Nicaragua: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
In 2016, growth is likely to remain resilient, mainly driven by public spending and by stronger activity in the United States (largest export market and investor). Economic activity can be expected to benefit from the increase in public investment in infrastructure in the areas of education, healthcare (construction of hospitals and roads). Welfare spending should also increase with the expected increase in the number of beneficiaries of the flagship anti-poverty program "Zero Hunger" which should reach close to 44,000 families in 2016 (i. e. the double of the current beneficiaries). Stronger activity in the United States will benefit the tourist sector and household consumption which is benefiting from the increase in foreign remittances. Agricultural exports (coffee, sugar, peanuts), semi-manufactured products (sugar, beef, dairy products) will in all likelihood also benefit from of the increase in US demand. Manufacturing exports, especially textiles, should on the contrary slow down because of the increasing competition from some Asian countries after the signing of the Trans-Pacific agreement of a gradual elimination of customs tariffs, signed with the United States. Despite the stabilization of the oil price, inflation is likely to accelerate under the effect of vigorous domestic demand.
Towards a fiscal policy easing in the electoral period
The 2016 budget presented by President Daniel Ortega’s government provides in particular for an increase in the fiscal deficit (before donations) to 2.4% of GDP versus 1.9% of GDP forecast previously. The President, who will run for a third term at the presidential elections in November 2016, aims in particular to consolidate his electoral base thanks to an extension of his public works and social welfare program. The deficit should be easily financed by multi- and bilateral official loans (World Bank and Inter-American Development Bank in particular) as well as by donations estimated at close to 1.4% of GDP. The public sector receives significant external financial support as the share of donations exceeds 50%. The public debt, albeit substantial, is predominantly held by multi- and bilateral creditors (close to 98% of the total debt in 2014), while private creditors hold only around 2%. Accordingly, its cost remains relatively low because of the largely concessional nature of the financing.
Current account deficit growth under the effect of rising imports
The current account deficit should grow slightly under the effect of increasing imports due to the vigor of domestic consumption. While the stabilization of the oil price should still enable the country to reduce its energy bill, imports of capital goods can be expected to grow due to the improvement in the public works sector. Exports should benefit from the increase in US demand, while only partially covering the increase in imports. Remittances from Nicaraguans living abroad are expected to grow and contribute to the reduction in the current account deficit. This deficit will probably partly be financed by foreign direct investments (around 6% of GDP) and by multi- and bilateral official loans that will cover half of the capital formation of in the country and be concentrated in mining, agriculture, telecommunications and energy. The current account balance nevertheless remains threatened by a possible termination of the agreements for delivery of Venezuelan oil under the PetroCaribe program, given Venezuela's economic and political problems. As the sustainability of this financing is not guaranteed, the government is seeking seeks to reduce its dependence on Venezuelan oil by developing renewable energies which now account for close to half of the electricity produced in the country.
Thanks to his popularity, President Daniel Ortega will probably win the presidential elections in 2016
In power since 2007, President Ortega and his party, the Sandinista National Liberation Front remain the dominant political force in Nicaragua. The President enjoys a high level of popularity despite pronounced interventionism in all the political, administrative and legal processes in the country. As he holds the majority in the national assembly and as he managed to get a constitutional reform voted that allows him to stand for re-election indefinitely, it is likely that he will be able to run for and probably win a third mandate at the next elections in November 2016.
At the foreign policy level, the President is expected to maintain friendly relations with the United States. Frictions with Costa Rica appeared when the Nicaraguan government decided to send back close to 2,000 Cuban migrants that had crossed the country’s border illegally from Costa Rica to try to make it to the United States. The business environment remains poor and similar to that of the other countries in the region.