The government of Carlos Alvarado and the main financial institutions of the country are betting on facilitating the necessary conditions so that the appetite for consumer credit is reactivated, which has been in a slowdown for some time.
The main problem they face is that consumers in Costa Rica are pessimistic: their confidence towards the economic future has not improved since last December when the Plan Fiscal (Tax Reform) went into effect.
In fact, according to the most recent Confianza del Consumidor (Consumer Confidence Index) published by the Universidad de Costa Rica (UCR) in May, the confidence of consumers towards the economy reaches 33 points, on the scale is 0 to 100.
“Consumer confidence fell in the last 3 months and is at a level of 32.9 points (on a scale of zero to 100), which reveals pessimistic consumers. This is likely because consumers do not perceive the economic recovery expected in the country after the approval of the Tax Reform. For this reason, if the country’s economic current conditions and future expectations are compared, the current moment is valued more negatively than 3 months ago,” said Johnny Madrigal, a UCR researcher.
Another factor that is leading to the slow growth of credit is that the population is over-indebted: According to the Banco Central (Central Bank), 60% of the income goes to pay off debt.
According to economist Roxana Morales, of the Economic and Social Observatory of the Universidad Nacional (UNA), since April 2017, the nominal growth rate of credit to the private sector has been constantly decelerating, at that time it grew to 13.6% year-on-year and currently grows by 3.1%; that’s 26 months of continuous fall.
“If analyzed in real terms, in April 2017 the credit grew by 11.58% year-on-year. As of June 2019, there is a decrease of 0.04% in real terms, the balance at June 2019 is ¢20.7 billion colones, which is equivalent to 60% of the estimated GDP for 2019,” Morales added.
What is the government doing? Actions in the area of economic recovery have focused on improving access to credit so that more people, small businesses and investors take out loans and this contributes to economic recovery.
With the help of the Central Bank, interest rates driven by cuts in the Tasa de Política Monetaria (Monetary Policy Rate) have been lowered, which is a reference for all financial institutions to react.
When this indicator is down, interest rates will gradually follow that path.
On the other hand, the Central Bank downgraded the legal minimum on deposit by 3 points, allowing financial institutions to have more resources to lend and on better conditions.
In addition, recently the Consejo Nacional de Supervisión del Sistema Financiero (Conassif) – – approved a series of measures that will benefit 63,000 debtors.
A credit stain will be erased from those who were wrongly classified in category CPH3 (very bad payers) and will be classified in CPH2 and CPH1, which are lower risk classifications.
A debtor with CPH3 rating cannot borrow for a period of 48 months. The lower risk classifications will allow former CPH3 to now borrow.
The Conassif also enabled the possibility that debtors can readjust, extend or refinance their maximum credits once a year, until mid-July 2021.
“The previous measures reflect the vision of the regulatory and supervisory authorities to adjust the regulations and their processes when the circumstances and economic reality of the country change, without jeopardizing the strength and stability of the financial system,” said Luis Carlos Delgado, President of Conassif.
Financial experts agree that the measures are useful, but their effects will not be felt in the short term.
The measure is very valuable for debtors who had some isolated situation that affected their history and have maintained an adequate historical payment behavior, giving them access to credit financing. However, for those with an over-indebtedness, the measure will be of no help.
Though the government plan is to restore consumer confidence, financial institutions also need confidence to lend.
