Country Report Nicaragua June 2009

Summary

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 will press 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 25% 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.

Mr Ortega is keen to initiate constitutional reforms in 2009 as the reforms need to be voted on twice in successive legislative years and he would like them to be in place well ahead of the 2011 general elections.
However, as the FSLN cannot command an absolute legislative majority (56 votes out 91), it is attempting to buy deputies to gain their support.
In late May an IMF mission visited Nicaragua to complete the second and third reviews of progress under the 2007 PRGF, which had been in limbo since late 2008.
It seems increasingly likely that the multilaterals will provide budget support to cover suspended donations and lower inflows from Venezuela than had been estimated.
The government has started talks with European donors and the EU over suspended donations.
The government, the unions and employers amicably agreed new minimum wage increases in May.
A minimum wage deal with the free-zone operators in March has been credited by some for helping save jobs.

This report covers the following industry codes:
SIC Code: 60;37
NAICS Code: 52;336