Magazine article Business Credit

Hot Spots: Nicaragua

Magazine article Business Credit

Hot Spots: Nicaragua

Article excerpt

So far, the Nicaraguan economy has held up well in the face of increasingly adverse international headwinds. Granted, real GDP growth in 2007, at 3.8%, was below target, mainly as a result of ballooning input costs due to a surge in world market prices for oil, the repercussions from hurricane Felix, the devastation wrought upon parts of agriculture by the subsequent heavy rains and electricity interruptions during the first half of the year. The same forces also drove up inflation, which in 2007 hit 16.9% and was most recently measured at a cumulative 13.4% for the first seven months of 2008, close to double the 6.9% clocked for the comparable period last year.

The government's macroeconomic policies have generally been quite prudent, guided as they are these days by the dictates of the IMF. Even though this is an election year, with an important municipal poll due in November, the authorities have been maintaining the government's fiscal position well within the IMF program's parameters, relaxing it only marginally to make room for larger-than-expected energy and transport subsidies.

The 2008 budget deficit target was set at 1.8% of GDP last February. Also, the government has vowed to ensure that public sector pay hikes will stay in line with nominal GDP growth, even though salary hikes of 16% have already been granted to teachers, health-sector workers, the army and the police.

Nonetheless, looking ahead, one finds it difficult to believe that a country as dependent on international aid, loans and investment as Nicaragua will not struggle to cope with an increasingly adverse international environment. On present trends, we expect the economic expansion to slow markedly, with the result for the second semester coming in significantly below the 3-4% that is currently still projected for all of 2008. The deceleration is likely to continue into 2009, since inflation and the large external deficits will leave the government little room for fiscal or monetary stimulation of business activity. Inflation is currently projected at between 15% and 17% by end-December, although the authorities during the course of this year have implemented a number of measures aimed at containing it.

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Inter alia, they have reduced import duties on selected foodstuffs, they have sought to facilitate agriculture's access to credit and to improve productivity so as to increase food supplies and they have attempted to reduce rigidities in the marketing of agricultural products to prevent abrupt fluctuations in prices. They have also, to cushion the negative impact of hefty fuel price increases on the population, maintained the urban transport subsidy for Managua at an annual $10 million and have received transfers from Venezuela to the tune of $75 million annually for inter-city passenger transportation and for taxis.

Still, inflation will prove sticky on the upside even as the economy's pace slackens. For now, there seems to be little risk of Nicaragua slipping into an outright recession. What will happen is that exports, which have been growing strongly, will lose momentum in response to weaker demand in the United States and other key foreign markets. Imports will show less of a tendency to drop due to still-high world market prices for fuel (Venezuela's contributions of cheap petroleum notwithstanding) and to ongoing investment programs requiring foreign capital goods.

We expect that the current-account BoPf deficit, which in January-June swelled to $657. …

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