Economic Situation Report

Economic Situation Report
Economic Activity
The latest GDP (Gross Domestic Product) data announced at the end of September
for the period from April to June indicates better performance by the economy as compared to the prior quarter derived from Free Zone exports.
Quarterly figures grew at an annual rate of 4.24% revealing a higher volume of international trade, while household and Government consumption growth rates decreased, as did investment and gross capital formation.
The rate of growth in exports accelerated throughout the year, particularly exported September 2013 goods as compared to exported services, according to BCCR data.
Procomer data also shows that Free Zone exports from April to June exceeded accumulated exports between January and March by 12%. In fact, May and June show the highest monthly income for the year for this regime. Accumulated Annual Free Zone sales at the end of August increased by 2.8% while the Normal Regime dropped 6.7%.
Gross Domestic Product

Interannual Accumulated Variation
GROSS DOMESTIC PRODUCT
Annualized Quarter
Investment Strategy
Adriana Rodrguez arodriguez@aldesa.com
Source: Aldesa graph based on BCCR data.
Lower prices and lower exports affected traditional exports, including coffee, banana, beef and sugar. The accumulated value of exports to August is 13% less than for the same period last year.
Free Zone exports equaled 54% of total national exports, while Definitive or Normal Regime sales were at 44%. Inward processing arrangements account for the remaining 2%, according to total accumulated figures to August.
Quarterly growth in household consumption is declining and is only comparable to 2009 figures. The different Consumer Confidence indexes show lack of satisfaction and pessimism in their perception of the economic environment.
In our opinion, consumer disposable income has been hit hard in the last two years. First because of the sudden increase in the Basic Lending Rate during 2012 combined with extremely high fuel prices. During this year there have been
constant increases in the prices of regulated goods and services, which have diminished household consumption capacity.
In addition, slow economic growth has led to higher unemployment rates, at a time of increased political uncertainty. In spite of the upcoming Christmas season, we do not see a turnaround in the trend towards declining levels of private consumption.
Household Consumption
Quarter to Quarter Variation
Final Consumption Home Expenses
Interest Rates
During September the Basic Lending Rate (BLR) fluctuated between 6.50% and 6.55%, a remarkably stable behaviour for the year caused by the new methodology used to make weekly calculations.
The BLR has met with some resistance against decreasing from the current 6.55% level and we have seen certain pressure towards increasing it in recent calculations. This could lead to a rate between 6.60% and 6.70% in the next few months.
Although Public Banks pay an average rate of around 6.06% and account for 63% of the BLR behavior, the Private Bank Group pays close to 6.86% and Savings and Loan Cooperatives pay 8.63%, together accounting for 30% of BLR movements, which caused the increase in the final average.
Mutual finance companies have had the lowest participation paying an average of 6.01% for 6-month deposits and accounting for 7% of the BLR calculated.
The four groups that comprise the calculation of the BLR have dropped their deposit rates significantly from January to September and as the rates in the banking system decrease, many depositors have moved over to Cooperatives, increasing their weight in calculating the BLR from 14.6% to 15.5% during this year.
Base Lending Rate
Source: BCCR. Prepared by Aldesa.
While short term rates in colones have remained stable, Government Bond rates and yields for terms beyond 2020 have been traded with a certain increasing trend.
2028 bonds have gone from an 8.33% yield in July to 8.84% in October and other bonds for 2020, 2022 and 2023 have behaved similarly.
The national dollar denominated bond market is still somewhat unstable and subject to international adjustments in the external debt curve. Internal bond yields have risen, although still not in the same proportion as for external debt bonds.
Economic Situation Report 3
The 2020 dollar bond has gone from trading at a 4.41% yield in May of this year to the current 5.14%. This means a price drop from 102.50 to 98.29, respectively.
Likewise, before the Federal Reserve change in Monetary Policy, the 2025 bond was traded at prices close to 103, with a 4.47% yield, while in October they were traded at 95.69 with a 5.55% yield. international markets. External debt bond yields are quoted at 5.80% on
The current fiscal situation, even assuming another successful placement of $1 billion on the international market during the first quarter of 2014, in our opinion implies a steeper slope in the yield curve due to less confidence and/or less appetite for long term Government bonds by national investors.
With regard to dollar interest rates, although the Prime, Fed Funds and Libor rates remain at minimum levels during 2014, the scenario is primed for higher investment yields, provided the Federal Reserve decreases its purchases of US Treasury Bonds in accordance with its Monetary Policy plan. In the absence of inflation in this country, we believe that yields should again reach this years maximums during the first half of next year. However, the large majority of investments have already assumed this adjustment.
Inflation
At the end of September, 46% of the 292 goods in the Basic Basket increased in price, 37% decreased and 17% showed no change according to INEC data.
General price levels increased by 0.13% in September. The accumulated increase for the year was 3.77%, for an interannual inflation of 5.37%
According to INEC data, during September the highest incidence on this increased price index derived from increased fuel prices and in general, during the year, the prices of regulated goods and services that have put pressure towards an increased inflation level.
As far as groups are concerned, rentals and housing services prices increased the most during the year, 10.31%; followed by alcoholic beverages, cigarettes and education.
Data on price behavior are different because of the mentioned increases in tariffs on goods and services.
Therefore, for September prices for regulated goods had accumulated interannual growth of 11.7%, while unregulated were at 3.7%. At the same time, inflation for 12month tradable goods was at 1.6% and non-tradable goods at 7.3%.
Consumer and Regulated Price Index

Interannual variation
Regulated Inflation
Regulated Variation
Un-Regulated Variation
Source: Aldesa graph based on INEC data.
Exchange Rate
During September the volume of currency traded on the MONEX market increased by 7.4%, as compared to the total traded during August.
A total of $361 million was traded during September -- $25 million more than August. Of this total, $149 million were acquired by the Public-Non Banking Sector (PNBS), representing close to 40%.
The behavior of PNBS purchases has been influenced since November of last year, by the Central Government currency sales derived from the sale of bonds abroad.
In September, trading prices reached levels not seen since January and in general the currency market seemed to have a dollar surplus, for this reason dollar sellers had a better trading position.
BCCR only had to buy dollars on one occasion, but for a significant amount -- $57 million -- coinciding with the expiration date of a Ministry of Finance internal debt
bond in colones. For this reason, it was assumed that Finance sold dollars from Eurobond placements to cover this payment.
Average MONEX Exchange Rate

513 511 509 507 505 503 501 499
Sep/12 Oct/12 Nov/12 Dec/12 Jan/13 Feb/13 Mar/13 Apr/13 May/13 Jun/13 Jul/13 Aug/13 Sep/13 Oct/13
Ave. ExRate TC Promedio
Purchase Int. Int. Compra
The remaining currency was acquired by the public sector, almost 45% of the total traded. Average dollar trading prices in September ($502.73) were higher than prices for prior months, very close to $500.00
Fiscal Deficit
Data on Central Government finances to August were similar to for recent years. A monthly permanent operating or current deficit and a large financial deficit because new debt was used to finance prior periods.
In August the monthly deficit in current expenditures was 94 billion, for an 8 month accumulated deficit of 455 billion. This implies a dangerous deficit growth of 25% in only one year. The total financial deficit reached 841 billion, 27% more than last year.
The deficit to August represents 3.4% of the GDP and in our opinion, will be higher than 5% by the end of the year, further undermining financial stability perspectives for 2014.
Deficit of the Central Government

8-month Aggregate
Million of Colones 0
-100,000 -200,000 -300,000 -400,000 -500,000 -600,000 -700,000 -800,000 -900,000
Dficit Primario Primary Deficit
Dficit Financiero Financial Deficit
+ 25%
+ 27%
2013 2012
Source: Aldesa graph based on Ministry of Finance data
Additional Information
Economic Activity Index by Sector

Indirectly measured Financial Mediation Services Finance and Insurance Services Other services Rendered to Companies Mining and Quarry Material Exploitation Commerce Construction Transportation, Storage and Communication IMAE with IEAT, Cycle Trend Hotels Remaining Industries Manufacturing Industry Power and Water Agriculture, Silviculture and Fishing IMAE Cycle Trend
Activity Index for the Manufacturing and Construction Sector

Manufacturing Industry
Construction
Inflation Expected
BCCR expectations survey
8.00% Inflacin 12 Meses 12-month inflation 7.50% 7.00% 6.50% 6.00% 5.50% 5.00% Sep-10 Sep-11 Sep-12 Sep-13
Secondary Market Yields
External Debt Instruments

Government $ Bonds
Bond Price Yield
Source: BNV. October 09, 2013.
Internal Debt Instruments Ministry of Finance

Fixed Rate Dollar Instruments
Government $ Ex Rate
Bond Price Yield
Ministry of Finance
Fixed Rate Colones Instruments
Government Ex Rate
Bond Coupon Price Yield
10

Economic Situation Report

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Economic Situation Report