Walter Molano | Costa Rica: Oversold on dogma

Azure skies can suddenly turn into heavy rains, and back again into pastel blues, in the tropical environs of Costa Rica.

Just as the weather can reverse in a moment's notice, the economic mood is also prone to manic swings. This year, Costa Rica was the epicentre of an economic panic attack. Bond prices plunged, and yields soared. Some people whispered the dreaded D-word, and the credit rating agencies began issuing warnings and downgrades.

At the heart of the issue was a fiscal reform that was struggling to make its way through the congress. Designed to curb the excess pay and benefits of public sector employees, thus reducing the operational fiscal deficit from the current level of 7.1 per cent of GDP, it had the support of most of the population.

However, the issue was hijacked by a small band of religious-based political parties, and they used it to exact a heavy price from the government. At the heart of the conflict was a cultural divide that is not characteristic of Latin America, but which is closely linked with the growing strength of the Christian right in the United States.

A recent study by the Pew Foundation found that protestants comprise 20 per cent of the Latin American population, up from three per cent a few decades ago. Much of the advances were made by evangelical factions, particularly pentecostals and baptists. This was the direct result of missionary work by protestant churches and faith-based organisations across the south and midwest.

It is part of a phenomenon that has spread across Latin America. During the recent presidential elections in Brazil, it was a major political issue, bolstering the campaign of right-wing candidate, and now president-elect, Jair Bolsonaro.

Although the religious right has been gaining traction in Central America for some time, the process accelerated during the last decade. The global financial crisis of 2008 delivered a devastating blow to most of the region. Given the strong economic links between Central America and the United States, large swathes of the population suffered as trade flows and remittances declined.

Rural communities welcomed US missionaries, who brought gifts of food, and financial assistance. Costa Rica was particularly targeted by many of these groups, given its relative safety and tropical setting. The country became an easy destination to spread the word of god, while enjoying a nice vacation.

Today, the Internet abounds with ads extolling the mission opportunities in Costa Rica. Not only did these missionaries indoctrinate the population in their religious beliefs, but they also embedded their intolerant moral values. In the process, they introduced the culture wars that rage in the US and have brought political gridlock to Washington.

Deeply divided

By convincing their Costa Rican followers to practise the 'take no prisoners' strategies, they polarised one of the most peaceful countries in Latin America. This was in full display during the presidential elections earlier this year. The political spectrum splintered into a cacophony of faith-based political parties that aimed to shanghai the public agenda.

As a result, Costa Rica, a country known for its human rights and social inclusion, became deeply divided on issues such as abortion, contraception and gay marriage. Bolstered by their moral righteousness, a handful of parties weaponised the political process, holding key legislation such as the fiscal reform hostage.

Their zeal was such that they were willing to careen the country to the edge of the economic abyss in order to impose their moral agenda.

In the meantime, the media is fretting about an economy that is sound. In spite of all of the noise, the Costa Rican economy is expected to grow 2.3 per cent year-on-year in 2018 and 2019. Inflation remains subdued at slightly more than two per cent year-on-year, and foreign direct investment continues to pour in. This allows the country to steadily post a balance of payments surplus and accumulate international reserves.

Unfortunately, the largesse on public sector employees and the subsequent fiscal deficits, have allowed the country's debt load to crest over 70 per cent of GDP. Nevertheless, the debt numbers are in line with some of the larger Latin American economies.

In order to improve liquidity, the government has undertaken several successful liability management operations, including a major domestic debt swap. This has brought relief to its financial position.

Last of all, the government has a powerful ace up its sleeve. Central bank president Rodrigo Cubero is a former senior IMF official and could be instrumental in securing multilateral financing. Therefore, most of the concerns about Costa Rica are overblown and it has resulted in an oversold situation.

What is more serious is the polarisation of the local political system, thanks to the missionary work of Christian zealots from the US who have brought their intolerance and political tactics to the tropics. It has unnecessarily darkened the azure skies of Costa Rica.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com