Economic Situation Report

Economic Situation Report
Economic Activity
National economic activity grew at a rate of 4.3% at the end of March, closing the first quarter with a slight upward trend. However, this was mostly due to free zone activity, creating a significant gap between free zone related sectors and those related to internal demand.
Although March numbers are better than February, growth is still relatively low throughout all the sectors that comprise the Monthly Economic Activity Index (IMAE) June 2013 The Indirectly Measured Financial Services sector is at the top of the table with 7.05% growth. Mining (5.9%) and Manufacturing Industry (5%) had the next best growth rates.
Good Free Zone production performance was responsible for Manufacturing Industry growth. Central Bank numbers to March show that Free Zone activity expanded by 12.6%, while Regular activities (all non Free Zone) actually had a -3.2% Interannual contraction.
Monthly Economic Activity Index

Interannual variation
IMAE Variation IMAE Variation
Investment Strategy
4.3%
Adriana Rodrguez arodriguez@aldesa.com

Source: Aldesa graph based on BCCR data.
Both the sub index for the Manufacturing Industry related to food, beverages and tobacco products, and the Agricultural, Forestry and Fishers index itself (1.7%) are trending between stagnation and contraction.
Producers blame this on increased transportation costs, electrical services, the unfavorable climate, limited international markets, low international prices and a stable exchange rate that does not let them mitigate part of their highest production costs.
According to Procomer and Central Bank figures, to April, total exports had an Interannual growth rate of 6.6%. Broken down by regime, Free Zones have exported 11% more and the Regular Regime 4% less.
Other economic growth indicators are currently showing certain losses, such as loans to the private sector and different consumer confidence surveys.
Interannual growth for private sector loans reached 9.41% up to April while December closed at 12% growth. This downward trend has been occurring over the last year.
Credit growth is still more pronounced in foreign currency, both for private and public banks and the lower demand for Colones is felt more strongly by state banks.
Interest Rates
The Basic Lending Rate (BLR) decreased in May to 6.65% from 6.75% at the close of April. In general, over the past year it has dropped from 9.20% to 6.65% for several reasons.
First, there was a significant change in the methodology for calculating the basic rate. Second, the Government acquired external financing instead of primarily
obtaining support from national resources. And third, economic activity is growing at a more moderate rate than last year.
Real and Gross Basic Lending Rate
11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% May-14 May-15 May-16 May-17
6.65%
0.00
Source: BCCR. Prepared by Aldesa.
The significant drop in the BLR was due to an environment that expected increased inflation, causing real interest rates to approach 0% or even to become negative, as in the case of some short-term Government bonds.
Likewise, the colon investment premium for investors who upon expiration were seeking to return their investments to dollars has declined from 5.94% in October 2012 to 2.4% at the end of March.
This occurs because as Colones rates have decreased, devaluation expectations have remained relatively stable at around 2%.
In the Colones-bond market, interest rates have remained relatively stable for terms longer than two years, while interest rates for shorter terms have fallen slightly. This was also due to more Colones liquidity in current stock market operations.
In view of new external debt bond placements, the interest rate panorama will be stable, since neither deficit financing nor the rhythm of economic activity exerts pressure to increase rates in Colones. Dollar interest rate behavior was interesting in May, resulting in better yields for mid and long-term international bonds and better rates for short-term dollar certificates.
Increased yield by international bonds limit additional increases in bond prices traded on the internal market, with yields that must also relate to current external debt bond levels.
Increases in reference yields during May were significant and spurred the first wave in the sales of Latin American bonds in more than a year and a half. This has caused a more than proportional increase in yields.
However, in the short term, on the national market the prevailing trend is the search for dollars to satisfy dollar credit demand, and we have observed an increase in the cost of dollar liquidity throughout the month.
Inflation
Inflation during the first five months of the year was 3.22%, compared to 5.28% last
At the end of May, 45% of the 292 goods in the Basic Basket increased in price, 42% decreased and 13% showed no change according to INEC data.
year. This indicates moderation in the rhythm at which price increases were being recorded over the last three months. In May inflation returned to the Central Bank target range of 4% to 6%, after remaining at 6% for the three months from February to April.
Although data on price trends reveal a considerable regulated component within the inflation data and that it should be temporary, inflation expectations among economic agents do not seem to follow that explanation and to the contrary remain stable at 6.4%.
Inflation on regulated goods (those controlled by the State) showed the first reversal since December reaching an interannual variation of 12.3% Prices for non-regulated goods had interannual growth of 3.40%.
Consumer Price Index
18% 16% 14% 12% 10% 8% 6% 4% 2% May-12 May-13 May-14 May-15 May-16 May-17 5.28%
Source: Aldesa graph based on INEC data.
Traded goods had a negative Interannual variation for the first time since November 2009, favored by the stable exchange rate and weak economic activity.
In other words, in the absence of rate adjustments on regulated goods and public services, the general growth level in prices would be closer to the lower Central Bank range than the higher range.
Lower inflation was generated by credibility in Central Bank actions and more confidence in national currency as a fair value reserve. Both are requirements for the Central Bank to be more effective in handling expected inflation through monetary policy instruments to foster a more flexible exchange rate regime.
Exchange Rate
During May $389 million were traded on the wholesale currency market, Monex. This amount was slightly higher than the $382 million traded in April
BCCR acquired $81 million of the total traded, a more active participation compared to the $31 million bought by the Bank in April (8%).
The Public-Non Banking Sector (SPNB) bought 49%, dropping to $190 million from the $231 million purchased in April.
In May private participation on this market was 30%, similar to the participation in April.
MONEX Average Exchange Rate
TC Promedio Ave. ExRate

525
Purchase Int. Int. Compra
520
515
510
505
500 May/15 Nov/15 May/16 Nov/16 May/17
There was significant bond expiration on May 29, when the Government paid $200 million to the market for the fixed rate bonds issued last year. This amount did not exert atypical pressure on MONEX, and the majority of creditors did not decide to colonize their dollars. The reason is that the premium for investing in Colones is becoming less attractive every month.
Fiscal Deficit
April data on Central Government finances show a financial deficit of 88 billion, for a 4-month cumulative amount of 439 billion, a 19.7% increase over the first quarter of last year.
The primary Government deficit without financial charges was 235 billion -- 17% higher than the first quarter of 2012.
The primary deficit is 0.94% of GDP, while the total deficit reached 1.75% GDP, according to Ministry of Finance data which considers a 10.6% growth in nominal GDP.
Deficit of the Central Government

4-month Aggregate
Million of Colones
0 -50,000 -100,000 -150,000 -200,000 -250,000 -300,000 -350,000 -400,000 -450,000
Dficit Primario Primary Deficit
Dficit Financiero Financial Deficit
+ 17%
2013
2012
+ 19.7%
Source: Aldesa graph based on Ministry of Finance data
On the primary market, Ministry of Finance bonds were sold under the conditions of the issuer and in Colones obtaining 570 billion, 5% less than during the first 5 months of last year.
Auctions of dollar-denominated bonds were radically affected by the placement of external debt bonds, because the Government sold 95% less of these internal debt bonds as compared to last year, because it has acquired sufficient dollars at better rates than on the internal market.
In our opinion, the Ministry of Finance has resolved the financing of its cash flow for the next few months. However, finishing out the year without increasing interest rates
Economic Situation Report 7
will be a significant challenge, since the money from Eurobonds will possibly run out before then (according to the Ministry of Finance expiration schedule), making the results of debt swaps quite important.
Additional Information
Economic Activity Index by Sector

Dec-12 Indirectly measured Financial Mediation Services Mining and Quarry Material Exploitation Manufacturing Industry Hotels Construction Commerce IMAE with IEAT, Cycle Trend Other services Rendered to Companies Finance and Insurance Services Transportation, Storage and Communication Power and Water Remaining Industries Agriculture, Silviculture and Fishing IMAE Cycle Trend
Jan-13
Feb-13
Mar-13
Activity Index for the Manufacturing and Construction Sector

Manufacturing Industry
Construction
Regulated and Unregulated Goods and Services Interannual Price Variation
Regulated Inflation Inflacion Regulados
Inter annual Variation Variacin Interanual
Unregulated Inflation Inflacion No Regulados
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% May-14 May-15 May-16 May-17 5.3% 3.4% 12.3%
Expected Inflation
BCCR Survey
8%
Inflacin 12 Meses 12-month inflation
7% 6.4% 6%
5% Apr-14 Apr-15 Apr-16 Apr-17
Secondary Market Yields External Debt Instruments
Government $ Bonds
Bond Price Yield
Source: BNV. May 28, 2013.
10
Internal Debt Instruments
Ministry of Finance
Fixed Rate Dollar Instruments
Government $ Ex Rate
Bond Price Yield
11
Ministry of Finance
Fixed Rate Colones Instruments
Government Ex Rate
Bond Coupon Price Yield
Costa Rican Electrical Institute

Fixed Rate Dollar Instruments Costa Rican Institute of Electricity Bond Price Yield
Source: BNV. May 28, 2013. Economic Situation Report 12

Economic Situation Report - JUN 2013

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Economic Situation Report - JUN 2013

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