A recovery that has run out of steam

The solid economic recovery observed in 2021 will no longer be relevant in the face of the slowdown in the U.S. economy, the leading destination for exports and provider of expatriate remittances. However, remittance flows will remain high (+31% for the first five months of the year compared with the same period in 2021), thanks to the low unemployment rate in the United States and the new arrivals of Nicaraguan emigrants in the country. These remittances, which accounted for 17% of GDP at the end of 2021, support household consumption, as the labor market has remained stagnant since the 2018 crisis. However, these transfers must be increased due to soaring inflation, well above the central bank’s target window (3 +/- 1%). The support measures implemented by the government (fuel price controls) will not prevent price increases from significantly impacting the poorest households. The increase in the central bank’s key rate in June 2022, from 4 to 4.5%, will not be enough to limit inflation in the short term. On the other hand, it is expected to dampen credit growth to the private sector, which the needs of the public sector have already crowded out. Indeed, faced with the risk of default in the productive sector, banks tend to lend, in priority, to the public sector, leaving the private sector in a vicious circle of under-investment. Foreign investment will remain restricted to a few areas of activity, such as mining and energy (New Fortress Energy’s gas refinery project on the Pacific coast). U.S. sanctions against the main interlocutors of investors in the country threaten these investments’ success. Chinese loans are not expected to turn the tide in the short term. Public demand will likely remain focused on infrastructure if financing is obtained, particularly from China (USD 60 million for housing construction). High global prices will support mineral production, especially gold (despite the new U.S. sanctions against the state-owned gold company Eniminas due to its links with Russia) and agricultural production (coffee, sugar, meat). Manufacturing production, notably cables, electrical appliances, and clothing, should suffer from the U.S. slowdown. Construction will depend on public demand and obtaining adequate financing, while the tourism sector still needs to be developed, affecting the hotel and restaurant industry.

A less comfortable position for the public and external accounts

After their increase in 2021, the loss of momentum in demand should lead to lower revenue growth in 2022. The increase in spending to counter the effects of inflation will lead to a moderate re-increase in the deficit. The deficit is expected to be financed by access to multilateral loans from the Central American Bank for Economic Integration, whose weight in the country’s financing has increased in recent years. Because of its regional ownership, it is not subject to U.S. sanctions on the provision of funds by other multilateral agencies. New Chinese financing could be added, although the exact amount is uncertain. Largely concessional (93% of disbursements in 2021 came from multilateral agencies), the debt remains limited relative to GDP and, therefore, sustainable.

Regarding the external accounts, the balance of goods deficit is expected to increase. High global prices are increasing the import bill, especially for oil. Higher prices for agricultural and mineral exports will partially offset this. The services surplus will remain very small, while the income surplus will be stable. This is because dividend repatriation by foreign investors is increasing, but at the same time, remittance flows remain dynamic. Despite the lack of foreign investment, the current account deficit will be temporarily financed by foreign exchange reserves that are still comfortable (5 months of imports in December 2021). This should be sufficient to maintain the cordoba’s peg to the dollar.

Increased tensions with the international community following disputed elections and repression of the opposition

On 7 November 2021, Daniel Ortega, in power since 2007, and his vice president and first lady, Rosario Murillo, won the presidential election with 75% of the vote and the legislative elections. The process was widely boycotted by the opposition and criticized internationally. As the government had systematically arrested all opposition candidates in the preceding months, turnout was low. While the government announced a figure of 65%, the opposition announced only 20% participation, meaning that only Ortega’s supporters turned out (18% of voting intentions for the president, according to some polls). The election was widely criticized by the United States, the European Union, and the Organization of American States, which initiated an exclusion procedure. In response, the government announced that it would leave the organization in April 2022 without meeting the legal deadline for such a withdrawal. For its part, the United States increased its sanctions against the country’s senior officials. The passage of the Renacer Act in Congress on 3 November 3, 2021, obliges the executive branch to take such measures. To cope, the Ortega administration cut diplomatic ties with Taiwan in December 2021 to turn to China and its funding. In January 2022, the two countries signed a memorandum on Nicaragua’s participation in China’s Silk Road project, paving the way for various financing.