Nicaragua: Risk Assessment
Country Risk Rating
Business Climate Rating
- Mineral (gold) and agricultural (coffee, sugar, meat) resources
- Membership in Central America/United States and Central America/EU free trade zones
- Cautious economic policy
- Stable financial system
- Support from the international community
- Low crime rates compared with other countries in the region
- Highly vulnerable to natural disasters (cyclones, earthquakes)
- Healthcare and education shortcomings and persistent poverty rate
- Inadequate infrastructure (energy, transport)
- Structurally large current account deficit
- Dependence on international aid, particularly from Venezuela
- Institutional failings: concentration of power within the executive and the Sandinista party, corruption
Growth still performing well
Nicaragua is still characterized by relatively high growth; above the average for Latin America. In 2018, growth is expected to remain resilient, against a background of recovery in the agricultural and tourism sectors, still buoyed by robust domestic demand. It will above all be sustained by private consumption, thanks to higher incomes, in particular due to inflows of remittances from expatriate workers and lower unemployment – even if purchasing power will decline slightly because of higher inflation. This is expected to rise, not only because of internal dynamics, but also because of higher energy prices and the controlled devaluation of the cordoba (intended to improve the country’s competitiveness). Investment in the public sector (infrastructure projects) is expected to continue to boost productivity and attract FDIs, which are also favored under the law on PPPs of 2016, but will be less dynamic due to budget cuts. External demand is likely to weaken, because of modest growth in the United States and loss of competitiveness of the maquiladora industry.
By contrast, with Nicaragua’s highly dollarized economy (almost 90% of the banking system is in foreign exchange) financial conditions could tighten due to an expected strengthening of the dollar as US monetary policy becomes more restrictive.
Budgetary policy neutrality and exposure to American politics
The budget deficit is expected to remain stable. This is because, despite the growing need to fund the social security system (INSS) and the reduction in financial flows from Venezuela – which have notably been used to finance certain social programs (housing subsidies) – the government looks set to benefit from rising revenues, thanks to strong economic performance and cuts in investment spending aimed at controlling the deficit. Even if the public debt is considered sustainable, the developments in public finances remain exposed to economic changes in Venezuela. Moreover, if the NICA Act is approved (Nicaragua Investment Conditionality), the United States will make all future loans to Nicaragua conditional on the country’s respect of democratic principles, which would have a major impact on the public finances and would send a negative signal to investors.
The current account deficit is likely to remain substantial but stable. Imports (manufactured products, oil, food) are set to continue to grow as domestic demand grows, while exports (food, textiles, machinery and equipment) will bounce back only weakly, given the modest growth momentum in the United States in a context of the growing risk of protectionism (risk of uncertainty regarding the ALEC free-trade agreement). The financial flows from Venezuela will continue to decline further, while access to official multilateral loans, highly concessional in nature, could reduce (cf. NICA Act). By contrast, the transfer balance will be sustained by the still substantial remittances from Nicaraguans working abroad. However, these will still be exposed to a potentially more restrictive US immigration policy, which could result in a reduction of these payments (50% of which are from the US).
Stronger interventionist policy and worsening business climate
President Daniel Ortega of the Sandinista Liberation Front party (FSLN) won a third consecutive term in the November 2016 elections and remains very popular. His position was reinforced following the November 2017 municipal elections. FSLN’s victory was recognized by international observers, despite post-electoral violence that claimed several victims. The opposition, which is divided, has little influence on the political scene and State interventionism continues, with the desire for reform remaining weak. The country faces numerous challenges. Despite a favorable security climate, the country’s performance with regard to the business climate is the worst in Central America (127 out of 190 according to the Doing Business 2017 rankings).
Externally, relations with Costa Rica and Columbia are still characterized by tensions, especially with Costa Rica due to differences over the maritime and land borders, and the situation is unlikely to change much.