Costa Rica's Governance Crisis: A Threat to Sovereign Debt Stability and Regional Markets

The arrest of Celso Gamboa, former Costa Rican Security Minister and Supreme Court judge, has exposed a systemic corruption scandal that could destabilize the country's economic and political equilibrium. At the heart of the case is an alleged narcotics trafficking network operating with the complicity of high-ranking officials, including claims of support from President Rodrigo Chaves' administration. This revelation, occurring amid heightened regional instability, poses significant risks to Costa Rica's sovereign debt, foreign investment inflows, and the broader Central American economic landscape.

Political Risks: Erosion of Institutional Trust
Gamboa's arrest, the second case under Costa Rica's newly strengthened extradition law (passed in May 2025), has ignited a national debate over governance. His accusations of government involvement in drug trafficking—despite unproven—have already triggered protests and calls for judicial reform. Public trust in institutions has plummeted, with polls showing approval ratings for Chaves' administration dropping to 28% in June 2025. The scandal's political fallout is compounded by the 2026 election cycle, which could further polarize the political landscape and delay critical reforms.

Economic Implications: Sovereign Debt and Tourism Decline
Costa Rica's economic resilience hinges on its reputation as a stable, democratic outlier in Central America. However, the Gamboa scandal threatens this narrative. Sovereign debt, currently rated BB+ by Fitch, faces pressure as investors reassess creditworthiness. The country's 10-year bond yield has already risen by 80 basis points since late 2024, reflecting growing risk aversion.

Simultaneously, the tourism sector—a pillar of the economy contributing 8.2% to GDP—is in freefall. Visitor numbers have declined 15% year-on-year, with U.S. travel advisories citing rising crime rates. This trend risks a self-reinforcing cycle: weaker tourism revenues could strain public finances, further pressuring debt sustainability.

Regional Contagion: Central America's Fragile Equilibrium
Costa Rica's stability has long contrasted with Nicaragua's authoritarian turmoil under Daniel Ortega, which has driven FDI to just 6.4% of GDP in 2024. Yet the Gamboa scandal now raises questions about whether Costa Rica can sustain its relative advantage. Contagion risks are materializing as investors reassess the entire region. A spike in bond yields for Guatemala or Honduras, for instance, could indicate broader investor skepticism toward Central American markets.

Investment Strategy: Hedging Against Governance Risks
The risks to Costa Rica's sovereign debt are clear. Investors should consider:
1. Shorting local debt instruments: Positioning against bonds like the Cortico 2030 could profit from yield increases.
2. Credit default swaps (CDS): Use CDS to hedge existing exposures to Costa Rican debt.
3. Avoiding regional exposure: Diversify out of Central American equities or bonds, given the potential for cross-border contagion.

Meanwhile, long-term investors might capitalize on a potential rebound if governance reforms materialize. However, with elections looming in 2026, the path to credible reform remains uncertain.

Conclusion
The Gamboa scandal marks a turning point for Costa Rica. Its ability to address institutional corruption and stabilize investor confidence will determine whether it retains its role as a regional safe haven. For now, the risks to sovereign debt and regional stability are too acute to ignore. Prudent investors must prioritize hedging strategies or outright short positions in local debt, while keeping a wary eye on Nicaragua's continued decline—a reminder of how governance failures can unravel economic gains.

The writing is on the wall: without meaningful reform, Costa Rica's status as Central America's “economic island” may soon be submerged by the very tides of corruption it sought to contain.