Country Report Nicaragua July 2009

Outlook for 2009-10

• A renewal of the nine-year pact between Mr Ortega of the ruling FSLN and Mr Aleman of the opposition PLC will shape political appointments and policy in 2009-10.
• Despite a domestic recession, Mr Ortega will focus on ways to remain in office beyond 2011. To that end he is pressing hard to initiate constitutional reforms, including consecutive re-election, in 2009.
• Despite tensions with foreign donors over the alleged 2008 municipal election fraud, we expect an accommodation which will allow financing to flow from the multilateral agencies.
• Decelerating domestic demand and recessions in the US and the EU will cause GDP growth to contract by 2.5% in 2009 before recovering to 1.6% in 2010 on the back of a slow strengthening of global demand.
• The current-account deficit will ease sharply in 2009-10, largely owing to a fall in import spending as the economy slows, although the trade imbalance will remain huge (averaging over 27% of GDP).
• Although not our baseline scenario, there is still a risk that donor support will fall, restricting capital inflows. This could cause a balance-of-payments crisis, unless Nicaragua gets multilateral support.

Monthly review

• As temporary Central American Integration System (SICA) president, Mr? Ortega convened Latin American leaders to condemn the ouster of the Honduran president, Manuel Zelaya.
• The Nicaraguan business community decried Central America's decision to close its borders with Honduras for 48 hours. Nicaraguan exporters send nearly half their exports for shipping to Puerto Cortez in Honduras.
• Army leaders have recently expressed concern that criminal elements are becoming better organised and more dangerous.
• The government and the IMF appeared close to an agreement on ways to restart the PRGF which has been in an indeterminate state since late 2008.
• Although the US cancelled its MCA aid as a result of the 2008 electoral fraud, the EU appears close to an agreement on restarting its budget support.
• According to a Central Bank study, Venezuela raised total aid to Nicaragua to US$457m in 2008 from US$185m in 2007. Overall, aid to Nicaragua from all sources remained largely unchanged at US$1.06bn.

Source: Country Report