Moody’s: Nicaragua Could Lose All External Financing

By Mabel Calero (La Prensa)

HAVANA TIMES – The rating agency Moody’s Investors Service expects this year a fall in the Gross Domestic Product (GDP) of 2.5 percent and warned that external financing is at greater risk, “due to an international response to the political crisis in Nicaragua.”

“The possible interruptions of official external loans to Nicaragua, particularly of multilateral development banks, would generate external liquidity pressures. Additionally, the Nicaraguan Investment Conditionality Act (Nica Law) that became law in the United States in December of 2018, calls to conditioning the approval of the United States of multilateral loans to Nicaragua on the government’s adhesion to democracy,” the agency said in its August 2 report.

But the rating agency also warns that the country runs the risk that international loans already approved for 2019 will be suspended if international pressure increases. In addition, if the current crisis continues after 2020, the country will not be able to find new lines of credit from multilaterals.

“Some Latin American governments could support the conditioning of new loans to Nicaragua, following the measures taken by the Organization of American States (OAS), which could affect the new loans for 2020 onward. Furthermore, Nicaragua faces risks that loans already approved for 2019 could be suspended if international pressure increases,” the agency said.

In the “Policy Guidelines for the formulation of the budget and the medium-term budget framework 2020-2023 Project,” the Executive says that with multilateral financial organizations it has secured resources until 2025.

Recently, the Economic Commission for Latin America and the Caribbean (ECLAC) and the International Monetary Fund (IMF) estimated that the economy would contract five percent. While the Nicaraguan Foundation for Economic and Social Development (Funides) foresaw that the fall is between 5.4 and 6.8 percent, in the worst-case scenario.

All these perspectives are contrary to the forecasts of the Ortega Government which foresees recovery from next year, although with very low growth rates.

Lower foreign investment

According to Moody’s the contraction in the Nicaraguan economy will continue due to lower inflows of Direct Foreign Investment, withdrawals of deposits from the banking system, credit reduction and the lack of a political agreement.

“It is very likely that the Nicaraguan economy will contract again in 2019, around 2.5 percent according to our estimates. Given the current political situation, foreign private investment will continue to be weak, particularly driven by lower inflows of Direct Foreign Investment in the country,” it details.

Expenses Reduction

On the other hand, although to date there has been no reform of the Budget of the Republic, Moody’s in its report indicates that there may be a reduction in public spending.

“In addition, due to a combination of lower government revenues and funding restrictions, the authorities will reduce expenses, particularly public investment, which will also weight on growth,” it states.

Impact of the reforms

Regarding tax reform, Moody’s points out that the measure was recessive and that it would only be efficient in the first semester of 2019.

“In February, 2019, the authorities implemented a tax reform that increased withholding rates on income tax… and expanded the basis of the consumption tax. The government expects tax measures to increase 1.8 percent of the GDP by the end of the year, a significant journey in a recessive environment, but we believe that it will probably only give a return during the first half of 2019,” Moody says.

Regarding the Social Security reform, the agency said that “although the general reform package is somewhat lighter than the version tried in April of 2018, we note that it should help to limit the INSS deficit slightly below current levels.”