Foreign trade and investment have been pushing Costa Rica and its economy to new heights. After the country turned the page on the challenging Covid-19 years, its indicators bounced back stronger than ever as the fraying global economy boosted its nearshoring appeal in the eyes of companies serving the North American market. 

In 2023 alone, the country posted record foreign direct investment (FDI) inflows, exports, and international tourist arrivals. Its gross domestic product (GDP) beat any forecast last year, growing by 5.1%, about twice as much as expected by the market, and unemployment fell to historic low levels. 

The prowess of its external sector and the influx of hard currency it generated has propped up the value of the Costa Rican colón. What initially may have seemed as an additional perk of the current cycle able, for example, to bring down inflation into negative territory, has now turned into a peril. 

Business leaders speaking to fDi at Costa Rica’s national FDI Summit 2024, held in its capital San José on June 11–12, argued that the foreign exchange swing has gone too far and started biting into the competitiveness of the country’s exporters, suggesting that the current supercycle may be close to a tipping point. 

It currently costs about 530 colón to buy one US dollar, down from more than 689 in June 2022. This rate of appreciation of the colón against the greenbuck was unmatched by any other currency worldwide in the period, as shown by data from Haver Analytics up to May 2024. 

In the region, not even the Mexican peso could keep up with the colón — between June 2022 and May 2024, it appreciated by 16% against the dollar.  

“The appreciation has been a challenge for the productive sector in Costa Rica,” explains Carolina Palmer, an associate partner for the indirect tax practice at EY in Costa Rica and Central America as exporters selling in US dollars get fewer colón in exchange to pay for local wages and utilities.

But there are “two sides of the coin” from the appreciation, since employees paid in colón are better off, adds Ms Palmer. But “in the race for FDI”, companies will take into account the stability and strength of the local exchange rate.

It has been “painful for us,” confirms Jonathan Soto, supply chain lead for the Costa Rican site of Proquinal, a Colombian vinyl fabric producer that exports to the US and Europe. Despite cheaper imports of materials, Mr Soto says the company made less revenue in the final quarter of 2023 than they had expected due to the stronger colón. 

Traditional agricultural export industries, such as coffee, bananas and pineapples, have been among the hardest hit by the colón appreciation. Local coffee-growing associations have been calling for more intervention from Costa Rica’s central bank to help them reverse losses in export revenues.

Domestic and international exporters based in Costa Rica are inevitably adjusting. Carlos Alberto Sandi, manager of the American Free Zone, the country’s largest services-focused free zone, notes that some of his tenants are actively trying to cut costs in Costa Rica to compete with other lower cost locations in Asia and eastern Europe.

The job market is showing early signs of this correction. Official figures show that the unemployment rate fell to a historic low level of 7.9% in the last quarter of 2023. However, net job creation by multinationals in Costa Rica stood at just 5574 positions in 2023, the first time growth had decelerated in the last 15 years, according to a Cinde analysis of figures from the Costa Rican Social Security Fund. 

The same foreign exchange rate has been adjusting, depreciating from a decade low of 501.8 colón per dollar in April to the current spot rate of 527. 

“In terms of competitiveness, we will have problems [from] the currency [appreciation] for the next year,” says Mario Sáenz, the manager of the exports department at Procomer, Costa Rica’s foreign trade and investment promotion agency. “But we are trying to help [exporters] be more competitive in terms of logistics, solutions and technologies”.

One of the recent bright spots for Costa Rica’s economy has been the medical devices sector, in which Costa Rica has been the largest destination for FDI projects in the Latin American region since 2003, according to fDi Markets. 

The value of exports by medical device companies in Costa Rica grew year-on-year by 28% in 2023, according to Procomer, making up 42% of Costa Rica’s record high total exports worth $18.24bn. This is reflected in the continual expansions by foreign giants of the industry, including US-based Johnson & Johnson, Boston Scientific and Irish company Medtronic, which invested $65m in 2022 to expand manufacturing capacity in Coyol Free Zone.

Bernardo Cañas, the leader of Medtronic’s site in Coyol Free Zone, tells fDi the colón’s appreciation has had less of an impact on the competitiveness of companies operating for much cheaper in Costa Rica than elsewhere. 

“From a Medtronic perspective, we are transferring the production from high-cost countries like the United States or Europe to Costa Rica, so the cost savings are still significant,” he explains, adding that other smaller companies may find cheaper costs in countries like the Dominican Republic and Mexico.

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