Country Report Nicaragua September 2009

Summary

Governing will become more difficult for Mr Ortega and the ruling FSLN in the outlook period as his chances of remaining in office beyond 2011 recede, prompting political tensions to rise.
Mr Ortega will continue to pressure Mr Aleman of the opposition PLC to agree to some kind of re-election deal as the two men bargain over political appointments in 2009-10.
Despite delays in concluding a second and third review under the IMF's three-year poverty reduction and growth facility (PRGF), we expect an accommodation which will allow financing from the multilateral agencies.
Decelerating domestic demand and recessions in the US and the EU will cause GDP to contract by 3.1% in 2009 before recovering to growth of 2% in 2010 on the back of strengthening 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 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.

In a desperate effort to win votes to run for re-election, Mr Ortega launched a proposal to establish a mid-term revocatory referendum on the president along the lines of the mechanism established in Venezuela and Bolivia.
Opposition candidates Mr Aleman and Mr Montealegre of the VCE sat down to discuss the prospects for an unlikely alliance against the ruling FSLN in the 2011 elections. Opinion polls favour Mr Montealegre over the PSL candidate.
Nicaragua's government and business community failed to persuade the IMF to forego a previous set of PRGF requirements. An agreement to restart the PRGF remains unlikely in the short term.
The government has proposed a new tax reform targeted at the private sector in order to raise revenue for the state (at least US$92m, 1.4% GDP). The business community was quick to show its disapproval.
Amid contrary trends, first-half 2009 fiscal figures suggest the government has curbed capital outlays in response to delays on donor funds.

This report covers the following industry codes:
SIC Code: 60;49
NAICS Code: 52;22