Country Report Nicaragua April 2009

Summary

A deal between the president, Daniel Ortega of the Frente Sandinista de Liberacion Nacional (FSLN), and Arnoldo Aleman of the Partido Liberal Constitucionalista (PLC) appears to have restored a sense of governability.
The agreement has resulted in a pick up in policy implementation in the short term and may lead to electoral reform in the longer term. This could lower the risk of fraud in the 2011 elections.
Despite tensions with foreign donors, we expect an accommodation. However, there is a risk that a reduction in donations will imperil fiscal financing, forcing the authorities to retrench or use foreign reserves.
Decelerating domestic demand and recessions in the US and the EU will cause GDP growth to contract by 1% in 2009 before recovering to 1.6% in 2010 on the back of a slow strengthening of global demand.
The massive current-account deficit will ease in 2009 and in 2010, largely owing to a fall in import spending as the economy slows, although the trade imbalance will remain huge (averaging 21% of GDP).
Although not our baseline scenario, there is a growing risk that donor support will fall, restricting capital inflows. This could cause a balance of payments crisis, unless Nicaragua gets multilateral support.

Business leaders have called for a national dialogue to avert a political and economic crisis, and to review tense relations between the government and business.
Protest marches by opposition civil society groups have tested the government's willingness to tolerate dissent.
The government was expected to present the legislature with a reformed budget proposal in late March.
The twice-yearly minimum wage negotiations between the government, business and labour got under way while alternative proposals, including making the talks annual, lingered.
External trade in January and February collapsed with export earnings falling by 22% while export volumes fell by an even greater 28%.
New details on the economic assistance Nicaragua received from Venezuela in 2008 showed that, unlike earlier impressions created by the government, some of the assistance constituted investment rather than aid.