Economic Situation Report

Economic Activity

Economic Situation Report

Inter-annual growth in the Monthly Economic Activity Index (EAI) reached 2.94% in November. The annualized economy growth rate for October and November peaked at 4.94% in contrast with the decreased or zero growth rate in the second and third quarters. In spite of this, the average over the last 12 months remained above 5%, which shows a trend approaching real GDP growth.

January 2013

In November services rendered to companies had the best growth rate (8.24%) with financial services in second place at 6.8%. Manufacturing improved compared to the previous month, modestly reversing the trend over the last few months. We expect momentum to continue on the rise in the next few months, primarily due to renewed optimism in the United States.

Monthly Economic Activity Index

12-month Variation Variacin 12 meses 8.0% 6.0% 4.0%
2.49%

12-month Average Variation Variacin promedio 12 meses

Investments Strategy Department

2.0% 0.0% -2.0% -4.0% -6.0% nov-08

nov-09

nov-10

nov-11

nov-12

Adriana Rodrguez arodriguez@aldesa.com

Source: Aldesa graph based on BCCR data.

Informe de Coyuntura Econmica

Construction continues to be one of the most dynamic sectors, growing at an annualized rate of 8.14% in October and November, driven mainly by private construction. In 2013 we expect public construction to make this indicator more dynamic compensating for the anticipated downturn in private construction because of credit restriction measures recently announced by the Central Bank. This is important because, as mentioned in prior reports, this behavior has gone hand in hand with the restoration of credit, as well as better performance in the local financial sector. For 2013 economic growth is expected to be slightly lower than 2012. On the

positive side, the possibility of an international crisis was considerably reduced because of renewed confidence in the Eurozone and in the monetary policies of the principal central banks around the world (Federal Reserve, European Central Bank and the Bank of Japan).

Interest Rates
Interest rates on the national market have noticeably decreased since November. Their behavior has accelerated over recent weeks after the Government declared war against so-called swallow capital" -- international capital that takes advantage of the high interest rates in colones. Entrance of these dollars into the country resulted in strong Central Bank intervention in Monex, exhausting the entire Plan for the Accumulation of International Reserves. In light of this, the government announced its plan to discourage the entrance of this capital, including: the promotion of lower interest rates and control of this capital in order to reduce the benefits from speculation on the local market to lessen pressure on the exchange rate. These types of measures, although difficult to implement, are often the key for economies with low margins in fiscal and monetary policy, as in the case of Costa Rica. The basic lending rate has decreased some 60 basis points, reaching 8.6%.

Economic Situation Reort

Basic Lending Rate

11.50% 10.50% 9.50% 8.50%

8,30%
7.50% 6.50%
ene-10 ene-11 ene-12 ene-13

Source: BCCR. Prepared by Aldesa.

This decreasing trend in rates is expected to continue during the first part of 2013 with BCCRs adjustment in Direct Central rates and they are expected to continue to influence the market to maintain this trend. There is more uncertainty for the second semester due to the governments fiscal deficit; however, if financed abroad, the pressure to increase rates would be moderate. Credit grew in the month of December at a rate of 14%. Credit in foreign currency had the highest growth (18.1%) because of lower rates and expected devaluation. More moderate growth in credit is expected for 2013 as compared to 2012, particularly after CONASSIF (National Financial System Supervisory Council) expressed its concern over the impact that increased credit in foreign currency could have on financial stability, and its dependence on foreign lines of credit. Some type of regulatory restriction is likely to reduce its growth. The stock market continues to show a substantial drop in medium and long term interest rates for financial debt instruments, both in colones and dollars -- equally for Government and private issues. However, there have been certain gains for some participants. With the abrupt downturn in the long segment of the yield curve, the rest of the terms have adjusted downward, with more liquid securities showing more significant adjustments.

Economic Situation Reort

As the first Eurobonds came out on the market in November of last year, dollar security yields were immediately corrected downward or prices rallied. The most traded dollar bonds, with a 2025 expiration date, went from a yield of 6.07% in October, to the current 4.85%. This means that the price rose from 91 to 102.2.

Inflation

According to INEC (Costa Rican National Statistics and Census Institute) data, prices
In 2012 BCCR met its goals for the fourth consecutive year.

for goods and services closed out the year at 4.55% growth, well within the BCCR goal for this year (+-5%). This goal was achieved thanks to the measures adopted by BCCR, for a slightly accelerated growth in the economy and for moderation of raw material prices (goods traded grew 1.8% in only one year); mainly in the last quarter of the year. In 2013 BCCR is expected to keep inflation under control. However, this situation is complicated by pressure to avoid the appreciation of Colones. Accordingly, it is possible that the year will close at a higher rate than last year. Of interest is the fact that during 2012 most growth occurred in the prices of goods and services regulated by the State. Inflation in this sector reached 9.88%, mainly due to constant cost increases in electricity, water, transportation services, fuel, etc.

Consumer Price Index

16% 14% 12% 10% 8% 6% 4% 2% dic-08 dic-09 dic-10 dic-11 dic-12 4.55%

Source: Aldesa graph based on INEC data.

Economic Situation Reort

Exchange Rate

In recent months the exchange rate trend reversed, increasing by 10 Colones. However, in January the exchange rate again dropped to the bottom of the currency band and BCCR had to continue its intervention to defend the low end rate. This exhausted the total Plan for the Accumulation of International Reserves of US$1,500 million (originally planned for use in the 2012-2013 period).

MONEX Average Exchange Rate

2011 525 520 515 510 505 500 495 ene

2012

abr

jun

sep

dic

Source: Aldesa graph based on BCCR data.

Pressure exerted on the exchange rate was produced by a combination of factors including Colonization of local portfolios, dollars sourced from Eurobonds and even more importantly the entrance of speculation capital. This capital entered the country to take advantage of high rates in Colones at 600 basis points above the dollar a product of internal financing of the fiscal deficit in the first half of 2012. This entrance of capital and external indebtedness put the country in a vulnerable position, since a relatively fast departure would destabilize transmission of monetary policy. For this reason, central banks around the world take action against this scenario.
Economic Situation Reort 5

As mentioned, to date the government has taken action by sending a proposal to the Legislative Assembly to discourage the entrance of this type of investment by the control of capital. It also fosters a reduction in interest rates. The question now, is what BCCR will do. Prior to the measures adopted by the government, there was a high possibility that the currency bands might be changed. However, now most probably the entity will decide to wait until the measures take effect, and foster more reduction in interest rates. A reduction in the low end of the band at this point would be counterproductive because it would cause frenzy among speculators.

Fiscal Deficit

2012 closed with a government deficit in excess of 1 billion, or 4.4% of the GDP, lower than Ministry of Finance projections at the start of the year. This is the countrys primary macroeconomic problem and the main cause of the high interest rates that attracted speculation capital. Fortunately, the economy expanded in 2012 to rates above 5%, which helps keep debt indicators stable. The highest monthly income for the year was recorded in December at 463 billion; However, expenses for the month were 557 billion, resulting in a monthly gap of 47 billion -- almost totally financed internally. December data, now in, indicates that 2012 ended with an operating deficit (not including interest) of 531 billion (34% higher!) and a total deficit of 1,003 million (19 higher). This means that for the first time it exceeded a billion colones in a year when capital investment dropped by 28.5%.

Economic Situation Reort

Central Government Deficit

12-month Aggregate

Bill

Dficit Primario Primary Deficit 600 400

Financial Deficit Dficit Financiero

Billions of Colones Miles de millones de colones

200 0 -200 -400 -600 -800 -1,000 -1,200 dic-07 jun-08 dic-08 jun-09 dic-09 jun-10 dic-10 jun-11 dic-11 jun-12 dic-12

Source: Aldesa graph based on Ministry of Finance data

In our opinion, hidden by the high availability of external financing, the debt problem will be important this year. This is particularly true since we are in a preelection year; therefore, the Government will retake capital expenses financed with foreign debt, and will retain an operating deficit. This implies a growing and continued deterioration of the debt ratio, further aggravated by lower projected growth for this year arising from the distortion in credit granted.

Economic Situation Reort

Additional Information

Economic Activity Index by Sector

Inter-Annual variation
ene-12 %
7.40% 11.23% 7.49% 2.77% 2.02% 4.58% 3.53% 3.90% 4.32% 2.54% 7.14% 7.95% 11.84%

Sector
Servicios de Intermediacin Financiera medidos Indirectamente Financial Intermediation Services measured indirectly Other Services Prestados a Empresas Otros Servicios Rendered to Companies Financial and Insurance Services Servicios Financieros y Seguros Contraction Construccin Mining and Quarry Extraction Extraccin de Minas y Canteras Sales Comercio Hotels Hoteles Agriculture, silvicultura y pesca Agricultura, forestry and fisheries Electricity and Water Electricidad y Agua Other de Industrias Resto Industries IMAE plus IEAT, Cycle Trend IMAE con IEAT, Tendencia Ciclo Transportation, Warehousing and Communications Transporte, Almacenamiento y Comunicaciones Manufacturing Industry Industria manufacturera

ago-12 %
8.00% 8.89% 6.26% 6.46% 6.24% 4.84% 4.25% 3.82% 3.65% 2.53% 3.72% 2.56% 2.00%

sep-12 %
7.83% 8.03% 5.67% 6.55% 6.33% 4.89% 4.23% 3.64% 3.51% 2.54% 3.10% 1.07% 1.18%

oct-12 %
7.24% 7.66% 5.06% 6.56% 6.29% 4.82% 4.18% 3.16% | 2.55% 2.59% 0.13% 1.05%

nov-12 %
6.87% 7.61% 4.46% 6.50% 6.07% 4.71% 4.16% 2.67% 3.51% 2.56% 2.49% -0.34% 1.80%

IMAE TENDENCIA CICLO IMAE CYCLE TREND

Source: Aldesa graph based on BCCR data.

7.14%

3.72%

3.10%

2.59%

249.19%

Activity Index for the Manufacturing and Construction Sector

Inter-Annual variation
Industria manufacturera Industry Manufacturing 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% nov-05 nov-06 nov-07 nov-08 nov-09 nov-10 nov-11 nov-12 Construccin Construction

Source: Aldesa graph based on BCCR data.

Economic Situation Reort

Market Performance Liquidity

Costa Rican Colones United States Dollars

Jan/12

Mar/12

May/12

Jul/12

Sep/12

Nov/12

Jan 13

Source: SIBO. Yields to January 31, 2013

Expected Inflation
BCCR Survey 8%

Inflacin 12 Meses 12-month inflation

7%

6% 5.6%

5% ene-10

ene-11

ene-12

ene-13

Source: Aldesa graph based on BCCR data.

Economic Situation Reort

Secondary Market Yields

External Debt Instruments

Government $B Bde$ Gobierno Security Ttulo

Precio Price

Yield Rendimiento

20/03/2014 01/08/2020 26/01/2023

104.25% 140.50% 103.36%

2.72% 3.75% 3.84%

Source: BNV. January 31, 2013

Internal Debt Instruments

Ministry of Finance
Fixed Rate Instruments in Dollars

Government $ExRt Tp$ Gobierno Security Ttulo

Precio Price

Yield Rendimiento

29/05/2013 07/08/2013 20/11/2013 20/05/2015 27/05/2015 25/11/2015 25/05/2016 24/05/2017 30/05/2018 27/05/2020 15/06/2020 25/05/2022 26/11/2025 26/05/2027
Source: BNV. January 31, 2013

100.00% 100.24% 100.20% 101.38% 108.52% 101.41% 109.02% 96.55% 103.25% 102.00% 126.09% 107.04% 102.50% 111.50%

3.06% 3.21% 3.65% 3.97% 3.73% 4.06% 3.97% 4.57% 4.37% 4.51% 4.78% 4.58% 4.80% 4.86%

Economic Situation Reort

10

Ministry of Finance
Fixed Rate Instruments in Colones

Government Tp Tp Gobierno
Security Ttulo Coupon Cupn Price Precio Yield Rendimiento

25/09/2013 19/03/2014 26/03/2014 24/09/2014 28/01/2015 24/06/2015 23/09/2015 23/03/2016 22/06/2016 28/09/2016 28/06/2017 27/09/2017 24/01/2018 28/03/2018 26/09/2018 27/03/2019 23/12/2020 29/06/2022 21/12/2022 28/06/2023

12.20% 8.28% 18.91% 7.80% 8.51% 9.66% 10.58% 8.74% 10.58% 13.00% 9.89% 11.04% 8.74% 11.13% 7.82% 9.20% 8.97% 9.43% 11.50% 10.12%

103.62% 100.75% 112.76% 100.52% 101.28% 103.94% 106.41% 102.24% 108.00% 114.33% 106.80% 111.47% 103.25% 114.82% 101.45% 103.50% 101.99% 105.69% 119.00% 113.87%

6.40% 7.56% 7.16% 7.45% 7.80% 7.82% 7.84% 7.92% 7.84% 8.36% 8.02% 8.03% 7.94% 7.60% 7.50% 8.46% 8.61% 8.54% 8.61% 8.12%

Source: BNV. January 31, 2013

Costa Rican Electrical Institute

Fixed Rate Instruments in Dollars

Costa Costarricense de Electricity Instituto Rican Institute ofElectricidad Security Ttulo Price Precio
Rendimiento Yield

10/12/2013 03/02/2014 20/05/2016 13/02/2019 12/11/2020 17/11/2021 24/06/2022 12/12/2024 07/09/2027 10/11/2021

102.60% 102.50% 102.02% 101.55% 102.00% 114.95% 109.88% 106.47% 108.54% 111.16%

3.98% 3.89% 4.59% 5.20% 5.19% 4.84% 5.61% 5.71% 5.99% 5.86%

Source: BNV. January 31, 2013

Economic Situation Reort

11