibility and could ultimately facilitate inflation convergence with the peer median. Inflation stood within the band of 5 percent plus or minus 1 percentage point for four consecutive years in 2012. Fitch expects inflation to be 5 percent over the next two years. Risks to inflation arise from higher fiscal deficits, swings in international commodity prices, and monetary expansion related to the defense of the floor of the FX band in the context of large portfolio inflows. In the near term, macroeconomic policy challenges have increased for the authorities due to the large capital inflows to the country in the context of limited exchange rate flexibility and the central bank’s persistent losses. A high interest rate differential attracted portfolio inflows of near 3percent of GDP in 2012. As a result, the central bank swiftly introduced macro-prudential measures to prevent excessive growth in asset prices and credit which could potentially become a source of risk for the financial system and the broader economy. High-quality FDI will continue to support external accounts over the forecast period. Fitch expects the 2013 current account deficit to reach 5.0 percent of GDP and to be mostly financed by FDI. However, recent strong portfolio inflows render the capital account somewhat vulnerable to sudden stops. In addition, Costa Rica’s international liquidity position remains weaker than rating category peers. High structural fiscal deficits continue to undermine Costa Rica’s credit profile. Fitch expects deficits to average 4.8 percent of GDP in the next two years. The lack of political consensus to address Costa Rica’s low revenue base and rigid expenditure structure weighs on its fiscal profile. Authorities’ efforts to rein in expenditure growth and improve tax collection efficiency are not sufficient to stabilize debt at current levels. Fiscal consolidation prospects are uncertain, as the electoral cycle is already underway. Presidential and legislative elections will take place in February 2014. Despite the increasing burden, the general government debt remains below the ‘BB’ median. Moreover, Fitch recognizes that Costa Rica’s debt tolerance is well supported by its higher per capita income level (compared with peers in the ‘BB’ category), well-established social and political stability, as well as material gains in the composition of debt. Costa Rica’s borrowing requirements are expected to exceed 10 percent of GDP in 2013, but domestic liquidity and external market access support its financing flexibility. RATING SENSITIVITIES The main factors that could lead to a positive rating action are: –Greater political consensus to address structural fiscal imbalances leading to a sustained expansion of the revenue base, improved fiscal management and favorable debt dynamics; –Increased monetary and exchange rate flexibility that enhances the shock-absorption capacity of the economy The main factors that could lead to a negative rating action are: –Sustained large fiscal deficits that cause a marked deterioration in debt dynamics and emergence of fiscal financing constraints; –Weakening of the macroeconomic policy framework that reverses the disinflation and de-dollarization process; -A material downshift in Costa Rica’s growth trajectory. The ratings and Outlooks are sensitive to a number of assumptions: –Fitch’s base-case scenario assumes no recession or deepening of the financial crisis in developed economies, most notably the U.S., and therefore a continuation of steady FDI flows; –Fitch assumes that no major fiscal reform will be implemented over the next two years and that the authorities continue to restrain expenditure growth and improve tax collection. –Fitch assumes that the central bank will maintain its foreign exchange rate regime and that no sustained macroeconomic imbalance will result as a consequence of the strong portfolio inflows.