Country Report Nicaragua October 2008

Outlook for 2009-10

• Uncertainty over the policy direction of the president, Daniel Ortega of the Frente Sandinista de Liberacion Nacional (FSLN, the Sandinistas), will continue to concern business, civil society organisations and donors.
• The FSLN, which lacks a majority in the legislature, will struggle to implement its policy programme in the face of a strengthening opposition. This will undermine political effectiveness in the forecast period.
• A loose fiscal policy and minimum wage rises will keep the risks weighted to the upside. Inflation will ease to 12% in 2009, from 20%, as commodity prices soften, but it will rise again to 14% in 2010 given a commodities rebound.
• Slowing domestic demand owing to higher food and oil prices, and decelerating external growth given recessionary conditions in the US will cause GDP growth to slow to 2.3% in 2009 before recovering to 2.9% in 2010.
• The massive current-account deficit (21% of GDP in 2008) will ease slightly in 2009-10 despite a large trade imbalance (averaging 26% of GDP). However, with continued donor support, a balance of payments crisis is unlikely.

Monthly review

• Tensions around the November municipal elections are rising with widespread concerns over the overall fairness of the process and worries that domestic and international observers may be disqualified.
• The Catholic Church added to the tensions by urging its faithful to exercise their right to vote. As high abstentions are presumed to favour the FSLN, the call has been widely interpreted as indirect support for the opposition.
• The IMF remained concerned about inflation despite efforts by the Banco Central de Nicaragua (BCN, the Central Bank) to step up money market operations in order to stem inflationary expectations and bolster reserves.
• The BCN published overall aid flows for 2007, showing that Venezuela's donation of US$185m prevented overall assistance from falling—otherwise, total donations would have declined by 4.4%.
• Despite a surge in export earnings, the trade deficit widened markedly owing to a sharper increase in import spending. This also resulted in a substantial widening of the current-account deficit.
• Progress was expected in the fifth round of the EU-Central America free-trade talks in October. Improved access to the EU would favour Nicaragua which already sells 16% of its exports there.