Country Report Nicaragua September 2008

Outlook for 2008-09

• 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.
• Slowing domestic demand owing to higher food and oil prices and decelerating external growth on the back of recessionary conditions in the US will cause GDP growth to slow to 3% this year and 2.3% next.
• Inflation will rise to 25% in 2008 before easing to 15% in 2009 as commodity prices soften, but an expansionary fiscal policy and sharp rises in the minimum wage will keep the risks weighted to the upside.
• The current-account deficit will average 18% of GDP, reflecting a massive trade imbalance (averaging 29% of GDP). However, with continued donor support, a balance of payments crisis is unlikely.

Monthly review

• There has been growing unease that the ruling FSLN may be resorting to dirty tricks, threatening the fairness of the November municipal polls.
• The Supreme Court remained paralysed in August owing to infighting between the FSLN and the Partido Liberal Constitucionalista (PLC) over the distribution of the 16 magistrates they appointed among the court's four chambers.
• The government has returned to an orthodox monetary stance allowing the Banco Central de Nicaragua (BCN, the Central Bank) to increase the use of its open market operations to absorb domestic liquidity and control inflation.
• Despite union demands of a 53% hike in the minimum wage, it is likely that the government will decree a 12% increase in line with business demands of an 11% rise.
• The growing likelihood that the IMF would finally conclude the first programme review in September raised the possibility that it would begin disbursing balance of payments support.
• In the wake of IMF talks and weakening activity indicators, the BCN revised its growth estimate for 2008 to 3-4% from 3.8%. In January-May 2008 activity slowed in all sectors except agriculture, construction and telecommunications.
• Nicaragua and Brazil signed an agreement for a 160-mw hydroelectric plant to be finished in 2012. Rumoured prospects of Iran building a similar hydro plant appear to have faded.