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
- Worst business environment in Central America (127/190 according to the Doing business 2017 ranking)
Political Unrest Drags on Growth
Whereas Nicaragua used to be characterized by above-average growth compared to the rest of Central America, economic activity in 2018 continues to suffer from the ramifications of the vast opposition movement to President Daniel Ortega, which began in April 2018. The tourism sector is heavily impacted by violent clashes and insecurity. Roadblocks by demonstrators severely disrupt the transport of goods, affecting the wholesale and retail sectors in particular. The construction sector will also suffer from the consequences of the crisis, with a delay in infrastructure projects to be expected and a decline in investment. Foreign investors, hitherto reassured by the stability of the Ortega's regime, will likely be more reluctant in the face of rising political uncertainty. On the demand side, although supported by the influx of expatriate remittances (+9.3% in Q1 2018 compared to the same period in 2017), private consumption is also likely to suffer from the crisis. The unemployment rate is expected to rise (4.2% in 2018 according to the central bank), as should inflation, notably via higher energy and food prices. However, external demand should remain fairly dynamic, supported by the growth of activity in the United States – the main destination for exports.
Weaker Public and Current Accounts
Public finances will likely also suffer from the spillover effects of the political crisis, which has reduced 2018’s growth prospects. The financial needs of the social security system (INSS), whose viability is now threatened, are weighing on the public account. The prospects for reform seem to be waning, especially given that the most recent reform project sparked the unrest in April 2018. Since abandoned, the project planned to increase contributions while reducing benefits.
The reduction of financial flows from Venezuela and a possible approval of the NICA Act (Nicaragua Investment Conditionality) by the US Congress would constrain external financing possibilities. Indeed, if this bill were passed, the United States would make future loans to Nicaragua conditional on the country's adherence to democratic principles, which would have a severe impact on public finances and send a negative signal to investors. A prolongation of the political crisis until the end of the summer could threaten the sustainability of the public debt, 80% of which is held by foreign investors. The external share represented 38% of GDP in Q1 2018.
The current account deficit is expected to increase in 2018. Exports (food, textiles, machinery, and equipment) will be strongly impacted by the political crisis and production constraints, while imports (manufactured goods, oil, food) should continue to grow in line with domestic demand. Financial flows from Venezuela will decline further, while access to official multilateral loans of a highly concessional nature may decline (see NICA Act). On the other hand, transfers of immigrants will remain high. They would nevertheless remain exposed to a possible more restrictive US migration policy that could reduce these flows (50% from the US).
Political Risk on the Rise in the Face of a Violent Crackdown
After winning a third consecutive term in the November 2016 presidential elections, President Daniel Ortega, from the Frente Sandinista de Liberacion Nacional (FSLN) party, enjoyed strong popularity until early 2018. However, the attempt to reform the pension system, which has since been abandoned, triggered a vast protest movement in mid-April 2018. The conflict became more severe as demonstrations were violently repressed, causing more than a hundred deaths. Conciliation negotiations organized by the Catholic Church are struggling to lead to a real agreement, while the government continues to suppress demonstrators who are demanding the departure of President Ortega and his wife, Vice-President Rosario Murillo. Nonetheless, the control of the various institutions by the Sandinistas and the absence of an alternative in the opposition give an advantage to the presidential couple, both of whom will likely be able to finish their mandate until the 2021 elections.
On the external front, relations with Costa Rica and Colombia remain characterized by tensions, in particular with Costa Rica, due to a dispute over maritime and land borders. However, the decision of the International Court of Justice in February 2018 in Costa Rica's favor, accepted by both parties, should ease tensions once compensation payments have been carried out. The government will finally have to face increasing pressure from the international community to negotiate a way out of the crisis with the demonstrators. In June 2018, the United States introduced visa restrictions for officials close to the government.