Economic Situation Report

Economic Activity

Economic Situation Report

The Monthly Economic Activity Index (IMAE) showed positive but limited growth during January (0.13% annualized), which was explained mainly by the reduced productive activity from the manufacturing sector.

Inter-annually, the expansion rate for January was 3.1%, which represents a noticeable slowdown from the 5% inter-annual growth observed in September. March 2014 This deceleration as well as the subsequent economic activity slowdown indicated by the IMAE indicator during 2013 is related to the export rhythm of the Free Trade Zones.

As a matter of fact, the Free Trade Zone deceleration has caused the IMAE measured without the Free Trade Zones for January to be greater that the IMAE with Free Trade Zones, as observed between July 2012 and May 2013.

Monthly Economic Activity

Inter-annual and Average Variation

Variacin IMAE IMAE Variation

12-month Average Variation Variacin promedio 12 meses

Investment Strategy

8.0%

6.0%

4.0%

3.08%

2.0%

Adriana Rodrguez
arodriguez@aldesa.com
0.0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Aldesa graph based on BCCR data.

Economic Situation Report

The Free Trade Zone Sector suffered a downward trend in its monthly exports, significantly and especially in November and December. This downward trend was related to the decreased US production affected by their unusually bitter winter season, which meant the temporary suspension of production and transportation in the East and Central regions of the US.

However, exports from the Free Trade Zones in February increased by $45 million, for a monthly total of $487 million. The accrued amounts for the Free Trade Zones for the first two months of the year were 1.2% less than that accrued for the first two months of 2013.

Based on Aldesas own estimates, we hope that the export rhythm for the Free Trade Zones will improve throughout the year, as well as continuing with a positive trend shown by the exports from the Regular or Definitive Regime.

Regarding the latter, the economic activity level measured by the IMAE from the Central Bank of Costa Rica (BCCR), as well as exports performed by them presents an upward trend since August of last year.

Exports from the Definitive Regime in February (exports outside of the Free Trade Zones that also include traditional exports) reached $435 million, its highest level yet since May 2013. Accrual for the first two months of the year registered 2.6% higher than that for the same period in 2013.

At the aggregated level, exports to the European Union and South America in February presented higher positive variations (27% and 30%, respectively), these destinations also added to improved monthly exports to North America and Asia.

Similarly, the BCCR recently disclosed the final data on Gross Domestic Product (GDP) for the last quarter of 2013, which closed the year with a 3.54% growth for the last portion of the period. This growth was due to the strong progress of goods and service exports and a stable investment.

As a matter of fact, Direct Foreign Investment for the last quarter of the year was the highest on record with $929 million recorded for the last quarter of the year, and an annual total of $2,682 million ($2,288 million in 2012).

Economic Situation Report

BCCRs expectations for Direct Foreign Investment for the Macro Economic Program in 2013 was $2,069 million, this number was revised in June and reached $2,460 million.

Inflation

Price growth for goods and services in the Basic Basket was 0.62%, for an interAt the closing of March, the accrued inflation for the Quarter was 2.04% (2.5% for March 2013).

annual inflation of 3.2%, and 2.04% accrual for the quarter (2.46% at March 2013).

The monthly price increase did not exceed Februarys registered price (0.66%), even though the high spike in the exchange rate fed the expectations of an increase in goods and services for the Basic Basket, which included imported supplies.

Inflation expectations for the following 12 months went from 5.8% to 6.1% between January and February, and the expectations for inflation for the following 6 months went from 1.9% in January to 3.8% in February.

Consumer Price Index

Inter-annual variation
Regulated Inflation IPC Interannual Variation Un-Regulated Variation

Source: Aldesa graph based on INEC data

Economic Situation Report

Interest Rates

The Basic Lending Rate (BLR) went from 6.45% to 6.60%, calculated towards the last week of the month, and reaching its highest point since August 2013.

From the four groups that comprise the BLR, only the Group from the State Banks presented an increase in its capturing rates, which went from 6.05% to 6.35%, enabling all averages from paid rates to jump from 6.45% to 6.60%. Capturing rates from Private Banks remained at 6.73%, Co-operatives at 7.72% and Mutual Funds at 6%.

On March 13th the Central Bank increased its Monetary Policy Rate (MPR) from 3.75% to 4.75% as a response to the accelerated depreciation of the Costa Rican Colon before the US Dollar; this obligated the Central Bank to sell a total of $226 million in March and $104 million in February.

The increase in the Monetary Policy Rate by the BCCR was followed by an increase in their Direct Central capturing rates, which forced banks to compete against these higher rates in order to attract resources.

On the other hand, stock market yields for investment instruments in domestic currency presented an additional increase for the month, especially visible for fixed rate bonds with terms greater than 4-years.

Basic Lending Rate and Monetary Policy Rate

MPR

BLR

Source: BCCR. Aldesa.

Economic Situation Report

We consider that interest rates in domestic currency will be less pressured to rise once the resources come in for the next allocation of foreign debt bonds in the international markets.

However, the actions of the Central Bank upon the increase of the exchange rate (increasing the MPR) implies a higher floor for interest rate levels and a higher cost of money, which will be reflected in the cost of credits at a moment when there is a higher attractiveness feel among consumers.

Short-term interest rates in US Dollars in international markets suffered a slight adjustment in March, when the markets didnt heed to the message sent by the US Federal Reserve regarding a possible first increase in its Monetary Policy Rate for 2015.

However, at the local level there persists a high liquidity level in US Dollars that implies lower interest rates for savings in that particular currency; while certain investment instruments denominated in US Dollars show interest rates that are relatively higher, but are subjected directly to the risk of a reduced rating in the sovereign debt by Moodys.

Exchange Rate

The Colon-Dollar exchange rate suffered an extremely volatile trend during the month of March. This volatility was greatest during the first two weeks of the month. It was measured by its standard 15-day variation, as well as from the daily exchanges for the Colon from the Dollar price.

In the foreign currency wholesale market (MONEX), the exchange rate suffered movements that ranged between !520.00 and !580.25, and reached its lowest value towards mid-march, when it was traded at MONEX at !520 and its daily average closed at !540.79. Traded amounts at MONEX exceeded 49% for February. March experienced trades of $588 million, for a daily average of $29 million. The daily average for February was $19 million, for a monthly total of $380 million.

Economic Situation Report

Amounts traded at the bank windows tended to stabilize during the last half of March. The daily average traded at the windows for the first half of the month was $139 million, and $118 million for the second half. Daily average for windows for all of 2013 was $120 million.

MONEX Average Exchange Rate

TC Promedio Ave. ExRate

580 570 560 550 540 530 520 510 500
Mar-11 Sep-11 Mar-12 Sep-12

Int. Compra Int.Purchase

Yearly accrued devaluation 9.2%

Mar-13

Sep-13

Mar-14

Source: Aldesa graph based on BCCR data.

With the entry of foreign currencies presumed by the latest allocation of $1 billion in new foreign debt bonds for 2044, we expect that the purchases from the NonBanking Public Sector (SPNB) to diminish, and therefore relieving the exchange rate market pressure and allowing the exchange rate to rise once again mainly during the second half of the year.

Economic Situation Report

MONEX traded amounts and exchange rates The Average Exchange Rate at the Monthly Closing
$700 $600 $500 $400 $300 $200 $100 $0
ENERO FEBRERO MARZO $380.69 $345.54 515.99

Millones de USD Dlares Millions of USD$

Monto Negociado MONEX MONEX traded amounts

550.35

Exchange Rate Tipo de Cambio

549.70

$588.06

$555 $550 $545 $540 $535 $530 $525 $520 $515 $510 $505 $500 $495

Exchange Rate Tipo de cambio MONEX closing cierre MONEX

Source: Aldesa graph based on BCCR data.

Fiscal Deficit

The Government operational monthly deficit for February was !120 billion (0.4% of GDP), and with the financial load for the month, the unbalance was !131 billion (0.5% of GDP).

For the annual accrual, the fiscal deficit ascends to !326 billion (1.2% billion) for the first two months of the year. The accrual is 8% above that registered for the same period in 2013 (!302 billion). Total earnings improved by 5.9% regarding total earnings for the first two months of the year, with total expenditure increasing by 6.7%.

This expenditure showed a 9.1% growth for remunerations and 12.4% for transfers. At the earnings level, those perceived under the profit and utilities concept grew by 23%, and 19% for the exportations concept.

Economic Situation Report

Fiscal Deficit accrued as of February Data accrued for February from each year, in Billions

Billions of CRC Colones

FINANCIAL SUP/DEFICIT

Source: Aldesa graph based on Ministry of Finance data.

Additional Information
Economic Activity Index by Sector
Inter-annual variation

apr-13
Indirectly measured Financial Mediation Services Transportation, Storage and Communication Finance and Insurance Services Other services Rendered to Companies Hotels Remaining Industries Commerce IMAE with IEAT, Cycle Trend Construction Agriculture, Silviculture and Fishing Mining and Quarry Material Exploitation Manufacturing Industry Power and Water

aug-13

dec-13

jan-14

IMAE CYCLE TREND

Source: Aldesa graph based on BCCR data.

Economic Situation Report

Activity Index for the Manufacturing and Construction Sector

Inter-annual Variation

Manufacturing Industry

Construction

Jan

Jan

Jan

Jan

Jan

Jan

Jan

Jan

Source: Aldesa graph based on BCCR data.

12-month Expected Inflation

BCCR expectations survey

12-month inflation

Source: Aldesa graph based on BCCR data.

Economic Situation Report

Secondary Market Yields

Foreign Debt Instruments

Government $ Bonds
Bond Price Yield

Source: BNV. March 27, 2014.

Domestic Debt Instruments Ministry of Finance

Rate Instruments in US Dollars
Government $ Ex Rate

Bond

Price

Yield

Source: BNV. March 27, 2014.

Economic Situation Report

10

Ministry of Finance
Fixed Rate Instruments in CRC Colones Government Ex Rate Bond Coupon Price Yield

Source: BNV. March 27, 2014.

Economic Situation Report

11