#1BC BANCO CENTRAL DE CR COSTA RICA The Central Bank's Macroeconomic Program: An Overview of 2018 and Perspectives for 2019-20 Rodrigo Cubero Brealey President, Central Bank of Costa Rica This Program was approved unanimously by the Board of Directors of the BCCR on January 25, 2019.#2Twitter @BancoCentralCR #ProgramaMacroBCCR 2#32018: An overview External developments Content The Costa Rican economy Perspectives for 2019-2020 3#4External Developments 2018 4#5External Developments 2018 Global economic activity lost traction in 2018: Growth declined to 3.7% (3.8% in 2017). Deceleration in China and Euro Area. However, US economy accelerated from 2.2% in 2017 to 2.9% in 2018. Monetary policy normalization. in advanced economies: Interest rates tend to increase. ECB completed asset accumulation program. 5#6World Trade in Goods and Services (Percent Variation in Volume) 3.8 2.8 2.2 5.2 4.2 2014 2015 2016 2017 2018 Source: Central Bank of Costa Rica, based on IMF data from October 2018. 6#7Rise in commodity prices, mainly oil. External Developments e Trade disputes between USA and China. 2018 Political and social tensions in Nicaragua. 7#8The Costa Rican Economy 2018 8#9Domestic Economy 2018 Elections during first quarter of the year. Worsening fiscal situation. Economic situation affected by high Central Government's financing uncertainty due to... problems. ¢ Public servants' strike against fiscal reform. 6#10Domestic Economy 2018 Uncertainty led to... Dollarization of savings. Deceleration in credit to private sector. Higher risk premia on government debt. Upward pressure on local interest rates. 10 10#11Macroeconomic Outcomes Inflation 2018 2.0% (2.6% in 2017) Low, stable and within target range (3% ± 1p. p.). Core inflation: 2.3% Inflation expectations 3.7% 11#1200 8 6 4 2 0 Inflation (Y-o-Y Change in Consumer Price Index, %) CPI Inflation Expected Inflation (12m) ---Core Inflation (average) Target Range for CPI Inflation -2 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 3.73 2.3 2.0 Jun-18 Dec-18 Source: Central Bank Of Costa Rica and National Institute of Statistics and Census 12#13Macroeconomic Outcomes Economic Growth 2018 2.7% (3.4% in 2017) Key Factors Public sector strike -0.4 p.p. Tensions in Nicaragua -0.2 p.p. Worsening fiscal situation, uncertainty, oil prices, global economic slowdown, rising international interest rates. 13#14Current Account Deficit Macroeconomic Outcomes Balance of Payments 2018 2017 3.0% GDP 4.9% GDP 2018 3.1% GDP 2017 FDI inflows 2018 4.5% GDP Net international reserves 2017 12.3% GDP 2018 12.5% GDP 14#15Macroeconomic Outcomes Public Sector 2018 Central Government Deficit 2017 2018 6.1% 6.0% GDP GDP Primary Deficit 2017 2018 3.0% 2.4% GDP GDP Central Government Debt 2017 2018 48.7% 53.6% GDP GDP 15#16Relative stability during first semester Macroeconomic Outcomes July to November: volatility, upward pressure on exchange rate. Exchange Rate Market 2018 December: relative FX affluence. 1 16#17630 620 610 600 590 580 570 560 550 01-01-18 01-31-18 03-02-18 04-01-18 05-01-18 05-31-18 Source: Central Bank of Costa Rica 06-30-18 07-30-18 08-29-18 09-28-18 17 10-28-18 11-27-18 12-27-18 640 Monex: Weighted Average Exchange Rate (Colones per USD dollar)#18MACROECONOMIC PROGRAM Perspectives for 2019-2020 18#19Macroeconomic Program 2019-2020 Export markets expected to grow at similar rates as in 2018: 2.5% External Outlook US GDP growth expected to decline: 2.9% 2.5% 1.8% 2018 2019 2020 Continued normalization of monetary policy in advanced economies→ international interest rates will continue to rise. 19#20Global GDP Growth (in %) 4.7 4.6 4.4 4.9 4.5 3.8 3.7 3.6 3.5 3.3 2.8 2.6 2.5 2.4 2.4 2.0 2.4 1.7 -World 2.3 1.7 2016 2017 -Advanced economies -Emerging market and developing economies -Trade Partners 2018 2019 2020 Source: Central Bank of Costa Rica, based on IMF data from January 2019. 20 20#21Trading partners' inflation to remain at 2.8% for 2019-2020. Macroeconomic Program 2019-2020 Change in average price of imported fuel: External Outlook 17.7% 12.3% 2019 2020 Nicaraguan economy will continue to face challenges. Continued geopolitical and trade tensions. 221#22Macroeconomic Program 2019-2020 Inflation and Monetary Policy BCCR's main objective: low and stable inflation Inflation target 3% ± 1p.p. Protects purchasing power of income. Facilitates economic calculus, reduces uncertainty. Stimulates growth. 22 22#23Macroeconomic Program 2019-2020 Costa Rica Inflation Target range 2% to 4% Demand pressures and inflation expectations consistent with inflation remaining within target range. Impact of new VAT (Law 9635) on price level: 1.1% (70% of which would materialize between July 2019 and June 2020). Consistent with BCCR's commitment to low and stable inflation. 2018: 2.0% BCCR will remain alert to the evolution of key inflation determinants. 23#242015Q4 2016Q1- 2016Q2- 2016Q3- 2016Q4- 2017Q1 2017Q2- Non-Conditional Inflation Forecast (YoY change in CPI, in %) 4% Target Range 2017Q3- 2017Q4 2018Q1- 2018Q2- 2018Q3- 2018Q4- 2019Q1- 2019Q2- 2019Q3- 2019Q4- 2020Q1 Source: Central Bank of Costa Rica 2020Q2 2020Q3- 2020Q4 0% -2% 2% 24 6% 8% 10%#25Macroeconomic Program 2019-2020 Policies to achieve inflation target Adjustment in policy rate if analysis identifies deviations between inflation forecast and target. Exchange rate market intervention for three motives: • Agent for non- financial public sector. • Meet own needs. Prevent excessive fluctuations. Pursue improvements in operations and price formation in key markets (FX, liquidity, and debt). Proactive management of liquidity control instruments, in coordination with Finance Ministry. Strengthen communication with the public. 25#26Macroeconomic Program 2019-2020 Costa Rica GDP Growth Higher than estimate for 2018 (2.7%), but below Costa Rica's potential GDP growth rate (3.5%). Projection 3.2% 2019 Projection 3.0% 2020 26#27General Government Consumption Expenditure Y-o-Y Change Base Scenario 3.2 Macroeconomic Program 2019-2020 Costa Rica 3.5 3.1 3.0 2.5 2.0 1.5 1.0 0.5 2017 0.5 2018 2019 --- Scenario w/o effects from 2018 strike 3.5 3.1 3.0 2.5 2.5 2.0 1.5 1.0 0.5 2017 2018 2020 1.2 1.1 2019 2020 Source: Central Bank of Costa Rica GDP Growth Government's consumption. expenditure reflects "rebound" from negative effects of the 2018 strike, despite efforts to rein in expenditure. 27 27#28Without the 2018 strike economic growth would have been.. 2018 3.1% (Instead of 2.7%) 2019 2.8% (Instead of 3.2%) 28#29Macroeconomic Program 2019-2020 Costa Rica Household Consumption Propelled by: Improvement in terms of trade → boosts disposable income. GDP Growth and Disposable Income Dampened by: High household indebtedness (60% disposable income). Negative effect of fiscal reform (0.29% in 2019 and 0.61% of GDP in 2020). 29 29#30Billions of Colones of 2018 Disposable Income and Private Consumption (Level and % Change) Level (in constant colones) 28.000 26.000 24.000 22.000 20.000 % Change 4.0 3,5 3.4 3.3 3,1 3,0 2,8 2,6 2,8 2,8 2,5 2,4 2,4 2,4 2,0 2,2 1,5 1,4 1,0 18.000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023 ■ Personal disposable income■ Private consumption Source: Central Bank of Costa Rica 30#31Macroeconomic Program 2019-2020 Costa Rica GDP Growth and Disposable Income Rate of growth 3.7% 12,0 10,0 Private Investment growth to moderate on less dynamic private construction activity. Private Investment (% Change) Construction Other Investment Total Private Investment 8,0 5,5 6,0 5,1 3,7 40 4,0 2,0 0,0 -2,0 -4,0 -5,4 -6,0 -8,0 2017 2018 2019 2020 -7,3 11,1 2,5 5,0 -3,3 -0,1 4,9 5,2 -5,4 5,5 3,7 5,1 31 Source: Central Bank of Costa Rica#32Public Investment a strong recovery in 2019 (mainly road infrastructure programs). 20,0 Public Investment % Change Construction Other Investment ― Total Public Investment 15,0 10,0 5,0 4,4 7,3 40 1,5 Macroeconomic Program Rate of growth 2019-2020 7.3% Costa Rica GDP Growth and Disposable Income 0,0 -5,0 -10,0 -8,9 -15,0 2017 2018 2019 2020 6,9 1-11,7 -2,9 -0,3 8,2 ■5,0 -4,6 17,5 - 4,4 - -8,9 - -7,3 1,5 Source: Central Bank of Costa Rica 32 32#33Contribution to GDP Growth by Expenditure Components (Contribution in p.p.) 4.0 0.1 3.5 Net External Demand 0.7 3.0 0.2 0.5 2.5 0.5 0.7 Inventories 1.4 2.0 0.3 0.1 Household Consumption 1.5 1.5 1.6 1.0 Public Investment 1.4 0.5 0.1 0.3 0.4 Private Investment 0.0 0.0 -0.5 -0.5 ■General Government Consumption -0.4 -1.0 -1.5 2.7 3.2 2018 2019 3.0 2020 Source: Central Bank of Costa Rica 33#34Effects of Fiscal Reform on Private and Public Consumption (in % of GDP) Households Consumption Expenditure -0.29% 2019 -0.61% 2020 General Government Expenditure -0.26% 2019 -0.71% 2020 Macroeconomic Program 2019-2020 Costa Rica GDP Growth and Disposable Income -0.55% 2019 Total Effect -1.31% 2020 34#35Fiscal Reform Impact over Economic Growth Cumulative Effect Marginal Effect 2019 -0.11% -0.11% 2020 -0.14% -0.03% 2021 -1.38% -1.24% 2022 -2.30% -0.92% 2023 -2.64% -0.34% Source: Central Bank of Costa Rica 35#36Macroeconomic Program 2019-2020 Costa Rica GDP Growth and Disposable Income Economic Activity by Industry GDP growth expected to be led by education and health services (recovery effect after public sector strike). Professional and business support services also expected to show more dynamism. Contribution to GDP growth in p.p. PIB Agriculture 2018 2019 2020 2.7 3.2 3.0 0.1 0.1 0.1 Manufacture 0.3 0.4 0.5 Retail 0.2 0.2 0.2 Business Services 0.5 0.6 0.5 Education and Health 0.1 0.7 0.3 Others 1.5 1.2 1.4 36#37Macroeconomic Program 2019-2020 Costa Rica Balance 2018 3.1% of GDP Current Account Deficit 2019 2.9% GDP 2020 2.8% GDP Lower than 2018 (3.1%), due to higher expected net service exports of Payments Deficit in goods trade but increasing surplus in services trade. 37#382018 Imports Expected nominal growth 2019 4.1% 4.1% 2020 5.7% Increase in capital goods imports related to public infrastructure projects Exports Expected nominal growth Macroeconomic Program 2019-2020 Costa Rica Balance of Payments 2019 2018 6.0% 6.0% 2020 6.1% Continued strength in exports from FTZS 38#39Macroeconomic Program 2019-2020 Costa Rica Balance of Payments Foreign Direct Investment 2019 2020 2018 4.5% of GDP 4.4% 4.0% GDP GDP Net International Reserves 2019 2018 12.5% 14.2% 2020 12.9% of GDP GDP GDP 39#40Assumption that Government will issue debt in international markets: USD 1.5 billion in each of 2019 and 2020. Access to multilateral budget support loans for USD 450 million. Macroeconomic Program 2019-2020 Costa Rica Balance of Payments Resources will be fundamental to help meet the Government's funding needs and reduce pressure on local interest rates. Net savings for private sector will remain around 1.8% of GDP. 40 40#41Macroeconomic Program 2019-2020 Costa Rica Fiscal Projections If all its provisions are strictly applied, the fiscal reform approved in December 2018 (Law 9635) will help restore long- term fiscal sustainability. Central Government's Deficit 2019 2020 2018 6.0% of GDP 6.2% 5.8% GDP GDP Primary Deficit Excludes interest payments 2019 2020 2018 2.4% 2.1% 1.2% of GDP GDP GDP 41#42Central Government: Projections for Total Debt and Financial Result 2 -Total Debt (right axis) 1 Primary Balance (in % of GDP) Primary Result Total Debt w/o Fiscal Adjmt (right axis) 0 -3 -4 -5 -6 -7 OT Ņ ♡ 4 5 6 N -1 -2 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Source: Central Bank of Costa Rica 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 42 42 155 145 135 125 115 105 95 85 75 65 55 45#43Central Government: Gross Financing Needs (in % of GDP) 2017 2018 2019 2020 Gross Financing Requirements 11,6 12,3 12,7 11,9 Deficit 6,1 6,0 6,2 5,8 Debt Amortization 5,5 6,3 6,5 6,1 Sources 11,6 12,3 12,7 11,9 Internal Debt 11,1 11,7 8,4 8,2 External Debt 0,6 0,6 4,3 3,7 Source: Central Bank of Costa Rica and Minister of Finance 43#44Macroeconomic Program 2019-2020 Costa Rica Credit and Monetary Aggregates National Savings (Approximated by financial wealth) 2018 2019 2020 7.5% 8.5% 7.4% Credit to the Private Sector 2019 2020 2018 3.5% 4.9% 5.5% 44#45Macroeconomic Program 2019-2020 Risk Analysis All projections in this Program are based on the best available information up to January 2019. There exist, however, risks arising from international and domestic factors, which could generate deviations in the projections. 45 45#46Macroeconomic Program 2019-2020 Risk Analysis External Lower global growth Trade tensions. Financial market volatility. Worsening political conflicts in the region. International volatility in commodity prices: Mainly oil prices. 46 46#47Macroeconomic Program 2019-2020 Risk Analysis Domestic Absence of Supply shocks approval for external funding. associated to adverse climatic Social tensions (strikes). conditions. 47#48Macroeconomic Program 2019-2020 Macroeconomic implications of lack of authorization to international bonds issuance (Alternative scenario) Funding requirements should be met in domestic markets or multilateral loans. Uncertainty. Upward pressure on domestic interest rates. Stress in currency, liquidity and debt markets. Private sector crowding out. Lower GDP growth and employment generation, higher poverty. 48 188#49Scenarios Central Government's Debta Average 2019-2020 Base Alternative 59.1% 60.5% Central Government's Domestic Debta 45.0% 49.3% Interest Payments b 4.4% 5.1% Credit to the Private Sectorc 5.2% 4.5% GDPC 3.1% 2.1% a As % of GDP. b Ratio to GDP. C Annual growth rate. Source: Central Bank of Costa Rica 49 49#50BC BANCO CENTRAL DE CR COSTA RICA The Central Bank's Macroeconomic Program: An Overview of 2018 and Perspectives for 2019-20 Rodrigo Cubero Brealey President, Central Bank of Costa Rica This Program was approved unanimously by the Board of Directors of the BCCR on January 25, 2019.