Crisis in Nicaragua: No Solution in Sight

In the view of Fitch Ratings, continued political unrest could undermine investment conditions and economic growth, as well as raise the risks of confidence shocks to the financial system and macroeconomic stability.

Friday, May 18, 2018

From a statement issued by from Fitch Ratings:

Fitch Ratings-New York/San Salvador-17 May 2018: Continuing protests and resulting political violence in Nicaragua heighten risks to political stability and governability, says Fitch Ratings. Continued political unrest could undermine investment conditions and economic growth as well as elevate risks of confidence shocks to the financial system and macro stability.

Large-scale demonstrations have continued now for almost a month across multiple cities, leading to at least 49 protesters' deaths. The use of force against demonstrators by police and supporters of President Daniel Ortega and Vice President Rosario Murillo has undermined public trust in the administration and will limit the government's ability to implement reforms. A national dialogue between the government and civic groups began Wednesday, although it is uncertain whether it will lead to a political resolution.

The Ortega-Murillo administration has less political capital to govern. Beyond immediate policy formation risks, the political disruption raises questions as to the sustainability of the current administration through 2021, when the next elections are scheduled. New elections may be called, as Ortega set a precedent for this in 1989; however, the weak organization and funding of opposition political parties would create short-term uncertainty for policy continuity and steep administrative challenges for any new government. Although an extreme tail-risk, there is potential for a destabilizing regime-change scenario.

Larger government financing needs and faster growth of the general government debt burden will be the main consequences for public finances as social security program (INSS) losses continue. The partial reform of INSS , which sparked the initial protests on April 18, was rolled back (see "Social Security Reversal to Lift Nicaragua Deficit, Debt," at www.fitchratings.com).

Fitch expects Nicaragua's economic growth to decelerate in 2018-2019 from its recent 5% average growth rate. Lower consumer confidence, private foreign direct investment and budget space for public infrastructure investment could dampen domestic demand, while the economy faces challenges from higher fuel import prices, the end of Venezuelan financial support and a more uncertain investment climate. Externally, U.S. growth supports export demand and remittance receipts, while higher oil prices could lift the current account deficit (5% of GDP in 2017).

The financial system is stable, although it has some structural vulnerabilities. Nicaraguan bank capital and liquidity levels are sufficient, although banks' above-average credit growth and profitability are likely to fall to rates more in line with Central American peers. The large share of short-term deposits and high financial dollarization increases the vulnerability of the banks and economy to confidence shocks. Bank deposits declined 3.7% from April 18, 2018 to May 9, 2018. Some Nicaraguan banks are accumulating liquidity by restricting lending in segments affected by the protests (e.g. consumer loans, SMEs and tourism). Fitch expects an increase in nonperforming loans from the low levels (1.0% of gross loans) of December 2017.

Political developments could hasten U.S. congressional passage of the NICA Act, which Fitch expects would dampen U.S. FDI but not undermine multilateral loan disbursements (see "US NICA Act Unlikely a Major Financing Risk to Nicaragua," at www.fitchratings.com).

The central bank has a small external liquidity buffer relative to external liabilities, which supports the stable currency arrangement (a crawling peg to the U.S. dollar). Net international reserves (USD2.938 billion at May 14) have increased since the end of 2017. The international liquidity ratio (including external debt service) is close to 200%. The central bank has an additional USD200 million external liquidity line from the Central American Bank for Integration. Fitch estimates external amortizations and interest at USD844 million, 11% of current external receipts, in 2018. Most public external debt is official at concessional terms, limiting refinancing risk.



More on this topic

Nicaragua: Slight Improvement in Risk Outlook

November 2019

Fitch Ratings decided to keep the country's risk rating at B, but changed the outlook from negative to stable, arguing that there are some signs of stabilization of Central Bank reserves and commercial bank deposits.

The revision of the outlook reflects the stabilization of central bank reserves and commercial bank deposits, a significant fiscal adjustment and social security reform that have reduced domestic financing needs and a pronounced external rebalancing that has facilitated the external financing requirement, the rating agency reported.

Fitch Downgrades Nicaragua's Debt Again

November 2018

Justifying a larger-than-expected economic contraction, a growing fiscal deficit and a greater risk of internal and external financial constraints, the rating agency lowered the rating from B to B-.

This is Fitch Ratings' second downgrade so far this year. In the first quarter, the rating was B+ with a solid outlook, in the second quarter the rating agency downgraded it to B with a negative outlook, and now it downgraded it to B-, and kept the negative outlook.

Fitch Downgrades Nicaragua to 'B'

June 2018

The downgrade and Outlook change reflect increasing political instability and the corresponding deterioration of Nicaragua's investment, economic growth, and public finance outlook

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-22 June 2018: Fitch Ratings has downgraded Nicaragua's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B' from 'B+'. The Outlook is Negative. 

Elections in Nicaragua Confirm Continuity

November 2016

According to Fitch Ratings the reelection of Daniel Ortega as president of Nicaragua means stability in the country's economic policies.

EDITORIAL

Stability and economic and political continuity is what Fitch Ratings envisages for Nicaragua after the outcome of the presidential elections last Sunday, in which President Daniel Ortega was declared the winner, with 70% of the vote, according to a report by the Supreme Electoral Council. 

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