VZCZCXYZ0000
PP RUEHWEB

DE RUEHSJ #0811/01 2671702
ZNR UUUUU ZZH
P 241702Z SEP 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 1234
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS SAN JOSE 000811 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA, WHA/CEN, WHA/EPSC, EEB/IFD/OMA AND EEB/IFD/ODF; 
PLEASE PASS TO TREASURY: SSENICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV PGOV PREL CS
SUBJECT: COSTA RICA: PRUDENT DEBT MANAGEMENT 
 
¶1.  (U) SUMMARY:  The Arias administration has increased spending on 
infrastructure, education, health, support for workers, and the 
judiciary, not only in absolute terms, but also as a percentage of 
the total budget.  As spending in these line items increased, they 
were offset by a decline in the percentage of the budget spent on 
debt payments.  Despite the economic crisis and former Finance 
Minister Zuniga's request for 20 percent across the board budget 
cuts, international financial institution (IFI) representatives from 
the International Monetary Fund (IMF) and Inter-American Development 
Bank (IDB) expect spending in priority areas to continue, albeit at 
a slower pace.  The decline in debt payments is likely to stall 
however, as the crisis has compelled the administration to take on 
more debt as revenues fall.  End Summary. 
 
--------------------------------------------- 
INVESTING IN SOCIAL AND PUBLIC WORKS PROGRAMS 
--------------------------------------------- 
 
¶2.  (U) An analysis of the government of Costa Rica's (GOCR) 
2007-2009 period reveals a notable increase in spending on 
infrastructure, education, health, support for workers, and the 
judiciary as a percentage of the total budget.  The increases are 
remarkable when compared to budgets of the previous administration 
(2003-2006 budgets) and in light of the fact that an estimated 90 
percent of the budget consists of mandated expenses and debt 
payments. 
 
Ministry or           Percent of total budget   Difference 
Budget Item          2003-2006      2007-2009 
                     (average)       (average) 
Education              19.7            24.6         4.9 
Public Works            3.5             5.3         1.8 
Judiciary               3.7             4.6         0.9 
Health                  1.7             2.4         0.7 
Labor                   1.1             1.9         0.8 
Finance                 1.1             1.7         0.6 
Public Debt            50.4            38.3       -12.0 
 
¶3.  (U) In education, the greatest increases came in funding for 
university education, followed by secondary education, and auxiliary 
and general education services.  Over the same time period, spending 
on non-university post-secondary education dropped by almost three 
percentage points as the emphasis switched to university education. 
This change began in 2006 with the last budget prepared by the 
Pacheco administration and continued through the Arias 
administration. 
 
¶4.  (U) For public works, capital expenditures for highways posted 
the largest increase.  The pattern of increasing expenditures is 
expected to continue through at least 2010 since the IDB's USD 850 
million infrastructure loan was recently approved.  The 2009 
extraordinary budget, presented to the National Assembly on August 
31, includes individual road projects from the loan. 
 
¶5.  (U) Increases in health, labor, finance, and the judiciary 
flowed mostly to general services in each of the ministries.  A 
further breakdown showed the increase funded mostly wages and 
salaries in the judiciary, goods and services in finance, and public 
sector transfers in health and labor. 
 
--------------------------------------- 
THE RATIO OF PUBLIC DEBT DECREASES. . . 
--------------------------------------- 
 
¶6.  (U) The decrease in the percentage allocated to public debt 
payments cannot be wholly attributed to the Arias administration, as 
it is partially the result of less borrowing during previous 
administrations.  Although debt had been declining as a percent of 
the budget and as a percent of GDP through 2008, it was not possible 
for the administration to maintain the trend in the face of sharply 
declining revenues. 
 
------------------------- 
. . .AS DEFICITS INCREASE 
------------------------- 
 
¶7.  (U) In a presentation to market participants in August, Director 
of Public Credit Juan Carlos Pacheco Romero noted that revenues 
declined by 8.3 percent in the first half of 2009 (1H2009) compared 
to 1H2008, while expenditures increased by 22.1 percent in 
comparison to the same time period.  This resulted in an accumulated 
deficit of USD 350 million, which has been entirely financed through 
domestic debt issuance.  Pacheco estimated that domestic debt would 
finance the combined public sector 2009 budget deficit (4.8 percent 
of GDP, 19 percent of the budget), but that the country will have to 
draw on a USD 500 million loan from the World Bank to finance not 
quite half of the 2010 budget deficit. 
--------------------------------------------- ----- 
INTERNATIONAL FINANCE INSTITUTIONS SIGNAL APPROVAL 
--------------------------------------------- ----- 
 
¶8.  (SBU) The IMF's mission chief for Costa Rica Andreas Bauer 
stated that he encouraged the GOCR to draw on the World Bank loan, 
as the increased domestic debt issuance was likely to begin to 
strain the domestic market.  Bauer noted that although spending 
increased by 22 percent, this was lower than the 30 percent increase 
called for in the 2009 budget.  A main risk to economic recovery was 
the continued under-execution of the 2009 budget, especially 
continued under-execution of investment expenditures.  He noted that 
the increase in expenditures was due largely to current 
expenditures, particularly to increased public salaries.  Such 
salary expenditures will be difficult to reverse once the crisis 
abates.  He said the IMF expected a combined public sector 2009 
deficit of 4.8 percent of GDP, assuming that spending on capital 
expenditures would increase in 2H2009. 
 
¶9.  (SBU) IDB resident representative Fernando Quevedo noted that 
the IDB's 2006-2010 country partnership strategy's priorities had 
not been revised based on the economic situation.  Although he 
expressed some disappointment with the length of the process to gain 
National Assembly approval on loans, he stated that operations were 
relatively on track and the GOCR still placed a high priority on 
infrastructure improvements. 
 
--------------------- 
2009 AND 2010 BUDGETS 
--------------------- 
 
¶10.  (U) The Finance Ministry presented the extraordinary 2009 and 
the regular 2010 budgets to the National Assembly on August 31 and 
September 1, 2009.  The administration plans to fight the economic 
slowdown through explicit deficit spending as the Finance Ministry 
requests the National Assembly's approval of debt financing for 
ordinary expenses as well as approval of the 500 USD million World 
Bank loan.  The extraordinary 2009 budget revision confirms the 
under-execution evident in 1H2009, but partially balances that with 
additional infrastructure spending in the port city of Limon 
financed by the World Bank.  The 2010 budget deficit, projected to 
be 20 percent of the budget and 5 percent of GDP, is similar to 
2009's budget deficit.  The budget itself represents a 12.23 percent 
increase in local currency terms over 2009.  While continuing to 
emphasize social and infrastructure spending, it also contains a 
notable 26.7 percent budget increase for public security. 
 
BRENNAN