Cablegate: Data Confirm Nicaragua's Economic Decline in 2009

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UNCLAS SECTION 01 OF 03 MANAGUA 000250

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV NU
SUBJECT: Data Confirm Nicaragua's Economic Decline in 2009

Summary

1. (U) Data from January-November 2009, the latest period for which figures are available, confirm an economic contraction in Nicaragua of almost 2% last year. The global financial crisis played a major role in the decline, but internal political factors also dampened economic activity, especially investment. Construction fell by approximately 20%, followed by a contraction of 9% in financial services and a corresponding drop in real estate demand. As a result of a drought, planted areas declined by 10% in 2009, negatively affecting the agricultural sector. Exports fell by 8% compared to the same period in 2008, while foreign direct investment (FDI) declined sharply by 36%. Remittances from Nicaraguans working abroad dropped by 6%, as a result of high unemployment in the United States. Perhaps reflecting a fall in consumer demand, inflation decreased dramatically to only 1% for the year, while foreign exchange reserves grew to approximately $1.5 billion. Agricultural exports to Venezuela and other countries in the Bolivarian Alliance for the Americas (ALBA) boomed by over 400% compared to 2008. The results of a business survey conducted in September 2009 showed that Nicaraguan companies remain pessimistic about the investment climate. Projections for 2010 vary, but at best modest rates of growth are expected.

Nicaraguan Economy Suffers in 2009

2. (U) The Nicaraguan Central Bank's (BCN) Index of Monthly Economic Indicators (IMAE) showed that the Nicaraguan economy contracted by 1.9% through November 2009, the latest period for which figures are available. Sectors that declined most were agriculture, construction, retail, and financial services. Because of low rainfall as a result of the El Nino climate phenomenon, farmers planted 10% less area during the second growing season compared to the same season in 2008. The construction sector contracted by 19.7% as a result of decreased public and foreign investment, along with a fall in real estate demand. The financial services sector declined by 9% because of a decrease in bank lending and a corresponding decrease in interest income. The Nicaraguan fisheries sector fared better, improving its performance with a 12% growth rate due to better wild shrimp capture. The cattle and livestock sector saw a modest increase, with a growth rate of 2.2%.

Labor, Employment and Salaries

3. (U) The BCN calculates the Nicaraguan labor force to be 2.3 million people, of whom 2 million (or 92%) are currently employed. Of that number, 28% are employed in the agriculture, fishery and forestry sectors, 18% in the manufacturing sector, and 53% in the services sector (retail, government, transportation, communication, and financial services). Although officially unemployment is reported to be only 8%, underemployment is widespread. According to the International Monetary Fund (IMF), approximately 65% of GDP is derived from activity in the informal, undocumented sector. The minimum wage in Nicaragua, which varies according to the type of work, is adjusted twice a year via negotiations between the GON, union representatives, and the business community represented by the Federation of Business Associations (COSEP). Wages in Nicaragua's free trade zones are negotiated separately. In January 2010, a phased-in agreement was signed which raises the minimum wage for free trade zone employees to 10% by 2013.

As Expected, Foreign and Domestic Investment Down Sharply

4. (U) According to ProNicaragua, the GON's investment promotion agency, foreign direct investment (FDI) in Nicaragua amounted to $400 million in 2009, a 36% decrease compared to 2008. ProNicaragua predicts a similar amount of FDI in 2010. The global economic crisis, and a lack of international credit availability, contributed to Nicaragua's decreased levels of FDI in 2009. In addition, domestic political factors increased Nicaragua's country risk, which hindered FDI.

5. (U) Local investors viewed economic opportunities in a similar light. BCN figures show that domestic fixed capital formation, a key measurement of domestic investment flows, declined by 31% through the first three quarters of 2009 compared to the same period in 2008. The GON's public sector investment is mainly financed through international donors. In 2009, the GON budgeted $458 million for public investment, 62% of which was provided by external sources (25% as donations, 75% as concessional loans). Major sources of funds included the Inter American Development Bank, the Central American Bank for Economic Integration, and the World Bank. In 2010, the GON plans to prioritize public investment in key sectors such as energy, health, education, water access and infrastructure.

Exports to ALBA Countries Boom

6. (U) According to the BCN, from January-November 2009, Nicaraguan exports totaled $1.28 billion, a decrease of 8% compared to the same period in 2008. Of Nicaragua's total exports during this period, 29% were shipped to the United States, 32% to Central America, 13% to the European Union, and 8.6% to member states of the Bolivarian Alliance of the Americas (ALBA). Exports to ALBA countries experienced a huge gain, from $26 million in 2008 to $110 million in 2009.

7. (U) Agricultural products represented 34% of total exports, while manufactured products represented 53%, fisheries 6%, and mining 6%. Coffee continued to serve as a critical export commodity for Nicaragua in 2009, representing 17.5% of total exports. Beef production comprised 16% of total exports, while 15% were dairy products. Imports into Nicaragua decreased in 2009, from $3.75 billion in 2008 to $2.9 billion. Consequently, Nicaragua's trade deficit decreased, from $2.3 billion in 2008 to $1.6 billion in 2009, a reduction of approximately 30%.

Inflation Down, and New Base Year for the CPI

8. (U) The accumulated rate of inflation in Nicaragua ended at just under 1% in 2009, a welcome decrease from 2008, when inflation was at 14%. In January 2010, the BCN launched a new base year to calculate the Consumer Price Index (CPI), which is now 2006 (formerly 1999). To make this adjustment, the BCN conducted household and business surveys to capture consumption pattern and prices of Nicaragua's most relevant consumer products and services in the country. As a result, the BCN now includes new categories such as the cost of internet access. The BCN reports that this new base year change will allow for a more accurate measure of the inflation rate.

Financial Sector Stable, Remittances Decrease

9. (U) As of December 2009, total deposits in the Nicaraguan banking system reached $2.7 billion, of which $1.66 billion (62%) was held in U.S. dollars, an increase of 10% compared to December 2008. The banking system's loan portfolio totaled $2.1 billion as of December 2009. Of all loans in Nicaragua, 86% are denominated in foreign currency, particularly in U.S. dollars. Interest rates for loans denominated in cordobas averaged 14.5% in December 2009, while the rates for loans in U.S. dollars averaged 12%. Interest rates for deposit accounts denominated in cordobas were 2.9%, while the rate for accounts in U.S. dollars was 1.9%. Because interest rates for loans remained almost unchanged throughout 2009, while deposit rates decreased, the spread between these rates increased by 173 basis points between January 2009 and January 2010. Remittances from Nicaraguans working abroad between January-November 2009 totaled $699 million, a 6% decline compared to the same period in 2008. Most observers attributed the decrease in remittances to the impact of the global economic crisis on employment in the United States.

10. (U) The GON's consolidated debt totaled $4.8 billion in December 2009, equivalent to 78% of GDP. Of this total, 75% is external debt owed to multilateral creditors such as the Inter American Development Bank, the Central American Bank for Economic Integration, the World Bank and the International Monetary Fund, and bilateral creditors such as Iran, Libya, Costa Rica, and Venezuela, among others. Foreign exchange reserves totaled $1.5 billion in December 2009, equivalent to 2.6 times the monetary base, an increase of 38% compared to December 2008 (Comment: the rise in both deposit levels and foreign exchange reserves is at least partially attributable to Nicaragua's decreased import bill in 2009.)

Business Confidence Remains Low

11. (U) According to a September 2009 survey performed by FUNIDES (a prominent local economic think tank), 80% of Nicaraguan companies reported that the investment climate is unfavorable. Nicaraguan businesses cited the political environment and corruption as the most harmful factors hindering investment. Perhaps more damaging, virtually all of the surveyed companies reported a complete lack of confidence in the Nicaraguan judicial system. Businesses did, however, report a slight increase in international and local demand for their products and services.

2010 Growth Estimates

12. (U) During a January press conference, Antenor Rosales, President of the BCN, estimated that Nicaraguan GDP will grow 1.5 to 2% in 2010, exports by 7 to 9%, and foreign remittances by 12%. Rosales predicted that FDI into Nicaragua will total $400-$450 million. Independent economist Nestor Avendano forecasts a more optimistic 2010, predicting a 3-4% GDP increase based on growth in the construction and agriculture sectors, with a particularly strong increase in sugar and coffee exports. FUNIDES remains much more bearish on 2010, predicting no growth or a contraction of 1%, arguing that despite a slight rebound in international export demand, the poor business climate in Nicaragua will continue to impede growth.

Comment

13. (U) Undoubtedly the global financial crisis was partly to blame for Nicaragua's poor economic performance in 2009, but domestic political factors also played an unhelpful role. Nicaragua faces very challenging economic prospects in 2010, due in no small part to the fact that 2011 is a pivotal presidential election year. Apart from investment in the energy and telecom sector, FDI has all but dried up in Nicaragua as potential investors sit on the sidelines. The boom in exports to Venezuela (subsidized by ALBA funds, reftel) is a telling example of the market distortions present in Nicaragua as a result of President Ortega's close relationship with Hugo Chavez.
CALLAHAN

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