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Citi Cuts Costa Rica Growth Forecast After Firings

By Isabella Cota
April 09, 2014 4:21 PM EDT 10 Comments
Intel Corp., the world’s largest computer-chip maker, is cutting 1,500 out of 2,500 jobs in the country as part of an effort to consolidate some operations in Asia, spokesman Chuck Mulloy said yesterday.
Photographer: Daniel Acker/Bloomberg
Intel Corp., the world’s largest computer-chip maker, is cutting 1,500 out of 2,500 jobs in the country as part of an effort to consolidate some operations in Asia, spokesman Chuck Mulloy said yesterday.

Citigroup Inc. (C) cut Costa Rica’s growth forecast after Bank of America Corp. and Intel Corp. said they would fire 3,000 workers in the Central American nation following the opposition's victory in a presidential runoff.

Citi cut its growth forecast for Costa Rica’s 2014 gross domestic product to 3.1 percent from 3.5 percent, economist Jorge Pastrana wrote in a report today. The 2015 forecast was lowered to 2.2 percent from 4 percent. The yield on Costa Rica’s dollar bonds due in 2023 have climbed 23 basis points the past two days, the most since January.

“The likely slowdown in growth would lower (even more) the political incentives to undertake the much needed fiscal adjustment, thereby affecting external debt prices,” Pastrana wrote.

Intel, the world’s largest computer-chip maker, is cutting 1,500 out of 2,500 jobs in the country as part of an effort to consolidate some operations in Asia, spokesman Chuck Mulloy said yesterday. Hours later, BofA said it would be exiting operations in Costa Rica, Guadalajara, Mexico and Taguig, Philippines, without saying how many jobs would be lost. Costa Rica’s foreign investment agency said the BofA move would result in 1,500 layoffs.

New President

The unexpected firings at high-profile foreign companies present an immediate challenge to President-elect Luis Guillermo Solis, who won an April 6 runoff in his first bid for elective office and will be sworn in May 8. Intel’s decision to invest in Costa Rica in the 1990s was lauded by economists as an example of how developing countries can woo foreign manufacturers to diversify their economies.

“The incoming government will have to start working, starting now, to find what the real, underlining cause of these two moves is because we need to take corrective measures,” former Finance Minister Thelmo Vargas said in an interview. “This is a strong call to the country to keeps tabs on things like the rising cost of electricity, telecommunications, wages and social guarantees.”

Pastrana said the firings will pressure the currency, represent a “major change” for the country’s balance of payments and make fiscal adjustments by the new government less likely.

The yield on the 2023 dollar bonds rose 8 basis points to 5.62 percent at 3:59 p.m. New York time. The currency was little changed at 550.13 colons per U.S. dollar.

Promoting Investment

Gabriela Llobet, the head of Costa Rica’s foreign investment promotion agency, said yesterday that the two announcements were a coincidence, adding that she was “surprised” to hear about the BofA decision following Intel’s announcement. The agency will host a news conference today at 3 p.m. local (5 p.m. EST) to discuss the firings.

BofA’s “shutdown has no relation whatsoever to the one announced by Intel today and it’s important to stress that both cases are separate, very specific and different,” Llobet said.

Solis, 55, said in a statement that Intel executives assured him that the move “had no relation with the election of new Costa Rican government.” The company said it is remaining in the country and will try to create 200 new positions.

“The president-elect confirmed the commitment of his administration to promoting foreign direct investment and his decision to do so as part of an effort to bring more and better sources of technology and environmentally-friendly jobs,” according to the statement.

Falling Unemployment

The firings come after President Laura Chinchilla, who wasn’t eligible for re-election, made progress in reducing unemployment that peaked at 10.5 percent in the second quarter of 2013. Joblessness in the $45 billion economy has since fallen to 8.3 percent. Nevertheless, frustration over corruption scandals involving Chinchilla’s aides undermined support for the ruling party, whose candidate withdrew from last weekend’s election.

The country of 4.7 million people climbed seven spots to 102nd in the World Bank’s annual “Doing Business” report this year, lagging behind China, Vietnam and Namibia. Moody’s Investors Service lowered its outlook on Costa Rica to negative from neutral in September, citing a rising debt burden and widening budget deficit. Moody’s rates the country Baa3, putting it in the same category as Turkey and Iceland.

Costa Rica’s fiscal deficit is forecast by the government to climb to about 6 percent of gross domestic product this year from 5.4 percent last year. The country’s dollar bonds have returned 3.3 percent this year compared with 4.4 percent for emerging markets, according to JPMorgan Chase & Co.’s EMBIG index.

Russia, Ukraine

In a Bloomberg survey published last month, Costa Rica was ranked fourth behind Russia, Argentina and Ukraine on a list of countries confronting the biggest loss of investor confidence. The survey cited data including the rising cost of credit default swaps and the currency’s performance against the dollar.

As other nations in Central America struggled to revive economic growth in the wake of civil wars, Costa Rica in the 1980s and 1990s moved to establish itself as a stable hub with a highly-educated, lower-cost workforce and access to U.S., Asian and European markets. The country, which abolished its military in 1948, remains home to operations by Dole Food Co., Procter & Gamble Co., Amazon Inc. (AMZN) and Hewlett-Packard Co.

Intel ‘Whale’

Santa Clara, California-based Intel, whose processors run more than 80 percent of personal computers shipped worldwide every year, originally chose to establish operations in Costa Rica after studying sites in Indonesia, Thailand, Brazil, Argentina, Chile and Mexico, according to a 2000 case study by Harvard University’s Center for International Development. The company’s $600 million investment at the time represented about 4.2 percent of GDP, prompting the company’s then-Vice President Bob Perlman to say Intel’s arrival was like “putting a whale in a swimming pool,” according to the study.

In 2013, about 21 percent of Costa Rica’s exports of goods came from Intel, according to investment promotion agency CINDE.

Intel (INTC) marked a landmark in our national history, by putting Costa Rica on the map as a place of investment in the world,” Foreign Trade Minister Anabel Gonzalez told reporters yesterday. “Today, Costa Rica doesn’t depend on one sector and one company, as we export close to 4,763 products to 153 different countries.”

To contact the reporter on this story: Isabella Cota in San Jose, Costa Rica at icota@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net; Bill Faries at wfaries@bloomberg.net Bill Faries, Robert Jameson

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