There is a new movement of expats looking towards Costa Rica in the short to medium term, baby boomers are reaching critical mass and critical financing which could see them escape from the doldrums of the US economy and take advantage of major changes in Costa Rica. The movement of these so-called “baby boomers” should not be underestimated as official estimates suggest they could total 76 million people from the US alone, account for in excess of 80% of personal finance assets in the US and control in excess of 50% of discretionary spending.
There is no doubt that the baby boomer generation is looking for new pastures, looking for opportunities to maximise their finances and to live a life very different to that on offer in the US at the moment.
Why might baby boomers target Costa Rica?
If you take a step back and look at the changes in Costa Rica over the last 20 years it is not difficult to see why expats have the country on their radar today. This is a country which is steeped in tradition with a very attractive culture, this is a country which has undergone monumental economic and political change and to cap it all this is a country which offers an array of different climates and environments to suit many expats.
We will now take a look at the main aspects of life in Costa Rica, what is attracting the so-called baby boomers and what the future holds for a country which has often been overshadowed by the likes of Brazil, Mexico, etc but is now beginning to stand on its own two feet.
The economy of Costa Rica
If we take a look at the economy of Costa Rica in the cold light of day it looks very impressive to say the least. While gross domestic product grew by around 5.3% per annum during the 1990s it has fallen slightly to 4% per year since 2001 but when you bear in mind the ongoing challenges of the worldwide economic downturn, not to mention the very close relationship with the US, this is still a very impressive performance. Indeed, in all honesty the 4% average increase in gross domestic product since 2001 is actually a relatively better performance than that seen in the 1990s when taking into account the economic environment.
Initially it was expected that the Costa Rican economy would grow by around 4.8% during 2013, compared to 4.6% in 2012, although recently this has been downgraded to around 4%. It seems that the weakness of the dollar and the country’s relatively close trading relationship with the US is being impacted by the softer than expected US economy. However, it seems as though the Costa Rican government is looking beyond the US trading relationship in the future and recently opened talks with China about a designated “economy zone” within Costa Rica.
There is no doubt that an ongoing expansion of trade relations around the world, less reliance upon the US and a more broad economic strategy with regard to business creation will benefit the economy going forward.
Is the Costa Rican economy at a turning point?
There is no doubt that the last 10 years or so have been very impressive with regards to the economic performance of Costa Rica. We have seen major changes on the economic front, on the political front and indeed international investors have an appetite for the country never seen before. However, there is a growing belief that the Costa Rican government now needs to reinvest more tax income, improve the country’s infrastructure and also ensure that business creation is as simple and straightforward as possible going forward.
As we will cover below, the Costa Rican government recently introduced a property tax on luxury homes described as a “solidarity tax”. The idea was to use income from this particular tax avenue to clean up and rebuild the slums in some of Costa Rica’s larger cities so that the whole population of Costa Rica is able to benefit to some extent from the ongoing prosperity. There is some concern as to whether the authorities are using this particular tax revenue, and other tax income, as promised or whether some of it is being diverted to other projects and areas of general government spending.
In years gone by the average infrastructure spend as a percentage of gross domestic product was in the region of 4% and seemed at the time to offer a very interesting and strong base going forward. Disappointingly, this figure has fallen back to around 3% of gross domestic product in recent years although again, perhaps we are being a little unfair when you bear in mind the overall worldwide economic situation?
Ironically, critics of the Costa Rica government highlight the fact that infrastructure spending should in theory be higher than it is today but this does offer a very interesting opportunity for the future. As and when the infrastructure is upgraded, which would seem to be only a matter of time, this will not only create a significant number of new jobs but it will also bring in an array of new international partners. Inadvertently, the recent lack of significant investment in the Costa Rican infrastructure could have a monumental impact upon the country going forward, make businesses more competitive, support the employment market and move the Costa Rican economy on to a new level.
Property in Costa Rica
Over the last 10 years we have seen demand for property in Costa Rica increase dramatically and indeed many overseas investors have been looking towards countries such as Costa Rica as something of a “safe haven” during these difficult worldwide economic times. As we touched on above, the Costa Rican government has to a certain extent taken advantage of this landslide of investment in Costa Rican property by introducing the new “solidarity tax”.
The fact that property prices upon which the tax is based were upgraded recently angered some overseas investors although if the tax revenue is used as the government promised, to clear and rebuild the country’s slums, then it will be a price worth paying. This promise has gone down very well with the Costa Rican public many of whom were becoming angered at the apparent investment returns seen by overseas investors in their country.
One thing is becoming more evident as the ongoing economic and property boom in Costa Rica continues, more and more people are now moving away from the densely populated inner cities to obtain better value for money. The irony is, as we touched on above, as and when the Costa Rica government decides to inject significantly more funding into infrastructure upgrades this will bring more rural towns and villages into play and the highly condensed property market will expand. In many ways, the expected increase in infrastructure spending could well hold the key to the future of Costa Rica as an economic entity and an international investment arena.
Will the government milk international investors and expats?
The reality is that when international investors move lock, stock and barrel into a new investment arena because of the perceived value for money, there will come a time when the government of the day will look to claw back some of the potentially excessive investment returns created. Whether or not we are at that stage with regards to the Costa Rican government is a matter for debate but the recent “solidarity tax” on high-value properties in the country could well be the thin end of the wedge and signal a change in strategy.
If we take a step back and look at the situation from a distance, can we really blame a government such as Costa Rica which has attracted significant international investment of late, made many international investors seriously wealthy and continues to attract more than its fair share of expats? The cost of living in Costa Rica has increased, the cost of property has moved ahead strongly but we are now comparing this against an economy which is much stronger, more broadly based and, assuming the government invests significant money in the infrastructure system, could well grow for many years to come.
Even if the worst-case scenario for economic growth in 2013 was to come in at around 4% this is a figure which European counterparts can only dream of. This is something which the US government will never achieve for years to come and this is still one of the better performing economies in Central America.
Despite the fact that we have seen an increase in property prices in Costa Rica, a sharp increase in the cost of living and a government which is seemingly changing its approach to taxing international investors and expats, this is still a very attractive area for the so-called baby boomers. Over the next few years we will see a significant number of expats moving from the US to countries such as Costa Rica, we are likely to see demand for Costa Rican property remain fairly strong and ultimately, assuming the government reduces business red-tape and encourages business creation, the economy appears well-positioned for the future.
There will be challenges ahead for the Costa Rican government, there will be some disappointments and failings but there is no doubt that a more open business arena, more fluid government spending and a fairer spread of the new wealth being created in Costa Rica will create a much firmer base going forward.
The Costa Rica News (TCRN)
San Jose Costa Rica