Costa Rica wraps up election campaign as ruling party leads polls

Costa Rica heads to a Feb. 1 presidential election with ruling-party candidate Laura Fernández Delgado leading most polls (close to 40% in some surveys; 30% in a recent CIEP poll) and second-place Álvaro Ramos under 8%, amid a fragmented field of 21 candidates and roughly 45% voter indecision. The campaign is framed by continuity linked to President Rodrigo Chaves (approval ~60%), a recent dispute involving the electoral authority and calls to lift presidential immunity, and a deteriorating public-security environment — 2024 homicide rate 16.6 per 100,000, rising organized-crime influence in several provinces. For investors, a Fernandez first-round win would imply political continuity, but high uncertainty and worsening security risks present potential downside for sovereign risk perception, local markets and foreign investment appetite.

Analysis

Market structure: A Fernandez first‑round victory (polls show 30–40% vs ~45% undecided) favors continuity trades — Costa Rica sovereign credit and the colon should tighten/appreciate as political risk premium falls; expect 10–50bp compression in local 5–10y spreads and 3–6% CRC appreciation if outcome is clear within 72 hours. Losers: tourism, regional carriers and property in affected provinces (Limón, Puntarenas, southern San José) face demand risk as insecurity rises; private security and surveillance services gain pricing power.

Risk assessment: Immediate (days) — electoral volatility around Feb 1 could spike local asset implied vol +25–50%; short‑term (weeks/months) — security announcements (increased policing) may raise fiscal deficits by 0.5–1.0% GDP, pressuring sovereigns if markets doubt sustainability. Tail risks: post‑election unrest, or a legal standoff with the Tribunal Supremo Electoral, could widen spreads 100–200bp and cause >10% tourist revenue shock. Hidden dependencies include tourism ≈5–7% of GDP and remittances; disruption propagates to FX and bank asset quality.

Trade implications: If Fernandez wins outright, favor local sovereigns/CRC and long EM sovereign overweight vs EM equities for 3–6 months; if outcome is contested or crime spikes, rotate to defensive USD cash and buy sovereign CDS. Direct plays include short positions in tourism/airlines with 6–12 month horizon and buying puts for asymmetric downside protection; implement pair trades long EMB vs short EEM to capture bond preference.

Contrarian angles: Consensus assumes continuity = stability, but high undecided voters (≈45%) make a runoff or surprise possible — markets may be underpricing security risk; a continuity government could also increase confrontational governance raising institutional risk and fiscal slippage. Historical parallels (Mexico 2018) show elections that reduce short‑term volatility can still leave long‑run policy uncertainty; price in a 15–30% downside to tourism‑exposed names if homicide rates remain elevated.

Key Decisions for Investors

• If Fernandez wins in the first round (final result within 72 hours), establish a 2–3% notional long position in Costa Rica local‑currency sovereign paper or take a 3–6 month long CRC forward (target 4–6% FX gain or 20–50bp sovereign spread compression). Close position if 10y sovereign spreads tighten >50bp or FX moves beyond target, or widen >30bp from entry.
• Initiate 1–2% short positions in tourism/exposed equities: NYSE:CPA (Copa Holdings) and NYSE:LTM (LATAM) with 6–12 month horizon; hedge with buying 3‑month puts 5% OTM on each. Cover shorts if government announces a measurable security plan (police deployment + crime reduction targets) and tourist arrivals rebound by >10% QoQ.
• Relative value: overweight iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) 2–3% vs underweight iShares MSCI Emerging Markets ETF (EEM) 2–3% for 3 months to favor sovereign credit sensitivity to political continuity; unwind when EMB/EEM spread >5% or EM equity VIX rises >20%.
• Buy 3‑month sovereign protection if available (Costa Rica CDS) sized to 0.5–1% notional as insurance against a >100bp spread widening; alternatively buy 3‑month ATM straddles on regionally‑exposed airline tickers to capture short‑term event volatility around Feb 1.