Nicaragua

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast *Including only Central Government, which also covers Social Security

RISK ASSESSMENT

Sluggish growth in the wake of the US economy

In 2022, the economic recovery lost momentum due to high energy prices, th tightening of US sanctions and the local duplication of the FED's monetary tightening policy. The trend is set to continue in 2023. First, domestic consumption will remain weak. Persistently high inflation (the Central Bank of Nicaragua's inflation target is between 2% and 4%) and rising unemployment (at least 4.7% of the labour force expected by 2023) will further erode household disposable income. However, remittances from expatriates in the US (at least 70% of remittances came from this source in 2022), whose numbers have grown considerably, could temper the drag. Second, underinvestment, both private and public, is expected to worsen. The Biden administration's new sanctions on sugar imports in 2022, and on local officials and gold mining, will further deter FDI and may cause Canadian mining companies to reduce their presence. The durably restrictive monetary policy (repo rate of 8.87% in October 2022 and estimated to average over 7.00% for 2023) will paralyse domestic business investment. The high rate of business defaults will make access to bank credit even more difficult. The state's budgetary discipline will further erode the public order on which construction depends. Third, sluggish external demand will again weigh on the production of goods and services. Economic slowdowns in the US (56% of total exports in 2021) and Central America (28%) will reduce textile production (35% of exports go to North and Central America in 2021) and beef production (11%) of the Maquiladoras. Nevertheless, global demand for gold, platinum, coffee and tobacco will prevent any decline in agricultural production (21% of total exports in 2021) and mining (13%), especially as the rapprochement with China could result in an increase in demand.

Further debt reduction amid a tougher external environment

The current account deficit narrowed in 2022 due to the increase in remittance flows. The trend is expected to moderate in 2023. The fall in the hydrocarbon import bill (17% of total imports in 2021 and estimated at 9.5% of GDP in 2023) should be compensated by that of manufacturing exports. The trade deficit will remain largely offset by expatriate remittances and stable tourism receipts (estimated at less than 3% of GDP in 2023). Although decreasing, the flow of FDI inflows (estimated at 5.1% of GDP in 2023) and external borrowing  will finance the current deficit. Last, the central bank's reserves (at least 6 months of imports at the end of 2022) will ensure the monetary peg to the USD.

Fiscal consolidation continued in 2022, but the debt of the social security agency (Nicaragüense de Seguridad Social) and state-owned enterprises continued to weigh on public finances. In 2023, while a surplus (estimated at less than 0.1% of GDP) is expected to be generated by the central government, the non-financial public sector as a whole will still run a deficit. On the one hand, public revenues (19.5% of GDP in 2022) will weaken due to the economic slowdown. On the other, public expenditure (16.4% of GDP in 2022) will decrease to prevent any primary deficit. To compensate for the extension of the petrol subsidy, capital expenditure (21% of expenditure in 2022) will be significantly reduced at the risk of aggravating public under-investment. Moreover, the debt burden will remain stable (less than 3% of GDP in 2023). The need for public financing will be covered by domestic issues (interest rate of at least 8% at the end of 2022) and external loans, potentially Chinese and CABEI financing. Mainly external (78% of the estimated stock of public debt for 2023), the debt will remain mainly concessional (93% of disbursements came from multilateral organisations, CABEI represented 55% of external financing in 2021) and sustainable in the medium term.

Continued rapprochement with China against a background of diplomatic isolation

On 7 November 2021, Daniel Ortega, in power since 2007, and his wife Rosario Murillo, were respectively re-elected to the presidency and vice-presidency of the country for a further 5 years (75% of the votes according to the authorities). This election was criticised for its irregularities by the international community, led by the United States and the European Union (a 20% turnout according to the opposition) and the arrest of the main opposition candidates in the months preceding the election. Through the RENACER Act of 2021, the US Congress enacted a series of sanctions against Nicaraguan officials for human rights violations, corruption and electoral malpractice. The legislation paves the way for Nicaragua’s possible exclusion by the US from CAFTA-DR, new sanctions and potential suspensions of multilateral loans. In this context, the Ortega administration has embarked on a diplomatic rapprochement with China (less than 0.1% of total exports in 2021, 12% of total imports in 2021) and Russia in the hope of securing new sources of financing and investments. To do this, the country broke diplomatic ties with Taiwan in 2021, which at the time accounted for 2% of total exports. It signed a memorandum of participation in the New Silk Roads in 2022. Regarding the war in Ukraine, it voted against the UN resolution condemning the Russian invasion, before abstaining in subsequent votes at the UN General Assembly. Last, the chronic under-investment in infrastructure, especially social infrastructure, and the hardening of the regime are resulting in greater emigration to North America. The trend could increase if additional sanctions are adopted, which may explain the United States’ relative restraint.

Last updated: June 2023