Nicaragua: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: C
Risk Assessment2
Moderate growth continues
Economic activity recovered slightly in 2010, having contracted in 2009 due to the international financial crisis and especially the recession in the United States, to which the Nicaraguan economy remains closely tied. In 2011, growth will likely continue at a rate comparable to that recorded in 2010. Economic activity will be mainly driven by household consumption, thanks to a public sector wage hike and a slight rise in migrant transfers, as well as by public spending, while the less than favourable business environment will continue to impede corporate investment.
Moreover, Nicaragua remains exposed to external shocks, and inflation will rise in the wake of higher world prices for oil and agricultural products.
Gradual consolidation of public finances
Larger-than-expected revenues in 2010 made it possible to bring down the budget deficit, which is expected to narrow marginally in 2011. The authorities have agreed to implement prudent budget policy under the Extended Credit Facility (ECF), initially concluded with the IMF in 2007 and extended until December 2011. This scheme focuses on the gradual consolidation of public finances: a broadened fiscal revenue base and improved tax collection, as well as improvements in public spending and the public sector employment system, should help ease the public debt burden (almost 80% of GDP in 2011). Advances in structural reform are also planned, with the restructuring of the electricity sector and a new Central Bank charter.
External account deficit remains high
Modest growth expected in the US in 2011 will affect exports of agricultural and manufactured products (from assembly plants - maquilas - in Nicaragua's free trade areas) which will be sluggish, with the effects of the very recent free trade agreement with the EU not yet fully materialized. Exports will be clearly outstripped by imports, particularly oil, despite preferential conditions granted by Venezuela as part of the PetroCaribe agreement. The trade deficit, accentuated by the services deficit, will only be partially offset by expatriate remittances. The result is expected to be a narrowing current account deficit, about half of which will be funded by North American investments. For the remainder, IMF support involves the intervention of multilateral institutions such as the Inter-American Development Bank, and bilateral support in the form of aid and concessional loans, mainly from the EU. The external debt will, however, creep up slightly in 2011, despite debt relief granted under the HIPC and MDRI initiatives.
The banking system remains on a sure footing, despite falling profitability. Bank supervision must, however, be tightened up, particularly in the cooperative and microfinance sectors.
Political manoeuvres in run-up to November 2011 presidential elections
Although President Ortega's Frente Sandinista de Liberación Nacional lacks a parliamentary majority, the country's leader exploits rifts within the three rival liberal opposition parties, ALN, MVE and Partido Liberal Constitucionalista (controlled by former President Arnoldo Alemán, whose 2003 prison sentence for money-laundering was quashed in 2009). In this context, the Supreme Court has made the controversial decision to allow President Ortega to run again in November 2011; he is likely to be re-elected as he remains the country's most popular political figure.
Strengths
- Mineral resources (gold, silver, copper) and agriculture (coffee, sugar, bananas, cotton)
- Member of the Central America – USA free trade zone (DR-CAFTA) since 2006 and ALBA (Bolivarian Alliance set up by Venezuela)
- Economic policy established in liaison with the IMF
Weaknesses
- Vulnerable to natural disasters and energy supply difficulties
- Insufficient healthcare provision, education infrastructure and significant poverty levels (half the population)
- Worsening public finances and high external debt
- Dependence on the US for exports, transfers and investments
- Problems with security and difficult business environment